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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
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)
200 Park Avenue, New York, NY 10166
(Address of principal (Zip Code)
executive offices)
(212) 578-2211
(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 July 29, 2004, 750,141,288 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 June 30, 2004 and
December 31, 2003 ........................................................................ 4
Unaudited Interim Condensed Consolidated Statements of Income for the Three Months and Six
Months Ended June 30, 2004 and 2003 ...................................................... 5
Unaudited Interim Condensed Consolidated Statement of Stockholders' Equity for the Six Months
Ended June 30, 2004 ...................................................................... 6
Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Six Months Ended June
30, 2004 and 2003 ........................................................................ 7
Notes to Unaudited Interim Condensed Consolidated Financial Statements ........................ 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . 36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................ 81
ITEM 4. CONTROLS AND PROCEDURES ............................................................... 81
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ..................................................................... 82
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES ...... 86
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................................... 87
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................................... 88
SIGNATURES .................................................................................... 89
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 or other
consequences 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 credit 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; (xiv) the Company's
ability to identify and consummate on successful terms any future acquisitions,
and to successfully integrate acquired businesses with minimal disruption; and
(xv) 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
JUNE 30, 2004 AND DECEMBER 31, 2003
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $164,902 and $158,333, respectively) $ 170,192 $ 167,752
Equity securities, at fair value (cost: $1,437 and $1,222,
respectively) 1,744 1,598
Mortgage loans on real estate 28,118 26,249
Policy loans 8,766 8,749
Real estate and real estate joint ventures
held-for-investment 4,110 3,848
Real estate held-for-sale 44 832
Other limited partnership interests 2,805 2,600
Short-term investments 2,089 1,826
Other invested assets 5,119 4,645
--------- ---------
Total investments 222,987 218,099
Cash and cash equivalents 4,459 3,733
Accrued investment income 2,330 2,186
Premiums and other receivables 7,566 7,047
Deferred policy acquisition costs 13,885 12,943
Other assets 7,255 7,077
Separate account assets 79,747 75,756
--------- ---------
Total assets $ 338,229 $ 326,841
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 96,021 $ 94,148
Policyholder account balances 79,943 75,901
Other policyholder funds 6,773 6,343
Policyholder dividends payable 1,064 1,049
Policyholder dividend obligation 1,330 2,130
Short-term debt 3,218 3,642
Long-term debt 6,226 5,703
Shares subject to mandatory redemption 277 277
Current income taxes payable 756 652
Deferred income taxes payable 1,931 2,399
Payables under securities loaned transactions 28,132 27,083
Other liabilities 11,495 10,609
Separate account liabilities 79,747 75,756
--------- ---------
Total liabilities 316,913 305,692
--------- ---------
Stockholders' Equity:
Preferred stock, par value $0.01 per share; 200,000,000 shares
authorized; none issued -- --
Common stock, par value $0.01 per share; 3,000,000,000 shares
authorized; 786,766,664 shares issued at June 30, 2004 and
December 31, 2003; 750,056,018 shares outstanding at
June 30, 2004 and 757,186,137 shares outstanding
at December 31, 2003 8 8
Additional paid-in capital 15,013 14,991
Retained earnings 5,663 4,193
Treasury stock, at cost; 36,710,646 shares at June 30, 2004
and 29,580,527 shares at December 31, 2003 (1,085) (835)
Accumulated other comprehensive income 1,717 2,792
--------- ---------
Total stockholders' equity 21,316 21,149
--------- ---------
Total liabilities and stockholders' equity $ 338,229 $ 326,841
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
4
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
REVENUES
Premiums $ 5,331 $ 5,083 $ 10,698 $ 9,915
Universal life and investment-type product policy fees 728 603 1,404 1,175
Net investment income 3,117 2,864 6,092 5,737
Other revenues 356 355 709 653
Net investment gains (losses) 47 (42) 163 (294)
-------- -------- -------- --------
Total revenues 9,579 8,863 19,066 17,186
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims 5,335 4,970 10,795 9,895
Interest credited to policyholder account balances 751 761 1,494 1,508
Policyholder dividends 471 507 913 1,010
Other expenses 1,916 1,841 3,797 3,580
-------- -------- -------- --------
Total expenses 8,473 8,079 16,999 15,993
-------- -------- -------- --------
Income from continuing operations before provision for income
taxes 1,106 784 2,067 1,193
Provision for income taxes 254 212 557 327
-------- -------- -------- --------
Income from continuing operations 852 572 1,510 866
Income from discontinued operations, net of income taxes 95 8 118 76
-------- -------- -------- --------
Income before cumulative effect of a change in accounting 947 580 1,628 942
Cumulative effect of a change in accounting, net of income
taxes -- -- (158) --
-------- -------- -------- --------
Net income $ 947 $ 580 $ 1,470 $ 942
======== ======== ======== ========
Income from continuing operations available to common
shareholders per share
Basic $ 1.13 $ 0.78 $ 2.00 $ 1.18
======== ======== ======== ========
Diluted $ 1.12 $ 0.78 $ 1.99 $ 1.18
======== ======== ======== ========
Net income available to common shareholders per share
Basic $ 1.26 $ 0.79 $ 1.95 $ 1.29
======== ======== ======== ========
Diluted $ 1.25 $ 0.79 $ 1.94 $ 1.29
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
5
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(DOLLARS IN MILLIONS)
Accumulated Other Comprehensive
Income (Loss)
-----------------------------------------
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, 2003 $ 8 $ 14,991 $ 4,193 $ (835) $ 2,972 $ (52) $ (128) $ 21,149
Treasury stock transactions, net 22 (250) (228)
Comprehensive income (loss):
Net income 1,470 1,470
Other comprehensive
income (loss):
Unrealized gains (losses)
on derivative instruments,
net of income taxes 85 85
Unrealized investment gains
(losses), net of related
offsets, reclassification
adjustments and
income taxes (1,155) (1,155)
Cumulative effect of a change
in accounting, net of
income taxes 90 90
Foreign currency translation
adjustments (95) (95)
--------
Other comprehensive income (loss) (1,075)
--------
Comprehensive income (loss) 395
------- -------- ------- -------- ------ -------- -------- --------
Balance at June 30, 2004 $ 8 $ 15,013 $ 5,663 $ (1,085) $1,992 $ (147) $ (128) $ 21,316
======= ======== ======= ======== ====== ======== ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
6
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(DOLLARS IN MILLIONS)
SIX MONTHS
ENDED JUNE 30,
---------------------
2004 2003
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,380 $ 3,201
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities 36,504 33,578
Equity securities 545 147
Mortgage loans on real estate 1,379 1,611
Real estate and real estate joint ventures 982 253
Other limited partnership interests 278 154
Purchases of:
Fixed maturities (41,981) (45,608)
Equity securities (596) (22)
Mortgage loans on real estate (3,175) (1,766)
Real estate and real estate joint ventures (205) (142)
Other limited partnership interests (411) (203)
Net change in short-term investments (141) (722)
Proceeds from sales of businesses 29 --
Net change in payable under securities loaned transactions 1,049 5,166
Other, net (561) (495)
-------- --------
Net cash used in investing activities (6,304) (8,049)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits 19,115 17,902
Withdrawals (15,307) (13,064)
Net change in short-term debt (425) 2,282
Long-term debt issued 615 161
Long-term debt repaid (91) (51)
Treasury stock acquired (275) --
Settlement of common stock purchase contracts -- 1,006
Stock options exercised 18 3
-------- --------
Net cash provided by financing activities 3,650 8,239
-------- --------
Change in cash and cash equivalents 726 3,391
Cash and cash equivalents, beginning of period 3,733 2,323
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,459 $ 5,714
======== ========
Supplemental disclosures of cash flow information:
Net cash paid during the period for:
Interest $ 176 $ 266
======== ========
Income taxes $ 142 $ 222
======== ========
Non-cash transactions during the period:
Business dispositions - assets $ 820 $ --
======== ========
Business dispositions - liabilities $ 820 $ --
======== ========
Purchase money mortgage on real estate sale $ -- $ 50
======== ========
MetLife Capital Trust I transactions $ -- $ 1,037
======== ========
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" or the "Company" refers to MetLife, Inc., a Delaware corporation
(the "Holding Company"), and its subsidiaries, including Metropolitan Life
Insurance Company ("Metropolitan Life"). MetLife 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 homeowners insurance and mutual funds and retail banking services
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 critical 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 capitalization and amortization of deferred policy acquisition costs; (v)
the liability for future policyholder benefits; (vi) the liability for
litigation and 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 control; and (iii)
variable interest entities ("VIEs") for 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 5). The 2004 financial statement presentation includes assets,
liabilities, revenues and expenses relating to certain separate accounts and are
also combined with the assets, liabilities, revenues and expenses of the general
account. See "-- Application of Recent Accounting Pronouncements." Intercompany
accounts and transactions have been eliminated.
The Company uses the equity method of accounting for investments in equity
securities, real estate joint ventures and other limited partnership interests
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 and
is not the primary beneficiary. 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 $951 million and $950 million at June 30, 2004 and December 31,
2003, respectively.
Certain amounts in the prior year period's unaudited interim condensed
consolidated financial statements have been reclassified to conform with the
2004 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 June 30, 2004, its consolidated results of operations for the three months
and six months ended June 30, 2004 and 2003, its consolidated cash flows for the
six months ended June 30, 2004 and 2003 and its consolidated statement of
stockholders' equity for the six months ended June 30, 2004, 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, 2003 included in MetLife, Inc.'s 2003 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 RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Emerging Issues Task Force ("EITF") reached further
consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments ("EITF 03-1"). EITF 03-1 provides
accounting guidance regarding the determination of when an impairment of debt
and marketable equity securities and investments accounted for under the cost
method should be considered other-than-temporary and recognized in income. An
EITF 03-1 consensus reached in November 2003 also requires certain quantitative
and qualitative disclosures for debt and marketable equity securities classified
as available-for-sale or held-to-maturity under Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities, that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. The disclosure requirements of EITF 03-1 were effective December 31,
2003. The accounting guidance of EITF 03-1 will be effective in the third
quarter of 2004 and is not expected to have a material impact on the Company's
unaudited interim condensed consolidated financial statements.
In March 2004, the EITF reached consensus on Issue No. 03-6,
Participating Securities and the Two-Class Method under FASB Statement No. 128
("EITF 03-6"). EITF 03-6 provides guidance in determining whether a security
should be considered a participating security for purposes of computing earnings
per share and how earnings should be allocated to the participating security.
EITF 03-6, which was effective for the Company in the second quarter of 2004,
did not have an impact on the Company's earnings per share calculations.
In March 2004, the EITF reached consensus on Issue No. 03-16, Accounting
for Investments in Limited Liability Companies ("EITF 03-16"). EITF 03-16
provides guidance regarding whether a limited liability company should be viewed
as similar to a corporation or similar to a partnership for purposes of
determining whether a noncontrolling investment should be accounted for using
the cost method or the equity method of accounting. EITF 03-16, which will be
effective in the third quarter of 2004, is not expected to have a material
impact on the Company's unaudited interim condensed consolidated financial
statements.
Effective January 1, 2004, the Company adopted Statement of Position 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 (i) the classification and valuation of long-duration
contract liabilities; (ii) the accounting for sales inducements; and (iii)
separate account presentation and valuation. At adoption, the Company increased
future policyholder benefits for changes in the methodology relating to various
guaranteed death and annuitization benefits and for determining reserves for
certain universal life insurance contracts by approximately $68 million, which
has been reported as a cumulative effect of a change in accounting. This amount
is net of corresponding changes in deferred policy acquisition costs ("DAC"),
including value of business acquired and unearned revenue liability ("offsets")
under certain variable annuity and life contracts and income taxes. In June
2004, the Financial Accounting Standards Board ("FASB") released Staff Position
paper No. 97-1, Situations in Which Paragraphs 17(b) and 20 of FASB Statement
No. 97, Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments, Permit or Require Accrual of an Unearned Revenue Liability ("FSP
97-1") which included clarification that unearned revenue liabilities should be
considered in determining the necessary insurance benefit liability required
under SOP 03-1. FSP 97-1 is effective July 1, 2004. However, additional industry
guidance related to SOP 03-1 continues to evolve. Although currently evaluating
FSP 97-1 and the possible additional accounting guidance, the Company
anticipates a reduction of the initial liability established under SOP 03-1 in
subsequent accounting periods. Certain other contracts sold by the Company
provide for a return through periodic crediting rates, surrender adjustments or
termination adjustments based on the total return of a contractually referenced
pool of assets owned by the Company. To the extent that such contracts are not
accounted for under the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133") and not already credited to the
contract account balance, under SOP 03-1 the change relating to the fair value
of the referenced pool of assets is recorded as a liability through policyholder
benefits and claims. Prior to the adoption of SOP 03-1, the Company recorded the
change in such liability as other comprehensive income. At adoption, this change
decreased net income and increased other comprehensive income by $63 million,
net of income taxes, which were recorded as cumulative effects of a change in
accounting. Effective with the adoption of SOP 03-1, costs associated with
enhanced or bonus crediting rates to contractholders must be deferred and
amortized over the life of the related contract using assumptions consistent
with the amortization of DAC. Since the Company followed a similar approach
prior to adoption of SOP 03-1, the provisions of SOP 03-1 relating to sales
inducements had no significant impact on the Company's unaudited interim
condensed consolidated financial statements. At adoption, the Company
reclassified $155 million of ownership in its own separate accounts from other
assets to fixed maturities, equity securities and cash and cash equivalents.
This reclassification had no significant impact on net income or other
comprehensive income at adoption. In accordance with SOP 03-1's guidance for the
reporting of certain separate accounts, at adoption, the Company also
reclassified $1.7 billion of separate account assets to general account
investments and $1.7 billion of separate account liabilities to future policy
benefits and policyholder account balances. This reclassification decreased net
income and increased other comprehensive income by $27 million, net of income
taxes, which were reported as cumulative effects of a change in accounting. For
the three months and six months
9
ended June 30, 2004, the impact of SOP 03-1 increased the Company's net income
by $78 million and $64 million, respectively. (See Note 4).
In December 2003, FASB revised SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits -- an Amendment of FASB Statements
No. 87, 88 and 106 ("SFAS 132(r)"). SFAS 132(r) retains most of the disclosure
requirements of SFAS 132 and requires additional disclosure about assets,
obligations, cash flows and net periodic benefit cost of defined benefit pension
plans and other defined postretirement plans. SFAS 132(r) was primarily
effective for fiscal years ending after December 15, 2003; however, certain
disclosures about foreign plans and estimated future benefit payments are
effective for fiscal years ending after June 15, 2004. The Company's adoption of
SFAS 132(r) on December 31, 2003 did not have a significant impact on its
consolidated financial statements since it only revised disclosure requirements.
In May 2004, the FASB issued FASB Staff Position ("FSP") No. 106-2, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("FSP 106-2"), which provides
accounting guidance to a sponsor of a postretirement health care plan that
provides prescription drug benefits. The Company expects to receive subsidies on
prescription drug benefits beginning in 2006 under the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 based on the Company's
determination that the prescription drug benefits offered under certain
postretirement plans are actuarially equivalent to the benefits offered under
Medicare Part D. FSP 106-2 is effective for interim periods beginning after June
15, 2004 and provides for either retroactive application to the date of
enactment of the legislation or prospective application from the date of
adoption of FSP 106-2. The Company is in the process of evaluating the
alternatives, however, neither alternative is expected to have a significant
impact on the Company's unaudited interim condensed consolidated financial
statements.
Effective October 1, 2003, the Company adopted 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 is measured at fair value on the
balance sheet and changes in fair value are reported in income. As a result of
the adoption of Issue B36, the Company recognized net income of $22 million and
$13 million, net of amortization of DAC and income taxes, for the three months
and six months ended June 30, 2004, respectively.
Effective July 1, 2003, the Company adopted SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149").
SFAS 149 amended and clarified the accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Except for certain previously issued and
effective guidance that was incorporated in SFAS 149, SFAS 149 is effective for
contracts entered into or modified after June 30, 2003. The Company's adoption
of SFAS 149 did not have a significant impact on its unaudited interim condensed
consolidated financial statements.
During 2003, the Company adopted FASB Interpretation No. 46, Consolidation
of Variable Interest Entities -- An Interpretation of ARB No. 51 ("FIN 46"), and
its December 2003 revision ("FIN 46(r)"). 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 and must be consolidated, in
accordance with the transition rules and effective dates, because the Company is
deemed to be the primary beneficiary. A VIE is defined as (i) any entity in
which the equity investments 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 support from other parties. Effective February 1, 2003,
the Company adopted FIN 46 for VIEs created or acquired on or after February 1,
2003 and, effective December 31, 2003, the Company adopted FIN 46(r) with
respect to interests in entities formerly considered special purpose entities
("SPEs"), including interests in asset-backed securities and collateralized debt
obligations. The adoption of FIN 46 as of February 1, 2003 did not have a
significant impact on the Company's unaudited interim condensed consolidated
financial statements. The adoption of the provisions of FIN 46(r) at December
31, 2003 did not require the Company to consolidate any additional VIEs that
were not previously consolidated. In accordance with the provisions of FIN
46(r), the Company elected to defer until March 31, 2004 the consolidation of
interests in VIEs for non SPEs acquired prior to February 1, 2003 for which it
is the primary beneficiary. The transition effect recorded at March 31, 2004 as
a result of such consolidations was insignificant. As of June 30, 2004, the
Company consolidated assets and liabilities relating to real estate joint
ventures of $16 million and $3 million, respectively, and assets and liabilities
relating to other limited partnerships of $82 million and $15 million,
respectively, for VIEs for which the Company was deemed to be the primary
beneficiary.
10
2. INVESTMENTS
NET INVESTMENT GAINS (LOSSES)
Net investment gains (losses), including changes in valuation allowances,
and related policyholder amounts were as follows:
- ----------
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN MILLIONS)
Fixed maturities $ (3) $ (43) $ 31 $(192)
Equity securities 89 (3) 97 (8)
Mortgage loans on real estate -- (8) -- (22)
Real estate and real estate joint ventures (1) 2 (6) 2 (4)
Other limited partnership interests (2) 4 (10) (62)
Sales of businesses -- -- 23 --
Derivatives (2) (29) 9 (38) (17)
Other (10) 5 58 11
----- ----- ----- -----
Total net investment gains (losses) $ 47 $ (42) $ 163 $(294)
===== ===== ===== =====
(1) The amounts presented exclude net investment gains 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") of $131 million and $152 million,
respectively, for the three months and six months ended June 30, 2004 and
$0 million and $90 million, respectively, for the three months and six
months ended June 30, 2003.
(2) The amounts presented include net investment gains related to scheduled
periodic 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 $22 million and $36
million, respectively, for the three months and six months ended June 30,
2004 and $12 million and $20 million, respectively, for the three months
and six months ended June 30, 2003.
11
The following tables show the estimated fair values and gross unrealized
losses of the Company's fixed maturities in an unrealized loss position,
aggregated by sector and length of time that the securities have been in a
continuous unrealized loss position, at June 30, 2004 and December 31, 2003:
JUNE 30, 2004
------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS EQUAL TO OR GREATER THAN 12 MONTHS TOTAL
-------------------- ---------------------------------- -------------------------
ESTIMATED GROSS ESTIMATED GROSS ESTIMATED GROSS
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSS VALUE LOSS VALUE LOSS
----- ---- ----- ---- ----- ----
(DOLLARS IN MILLIONS)
U.S. corporate securities $17,711 $ 509 $ 1,205 $ 91 $18,916 $ 600
Residential mortgage-backed securities 16,774 273 283 17 17,057 290
Foreign corporate securities 7,378 243 415 17 7,793 260
U.S. treasuries/agencies 7,773 160 74 6 7,847 166
Asset-backed securities 4,814 53 502 17 5,316 70
Commercial mortgage-backed securities 5,757 137 329 6 6,086 143
Foreign government securities 2,050 94 57 9 2,107 103
State and political subdivisions 1,149 36 69 6 1,218 42
Other fixed income assets 50 50 31 2 81 52
------- ------- ------- ------- ------- -------
Total bonds 63,456 1,555 2,965 171 66,421 1,726
Redeemable preferred stocks 519 71 -- -- 519 71
------- ------- ------- ------- ------- -------
Total fixed maturities $63,975 $ 1,626 $ 2,965 $ 171 $66,940 $ 1,797
======= ======= ======= ======= ======= =======
DECEMBER 31, 2003
-------------------------------------------------------------------------------------
LESS THAN 12 MONTHS EQUAL TO OR GREATER THAN 12 MONTHS TOTAL
------------------- ---------------------------------- -----------------------
ESTIMATED GROSS ESTIMATED GROSS ESTIMATED GROSS
VALUE UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
FAIR LOSS VALUE LOSS VALUE LOSS
---- ---- ----- ---- ----- ----
(DOLLARS IN MILLIONS)
U.S. corporate securities $ 7,214 $ 152 $ 1,056 $ 100 $ 8,270 $ 252
Residential mortgage-backed securities 8,372 98 27 4 8,399 102
Foreign corporate securities 2,583 65 355 14 2,938 79
U.S. treasuries/agencies 3,697 26 -- -- 3,697 26
Asset-backed securities 2,555 34 861 26 3,416 60
Commercial mortgage-backed securities 2,449 20 282 2 2,731 22
Foreign government securities 331 28 2 -- 333 28
State and political subdivisions 389 12 38 3 427 15
Other fixed income assets 130 73 40 10 170 83
------- ------- ------- ------- ------- -------
Total bonds 27,720 508 2,661 159 30,381 667
Redeemable preferred stocks 222 62 278 14 500 76
------- ------- ------- ------- ------- -------
Total fixed maturities $27,942 $ 570 $ 2,939 $ 173 $30,881 $ 743
======= ======= ======= ======= ======= =======
At June 30, 2004 and December 31, 2003, the Company had gross unrealized
losses of $29 million and $6 million, respectively, from equity securities that
had been in an unrealized loss position for less than twelve months. The amount
of unrealized losses from equity securities that had been in an unrealized loss
position for twelve months or greater is less than $1 million at both June 30,
2004 and December 31, 2003. The fair value of those equity securities that had
been in an unrealized loss position for less than twelve months is $389 million
and $53 million at June 30, 2004 and December 31, 2003, respectively. The fair
value of those equity securities that had been in an unrealized loss position
for twelve months or greater is $2 million and $22 million at June 30, 2004 and
December 31, 2003, respectively.
STRUCTURED INVESTMENT TRANSACTIONS
The Company invests in structured notes and similar type instruments, which
generally provide equity-based returns on debt securities. The carrying value of
such investments was approximately $906 million and $880 million at June 30,
2004 and December 31, 2003, respectively. The related income recognized was $28
million and $21 million for the three months ended June 30, 2004 and 2003,
respectively, and $33 million and $24 million for the six months ended June 30,
2004 and 2003, respectively.
12
VARIABLE INTEREST ENTITIES
As discussed in Note 1, the Company has adopted the provisions of FIN 46(r).
The adoption of FIN 46(r) required the Company to consolidate certain VIEs for
which it is the primary beneficiary. The following table presents the total
assets of and maximum exposure to loss relating to VIEs for which the Company
has concluded that (i) it is the primary beneficiary and which are consolidated
in the Company's unaudited interim condensed consolidated financial statements
at June 30, 2004, and (ii) it holds significant variable interests but it is not
the primary beneficiary and which have not been consolidated:
JUNE 30, 2004
-----------------------------------------------
PRIMARY BENEFICIARY NOT PRIMARY BENEFICIARY
---------------------- -----------------------
MAXIMUM MAXIMUM
TOTAL EXPOSURE TO TOTAL EXPOSURE TO
ASSETS(1) LOSS(2) ASSETS(1) LOSS(2)
--------- ----------- --------- -----------
(DOLLARS IN MILLIONS)
Asset-backed securitizations
and collateralized debt obligations $ -- $ -- $2,355 $ 16
Real estate joint ventures (3) 16 13 75 --
Other limited partnerships (4) 82 84 587 60
------ ------ ------ ------
Total $ 98 $ 97 $3,017 $ 76
====== ====== ====== ======
- ----------
(1) The assets of the asset-backed securitizations and collateralized debt
obligations are reflected at fair value as of June 30, 2004. 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 of the asset-backed securitizations and
collateralized debt obligations is equal to the carrying amounts of
retained interests. In addition, the Company provides collateral
management services for certain of these structures for which it collects
a management fee. 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 real estate funds, 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.
3. DERIVATIVE INSTRUMENTS
The Company uses derivative instruments to manage risk through one of five
principal strategies, the hedging of: (i) liabilities; (ii) invested assets;
(iii) portfolios of assets or liabilities; (iv) net investments in certain
foreign operations; and (v) 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 swaps, caps and floors,
credit default swaps and foreign currency swaps and foreign currency forwards
and options.
On the date the Company enters into a derivative contract for hedging
purposes, 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 scheduled periodic settlement receipts and payments are reported
in net investment gains (losses).
The Company formally documents all relationships between hedging instruments
and hedged items, as well as its risk management objective and strategy for
undertaking various hedge transactions. In this documentation, the Company
specifically identifies the asset,
13
liability, firm commitment, foreign operation, 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, and sets forth the
method that will be used to retrospectively and prospectively assess the hedging
instrument's effectiveness and the method that will be used to measure hedge
ineffectiveness. The Company generally determines hedge effectiveness based on
total changes in fair value of a derivative instrument. The Company discontinues
hedge accounting prospectively when: (i) it is determined that the derivative is
no longer effective in offsetting changes in the fair value or cash flows of a
hedged item; (ii) the derivative expires or is sold, terminated, or exercised;
(iii) the derivative is de-designated as a hedge instrument; (iv) it is probable
that the forecasted transaction will not occur; (v) a hedged firm commitment no
longer meets the definition of a firm commitment; or (vi) management determines
that designation of the derivative as a hedge instrument is no longer
appropriate.
The table below provides a summary of the notional amount and fair value of
derivatives by type of hedge designation at:
JUNE 30, 2004 DECEMBER 31, 2003
---------------------------------------- ----------------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL ------------------------ NOTIONAL ------------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- ------ ------ -----------
(DOLLARS IN MILLIONS)
BY TYPE OF HEDGE
Fair value $ 5,666 $ 77 $ 228 $ 4,027 $ 27 $ 297
Cash flow 14,472 136 403 13,173 59 449
Foreign operations 519 2 8 527 -- 10
Non qualifying 21,689 122 133 21,807 170 142
------- ------- ------- ------- ------- -------
Total $42,346 $ 337 $ 772 $39,534 $ 256 $ 898
======= ======= ======= ======= ======= =======
Non-qualifying derivatives are comprised of derivative instruments which do
not meet the requirements for, or for which the Company does not seek, hedge
accounting under SFAS 133. These include certain interest rate, foreign
currency, credit default and total return swaps, interest rate caps, foreign
currency forwards, purchased options and futures, embedded conversion options,
and derivatives held in consolidated separate accounts. The non-qualifying
notional amount at June 30, 2004 and December 31, 2003, includes $5,459 million
and $5,177 million, respectively, related to synthetic guaranteed investment
product contracts that meet the definition of a derivative, but are not
considered to be accounting hedges. The market value of such contracts at June
30, 2004 and December 31, 2003 exceeds the contract value.
During the three months and six months ended June 30, 2004, the Company
recognized net investment expense of $38 million and $70 million, respectively,
from the periodic settlement and amortization, and net investment losses of $13
million and $72 million, respectively, from disposals of interest rate caps,
options, futures and interest rate, foreign currency and credit default swaps
that qualify for hedge accounting. During the three and six months ended June
30, 2003 the Company recognized net investment expense of $10 million and $16
million, respectively, from the periodic settlement and amortization, and net
investment gains of $24 million and $27 million, respectively, from disposals of
interest rate caps and interest rate, foreign currency and credit default swaps
that qualify for hedge accounting.
The following table represents fair value hedges for the:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN MILLIONS)
Changes in the fair value of qualifying hedges $ 133 $ (83) $ 122 $ (92)
Changes in the hedged items reclassified into net investment gains (losses) (130) 74 (99) 86
----- ----- ----- -----
Net ineffectiveness gains (losses) from fair value hedging activities $ 3 $ (9) $ 23 $ (6)
===== ===== ===== =====
There were no discontinued fair value hedges during the three months and six
months ended June 30, 2004 or 2003.
14
The following table represents cash flow hedges for the:
THREE MONTHS SIX MONTHS YEAR THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 31, JUNE 30, JUNE 30,
2004 2004 2003 2003 2003
------------ ---------- ------------ ------------ ----------
(DOLLARS IN MILLIONS)
Changes in the fair value of qualifying hedges $ 115 $ 130 $(456) $(109) $(122)
Less: Gains (losses) deferred in other comprehensive income
on the effective portion of cash flow hedges 158 154 (387) (103) (116)
----- ----- ----- ----- -----
Net ineffectiveness recorded in net investment gains (losses)
from cash flow hedging activities $ (43) $ (24) $ (69) $ (6) $ (6)
===== ===== ===== ===== =====
Other comprehensive income balance at the beginning of the
period $(415) $(417) $ (24) $ (19) $ (24)
Gains (losses) deferred in other comprehensive income on the
effective portion of cash flow hedges 158 154 (387) (103) (116)
Amounts reclassified to net investment income 1 1 2 1 1
Amounts reclassified to net investment gains (losses) (15) (5) -- (8) 12
Amortization of transition adjustment (2) (6) (8) (2) (4)
----- ----- ----- ----- -----
Other comprehensive income balance at the end of the period $(273) $(273) $(417) $(131) $(131)
===== ===== ===== ===== =====
The Company uses forward exchange contracts to provide a hedge
on portions of its net investments in foreign operations against adverse
movements in foreign currency exchange rates. For the three months and six
months ended June 30, 2004, the Company experienced net unrealized gains of $0
million and $4 million, respectively, related to hedges of its investments in
foreign operations. Unrealized losses of $6 million and $10 million were
recorded as components of accumulated other comprehensive income at June 30,
2004 and December 31, 2003, respectively. There were no hedges of the net
investment in foreign operations at June 30, 2003.
For the three months and six months ended June 30, 2004, the Company
recognized as net investment gains the scheduled periodic settlement payments of
derivative instruments of $22 million and $36 million, respectively, and net
investment gains (losses) of $2 million and $(1) million, respectively, from
derivatives not qualifying as accounting hedges. For the three months and six
months ended June 30, 2003, the Company recognized as net investment gains the
scheduled periodic settlement payments of derivative instruments of $12 million
and $20 million, respectively, and net investment losses of $12 million and $52
million, respectively, from derivatives not qualifying as accounting hedges. The
use of these non-speculative derivatives is permitted by the applicable
insurance departments.
4. INSURANCE
CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS
The Company issues variable annuity contracts which may include contractual
guarantees to the contractholder for: (i) return of no less than total deposits
made to the contract less any partial withdrawals ("return of net deposits") and
(ii) the highest contract value on a specified anniversary date minus any
withdrawals following the contract anniversary, or total deposits made to the
contract less any partial withdrawals plus a minimum return ("anniversary
contract value" or "minimum return"). The Company also issues annuity contracts
that apply a lower rate of funds deposited if the contractholder elects to
surrender the contract for cash and a higher rate if the contractholder elects
to annuitize ("two tier annuities"). These guarantees include benefits that are
payable in the event of death or at annuitization. The Company also issues
universal and variable life contracts where the Company contractually guarantees
to the contractholder a secondary guarantee or a guaranteed paid up benefit.
The assets supporting the variable portion of contracts with guarantees are
carried at fair value and reported in total separate account assets with an
equivalent amount reported in separate account liabilities in the unaudited
interim condensed consolidated balance sheets. Net investment income, net
realized gains (losses) and net unrealized gains (losses) relating to such
separate accounts accrue directly to the contractholders and, accordingly, are
reflected net in the Company's unaudited interim condensed consolidated
financial statements. Amounts assessed against the contractholders for
mortality, administrative, and other services are included in universal life and
investment-type policy fees. Liabilities for guarantees and changes in such
liabilities are included in future policy benefits and policyholder benefits and
claims in the unaudited interim condensed consolidated balance sheets and
statements of income, respectively.
15
The Company had the following types of guarantees relating to annuity and
universal and variable life contracts at:
ANNUITY CONTRACTS JUNE 30, 2004
-------------------------------
IN THE AT
EVENT OF DEATH ANNUITIZATION
-------------- -------------
(DOLLARS IN MILLIONS)
RETURN OF NET DEPOSITS
Separate account value $ 5,557 N/A
Net amount at risk $ 23 (1) N/A
Average attained age of contractholders 60 years N/A
ANNIVERSARY CONTRACT VALUE OR MINIMUM
RETURN
Separate account value $ 39,923 $ 11,571
Net amount at risk $ 1,267 (1) $ 92 (2)
Average attained age of contractholders 61 years 59 years
TWO TIER ANNUITIES
General account value N/A $ 300
Net amount at risk N/A $ 36 (3)
Average attained age of contractholders N/A 58 years
UNIVERSAL AND VARIABLE LIFE CONTRACTS JUNE 30, 2004
------------------------------
SECONDARY PAID UP
GUARANTEES GUARANTEES
---------- ----------
(DOLLARS IN MILLIONS)
Account value (general and separate account) $ 3,135 $ 4,886
Net amount at risk $ 66,489 (1) $ 43,805 (1)
Average attained age of policyholders 44 years 52 years
- ----------
(1) The net amount at risk for guarantees of amounts in the event of death is
defined as the current guaranteed minimum death benefit in excess of the
current account balance at the balance sheet date.
(2) The net amount at risk for guarantees of amounts at annuitization is
defined as the present value of the minimum guaranteed annuity payments
available to the contractholder determined in accordance with the terms of
the contract in excess of the current account balance.
(3) The net amount at risk for two tier annuities is based on the excess of
the upper tier, adjusted for a profit margin, less the lower tier.
The net amount at risk is based on the direct amount at risk (excluding
reinsurance).
The Company's annuity and life contracts with guarantees may offer more than
one type of guarantee in each contract. Therefore, the amounts listed above may
not be mutually exclusive.
16
Liabilities for guarantees (excluding base policy liabilities) relating to
annuity and universal and variable life contracts are as follows:
ANNUITY CONTRACTS UNIVERSAL AND VARIABLE LIFE CONTRACTS
------------------------------- -------------------------------------
GUARANTEED GUARANTEED PAID
DEATH ANNUITIZATION SECONDARY UP
BENEFITS BENEFITS GUARANTEES GUARANTEES TOTAL
---------- ------------- ---------- ---------- ------
(DOLLARS IN MILLIONS)
Balance at January 1, 2004 $ 9 $ 17 $ 13 $ 22 $ 61
Incurred guaranteed benefits 4 3 2 1 10
Paid guaranteed benefits (2) 0 (1) 0 (3)
---- ---- ---- ---- ----
Balance at March 31, 2004 11 20 14 23 68
---- ---- ---- ---- ----
Incurred guaranteed benefits 2 3 6 1 12
Paid guaranteed benefits (2) 0 (1) 0 (3)
---- ---- ---- ---- ----
Balance at June 30, 2004 $ 11 $ 23 $ 19 $ 24 $ 77
==== ==== ==== ==== ====
The guaranteed death benefit liabilities are determined by estimating the
expected value of death benefits in excess of the projected account balance and
recognizing the excess ratably over the accumulation period based on total
expected assessments. The Company regularly evaluates estimates used and adjusts
the additional liability balance, with a related charge or credit to benefit
expense, if actual experience or other evidence suggests that earlier
assumptions should be revised. The assumptions used in estimating the liability
at June 30, 2004 are consistent with those used for amortizing DAC, including
the mean reversion assumption. The assumptions of investment performance and
volatility are consistent with historical S&P experience. The benefits used in
calculating the liabilities are based on the average benefits payable over a
range of scenarios.
The guaranteed annuitization benefit liabilities are determined by estimating
the expected value of the annuitization benefits in excess of the projected
account balance at the date of annuitization and recognizing the excess ratably
over the accumulation period based on total expected assessments. The Company
regularly evaluates estimates used and adjusts the additional liability balance,
with a related charge or credit to benefit expense, if actual experience or
other evidence suggests that earlier assumptions should be revised. The
assumptions used for calculating such guaranteed annuitization benefit
liabilities at June 30, 2004 are consistent with those used for calculating the
guaranteed death benefit liabilities. In addition, the calculation of the
guaranteed annuitization benefit liabilities incorporates a percentage of the
potential annuitizations that may be elected by the contractholder.
The liabilities for universal and variable life secondary guarantees and
paid-up guarantees are determined by estimating the expected value of death
benefits payable when the account balance is projected to be zero and
recognizing those benefits ratably over the accumulation period based on total
expected assessments. The Company regularly evaluates estimates used and adjusts
the additional liability balances, with a related charge or credit to benefit
expense, if actual experience or other evidence suggests that earlier
assumptions should be revised. The assumptions used in estimating the secondary
and paid up guarantee liabilities at June 30, 2004 are consistent with those
used for amortizing deferred acquisition costs. The assumptions of investment
performance and volatility for variable products are consistent with historical
S&P experience. The benefits used in calculating the liabilities are based on
the average benefits payable over a range of scenarios.
17
SEPARATE ACCOUNTS
Account balances of contracts with guarantees are invested in separate
account asset classes as follows at:
JUNE 30, 2004 JANUARY 1, 2004
------------- ---------------
(DOLLARS IN MILLIONS)
Equity securities (including mutual funds)
Equity $27,656 $23,784
Bond 3,934 3,531
Balanced 1,487 1,368
Money Market 511 501
Specialty 179 55
------- -------
TOTAL $33,767 $29,239
======= =======
At June 30, 2004, equity securities, fixed maturities and cash and cash
equivalents include $77 million, $57 million and $4 million, respectively, of
the Company's proportional interest in separate accounts.
During the three months and six months ended June 30, 2004, there were no
investment gains (losses) on transfers of assets from the general account to the
separate account.
SALES INDUCEMENTS
The Company defers sales inducements and amortizes them over the life of
the policy using the same methodology and assumptions used to amortize DAC. The
Company has two different types of sales inducements: (i) a bonus whereby the
policyholder's initial account balance is increased by an amount equal to a
specified percentage of the customer's deposit and (ii) the policyholder
receives a higher interest rate than the normal general account interest rate
credited on money in the enhanced dollar cost averaging program. Changes in
deferred sales inducements are as follows:
SALES INDUCEMENTS
-----------------
(DOLLARS IN MILLIONS)
Balance at January 1, 2004 $ 196
Capitalization 40
Amortization (1)
-----
Balance at March 31, 2004 235
=====
Capitalization 24
Amortization (3)
-----
Balance at June 30, 2004 $ 256
=====
5. CLOSED BLOCK
On April 7, 2000, (the "date of demutualization"), Metropolitan Life
converted from a mutual life insurance company to a stock life insurance company
and became a wholly-owned subsidiary of MetLife, Inc. The conversion was
pursuant to an order by the New York Superintendent of Insurance (the
"Superintendent") approving Metropolitan Life's plan of reorganization, as
amended (the "plan"). On the date of demutualization, Metropolitan Life
established a closed block for the benefit of holders of certain individual life
insurance policies of Metropolitan Life.
18
Liabilities and assets designated to the closed block are as follows:
JUNE 30, DECEMBER 31,
2004 2003
-------- --------
(DOLLARS IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits $ 42,061 $ 41,928
Other policyholder funds 255 260
Policyholder dividends payable 728 682
Policyholder dividend obligation 1,330 2,130
Payables under securities loaned transactions 5,135 6,418
Other liabilities 156 180
-------- --------
Total closed block liabilities 49,665 51,598
-------- --------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $29,243 and $30,381, respectively) 30,400 32,348
Equity securities, at fair value (cost: $323 and $217, respectively) 368 250
Mortgage loans on real estate 7,785 7,431
Policy loans 4,045 4,036
Short-term investments 62 123
Other invested assets 235 108
-------- --------
Total investments 42,895 44,296
Cash and cash equivalents 326 531
Accrued investment income 522 527
Deferred income taxes 946 1,043
Premiums and other receivables 93 164
-------- --------
Total assets designated to the closed block 44,782 46,561
-------- --------
Excess of closed block liabilities over assets designated
to the closed block 4,883 5,037
-------- --------
Amounts included in accumulated other comprehensive loss:
Net unrealized investment gains, net of deferred
income tax of $443 and $730, respectively 787 1,270
Unrealized derivative gains (losses), net of deferred income
tax benefit of ($23) and ($28), respectively (38) (48)
Allocated from policyholder dividend obligation, net of
deferred income tax benefit of ($464) and ($778), respectively (827) (1,352)
-------- --------
(78) (130)
-------- --------
Maximum future earnings to be recognized from closed
block assets and liabilities $ 4,805 $ 4,907
======== ========
Information regarding the policyholder dividend obligation is as follows:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(DOLLARS IN MILLIONS)
Balance at beginning of period $ 2,130 $ 1,882
Impact on revenues, net of expenses and income taxes 40 --
Change in unrealized investment and derivative gains (losses) (840) 248
------- -------
Balance at end of period $ 1,330 $ 2,130
======= =======
19
Closed block revenues and expenses are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- -------------------------
2004 2003 2004 2003
------- ------- ------- -------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 776 $ 825 $ 1,524 $ 1,624
Net investment income and other revenues 631 623 1,263 1,265
Net investment gains (losses) 11 (19) (15) (52)
------- ------- ------- -------
Total revenues 1,418 1,429 2,772 2,837
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 877 911 1,703 1,764
Policyholder dividends 364 392 730 786
Change in policyholder dividend obligation 39 -- 40 --
Other expenses 69 76 140 152
------- ------- ------- -------
Total expenses 1,349 1,379 2,613 2,702
------- ------- ------- -------
Revenues net of expenses before income taxes 69 50 159 135
Income taxes 25 18 57 49
------- ------- ------- -------
Revenues net of expenses and income taxes $ 44 $ 32 $ 102 $ 86
======= ======= ======= =======
The change in maximum future earnings of the closed block is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2004 2003 2004 2003
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Balance at end of period $ 4,805 $ 5,028 $ 4,805 $ 5,028
Balance at beginning of period 4,849 5,060 4,907 5,114
------- ------- ------- -------
Change during period $ (44) $ (32) $ (102) $ (86)
======= ======= ======= =======
Metropolitan Life charges the closed block with federal income taxes,
state and local premium taxes, and other additive state or local taxes, as well
as investment management expenses relating to the closed block as provided in
the plan of demutualization. Metropolitan Life also charges the closed block for
expenses of maintaining the policies included in the closed block.
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:
JUNE 30, 2004 DECEMBER 31, 2003
-------------------------------- --------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL --------------------- NOTIONAL ---------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
------ ------ ----------- -------- ------ -----------
(DOLLARS IN MILLIONS)
BY TYPE OF HEDGE
Fair value $ 31 $ 1 $ 2 $ 6 $ -- $ 1
Cash flow 661 2 75 473 -- 80
Non qualifying 115 -- 10 90 -- 12
---- ---- ---- ---- ---- ----
Total $807 $ 3 $ 87 $569 $ -- $ 93
==== ==== ==== ==== ==== ====
During both the three months and six months ended June 30, 2004, the
closed block recognized net investment expense of $1 million, from periodic
settlement and amortization, and net investment losses of $1 million, from
disposals of interest rate, foreign currency and credit default swaps that
qualify for hedge accounting. During both the three and six months ended June
30, 2003 the Company recognized net investment income of $2 million, from
periodic settlement and amortization, and net investment gains of $5 million,
from disposals of interest rate caps and interest rate, foreign currency and
credit default swaps that qualify for hedge accounting.
20
During the three months and six months ended June 30, 2004 and 2003, net
investment gains (losses) from ineffective fair value hedging activities were
insignificant. There were no discontinued fair value hedges during the three
months and six months ended June 30, 2004 and 2003.
The following table represents cash flow hedges for the:
THREE SIX THREE SIX
MONTHS ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30, DECEMBER 31, JUNE 30, JUNE 30,
2004 2004 2003 2003 2003
------------ ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
Changes in the qualifying hedges $ 2 $ 8 $(106) $(29) $(48)
Less: Gains (losses) deferred in other comprehensive
income on the effective portion of cash flow hedges 7 17 (93) (29) (48)
---- ---- ---- ---- ----
Net ineffectiveness recorded in net investment
gains (losses) from cash flow hedging activities $ (5) $ (9) $(13) $ -- $ --
==== ==== ==== ==== ====
Other comprehensive income balance at the beginning
of the period $(67) $(76) $ 20 $ 1 $ 20
Gains (losses) deferred in other comprehensive
income on the effective portion of cash flow hedges 7 17 (93) (29) (48)
Amounts reclassified to net investment income --
Amounts reclassified to net investment gains (losses) --
Amortization of transition adjustment (1) (2) (3) (1) (1)
---- ---- ---- ---- ----
Other comprehensive income balance at the end of the period $(61) $(61) $(76) $(29) $(29)
==== ==== ==== ==== ====
For the three months and six months ended June 30, 2004, the closed block
recognized no amounts as net investment gains from the scheduled periodic
settlement payments of derivative instruments and net investment gains of $14
million and $9 million, respectively, from derivatives not qualifying as
accounting hedges. For the three months and six months ended June 30, 2003, the
Company recognized as net investment losses the scheduled periodic settlement
payments of derivative instruments of $1 million and $1 million, respectively,
and net investment losses of $20 million and $21 million, respectively, from
derivatives not qualifying as accounting hedges. The use of these
non-speculative derivatives is permitted by the applicable insurance department.
6. COMMITMENTS, CONTINGENCIES AND GUARANTEES
The Company is a defendant in a large number of litigation matters. In
some of the matters, very large and/or indeterminate amounts, including punitive
and treble damages, are sought. Modern pleading practice in the United States
permits considerable variation in the assertion of monetary damages or other
relief. Jurisdictions may permit claimants to not specify the monetary damages
sought or may permit claimants to state only that the amount sought is
sufficient to invoke the jurisdiction of the trial court. In addition,
jurisdictions may permit plaintiffs to allege monetary damages in amounts well
exceeding reasonably possible verdicts in the jurisdiction for similar matters.
This variability in pleadings, together with the actual experience of the
Company in litigating or resolving through settlement numerous claims over an
extended period of time, demonstrate to management that the monetary relief
which may be specified in a lawsuit or claim bears little relevance to its
merits or disposition value. Thus, unless stated below, the specific monetary
relief sought is not noted.
Due to the vagaries of litigation, the outcome of a litigation matter and
the amount or range of potential loss at particular points in time may normally
be inherently impossible to ascertain with any degree of certainty. Inherent
uncertainties can include how fact finders will view individually and in their
totality documentary evidence, the credibility and effectiveness of witnesses'
testimony, and how trial and appellate courts will apply the law in the context
of the pleadings or evidence presented, whether by motion practice, or at trial
or on appeal. Disposition valuations are also subject to the uncertainty of how
opposing parties and their counsel will themselves view the relevant evidence
and applicable law. In this context, unless stated below, estimates of possible
additional losses or ranges of loss for particular matters cannot in the
ordinary course be made with a reasonable degree of certainty. Liabilities are
established when it is probable that a loss has been incurred and the amount of
the loss can be reasonably estimated.
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."
21
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.
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 June 30,
2004, there are approximately 331 sales practices lawsuits pending against
Metropolitan Life; approximately 40 sales practices lawsuits pending against New
England Mutual, New England Life Insurance Company, and New England Securities
Corporation (collectively, "New England"); and approximately 51 sales practices
lawsuits pending against General American. Metropolitan Life, New England 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.
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 and General American.
Regulatory authorities in a small number of states have had investigations
or inquiries relating to Metropolitan Life's, New England's or General
American's sales of individual life insurance policies or annuities. Over the
past several years, these and a number of investigations by other regulatory
authorities were resolved for monetary payments and certain other relief. The
Company may continue to resolve investigations in a similar manner.
ASBESTOS-RELATED CLAIMS
Metropolitan Life is also a defendant in thousands of lawsuits seeking
compensatory and punitive damages for personal injuries allegedly caused by
exposure to asbestos or asbestos-containing products. Metropolitan Life has
never engaged in the business of manufacturing, producing, distributing or
selling asbestos or asbestos-containing products nor has Metropolitan Life
issued liability or workers' compensation insurance to companies in the business
of manufacturing, producing, distributing or selling asbestos or
asbestos-containing products. Rather, these lawsuits have principally been based
upon allegations relating to certain research, publication and other activities
of one or more of Metropolitan Life's employees during the period from the
1920's through approximately the 1950's and have alleged that Metropolitan Life
learned or should have learned of certain health risks posed by asbestos and,
among other things, improperly publicized or failed to disclose those health
risks. Metropolitan Life believes that it should not have legal liability in
such cases.
Legal theories asserted against Metropolitan Life have included
negligence, intentional tort claims and conspiracy claims concerning the health
risks associated with asbestos. Although Metropolitan Life believes it has
meritorious defenses to these claims, and has not suffered any adverse monetary
judgments in respect of these claims, due to the risks and expenses of
litigation, almost all past cases have been resolved by settlements.
Metropolitan Life's defenses (beyond denial of certain factual allegations) to
plaintiffs' claims include that: (i) Metropolitan Life owed no duty to the
plaintiffs -- it had no special relationship with the plaintiffs and did not
manufacture, produce, distribute or sell the asbestos products that allegedly
injured plaintiffs; (ii) plaintiffs cannot demonstrate justifiable detrimental
reliance; and (iii) plaintiffs cannot demonstrate proximate causation. In
defending asbestos cases, Metropolitan Life selects various strategies depending
upon the jurisdictions in which such cases are brought and other factors which,
in
22
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, 2003 and 2004, trial courts in California, Utah, Texas 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 12 of Notes to Consolidated Financial Statements for the year
ended December 31, 2003 included in the MetLife, Inc. Annual Report on Form 10-K
for information regarding historical asbestos claims information and the
increase of its recorded liability at December 31, 2002.
Metropolitan Life continues 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.
Recent bankruptcies of other companies involved in asbestos litigation, as
well as advertising by plaintiffs' asbestos lawyers, may result 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 result in an
increase in the number of claims. As reported in MetLife, Inc.'s Annual Report
on Form 10-K, Metropolitan Life received approximately 60,300 asbestos-related
claims in 2003. During the first six months of 2004 and 2003, Metropolitan Life
received approximately 13,560 and 48,000 asbestos-related claims, respectively.
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.
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.
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 was made under the excess insurance policies in 2003 and 2004 for the
amounts paid with respect to asbestos litigation in excess of the retention. As
the performance of the indices impact the return in the reference fund, it is
possible that loss reimbursements to the Company and the recoverable with
respect to later periods may be less than the amount of the recorded losses.
Such foregone 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
23
and limits of the excess insurance policies. Portions of the change in the
insurance recoverable would be recorded as a deferred gain and amortized into
income over the estimated remaining settlement period of the insurance policies.
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, Alabama,
Illinois, Colorado, Indiana and Arkansas. The Company intends to defend itself
vigorously against these cases.
PROPERTY AND CASUALTY ACTIONS
A purported class action has been filed against Metropolitan Property and
Casualty Insurance Company's subsidiary, Metropolitan Casualty Insurance
Company, in Florida alleging 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. During the first quarter of 2004, a purported class
action was filed against Metropolitan Property and Casualty Insurance Company in
Florida on behalf of medical practitioners who provide MRI services. The suit
claims breach of contract and unjust enrichment arising out of the alleged
failure to include a consumer price index adjustment when paying MRI provider
fees. Metropolitan Property and Casualty Insurance Company is vigorously
defending itself against this lawsuit. Two purported nationwide class actions
have been filed against Metropolitan Property and Casualty Insurance Company in
Illinois. One suit claims breach of contract and fraud due to the alleged
underpayment of medical claims arising from the use of a purportedly biased
provider fee pricing system. A motion for class certification has been filed and
discovery is ongoing. The second suit claims breach of contract and fraud
arising from the alleged use of preferred provider organizations to reduce
medical provider fees covered by the medical claims portion of the insurance
policy. A motion to dismiss has been filed. A purported class action has been
filed against Metropolitan Property and Casualty Insurance Company in Montana.
This suit alleges breach of contract and bad faith for not aggregating medical
payment and uninsured coverages provided in connection with the several vehicles
identified in insureds' motor vehicle policies. Metropolitan Property and
Casualty Insurance Company is vigorously defending itself against this lawsuit.
Certain plaintiffs' lawyers have alleged that the use of certain automated
databases to provide total loss vehicle valuation methods was improper.
Metropolitan Property and Casualty Insurance Company, along with a number of
other insurers, has tentatively agreed in January 2004 to resolve this issue in
a class action format. The amount to be paid in resolution of this matter will
not be material to Metropolitan Property and Casualty Insurance Company.
DEMUTUALIZATION ACTIONS
Several lawsuits were brought in 2000 challenging the fairness of
Metropolitan Life's plan of reorganization, as amended (the "plan") and the
adequacy and accuracy of Metropolitan Life's disclosure to policyholders
regarding the plan. These actions named as defendants some or all of
Metropolitan Life, the Holding Company, the individual directors, the New York
Superintendent of Insurance (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 of the New
York State court. 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. On April
27, 2004, the appellate court modified the trial court's order by reinstating
certain claims against Metropolitan Life, the Holding Company and the individual
directors. 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. 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 in connection with
the plan. The plaintiffs in these actions, which have been consolidated, claim
that the Policyholder Information Booklets relating to the plan failed to
disclose certain material facts and seek rescission and compensatory damages.
Metropolitan Life's motion to dismiss these three cases was denied in 2001. On
February 4, 2003, plaintiffs filed a consolidated amended complaint adding a
fraud claim under the Securities Exchange Act of 1934. Plaintiffs served a
second consolidated amended complaint on April 2, 2004, and continue to assert
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934. On June 22, 2004, the court denied the defendants' motion to dismiss the
claim of violation of the Securities Exchange Act of 1934. 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.
24
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.
On April 30, 2004, a lawsuit was filed in New York state court in New York
County against the Holding Company and Metropolitan Life on behalf of a proposed
class comprised of the settlement class in the Metropolitan Life sales practices
class action settlement approved in December 1999 by the United States District
Court for the Western District of Pennsylvania. The complaint challenges the
treatment of the cost of the sales practices settlement in the demutualization
of Metropolitan Life and asserts claims of breach of fiduciary duty, common law
fraud, and unjust enrichment. Plaintiffs seek compensatory and punitive damages,
as well as attorneys' fees and costs. On May 24, 2004, the Holding Company and
Metropolitan Life served a motion to dismiss the complaint. In October 2003, the
United States District Court for the Western District of Pennsylvania dismissed
plaintiffs' similar complaint alleging that the demutualization breached the
terms of the 1999 settlement agreement and unjustly enriched the Holding Company
and Metropolitan Life. In January 2004, plaintiffs' appeal of that decision to
the United States Court of Appeals for the Third Circuit was dismissed. The
Holding Company and Metropolitan Life intend to contest this matter vigorously.
RACE-CONSCIOUS UNDERWRITING CLAIMS
Insurance departments in a number of states initiated inquiries in 2000
about possible race-conscious underwriting of life insurance. These inquiries
generally have been directed to all life insurers licensed in their respective
states, including Metropolitan Life and certain of its affiliates. The New York
Insurance Department 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 were 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
filed notices of appeal from the order approving the settlement, but
subsequently the appeals were dismissed. Metropolitan Life also entered into
settlement agreements to resolve the regulatory examination.
Twenty lawsuits involving approximately 140 plaintiffs were 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 resolved the claims of some of these plaintiffs through settlement, and
some additional plaintiffs have voluntarily dismissed their claims. Metropolitan
Life resolved claims of some additional persons who opted out of the settlement
class referenced in the preceding paragraph but who had not filed suit. The
actions filed in Alabama and Tennessee have been dismissed; two actions filed in
Mississippi remain pending. Metropolitan Life is contesting plaintiffs' claims
vigorously.
The Company believes that adequate provision has been made 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 were seeking unspecified compensatory
damages, punitive damages, a declaration that the alleged practices were
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. 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 commenced in 2004.
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
25
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.
As previously reported, the SEC is conducting a formal investigation of
New England Securities Corporation ("NES"), a 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.
Prior to filing the Company's June 30, 2003 Form 10-Q, MetLife announced a
$31 million after-tax charge resulting from certain improperly deferred expenses
at 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 and a motion to
dismiss has been filed and argued.
A purported class action in which two policyholders seek to represent a
class of owners of participating life insurance policies is pending in state
court in New York. Plaintiffs assert that Metropolitan Life breached their
policies 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.
Plaintiffs have served their motion to certify a litigation class. MetLife is
vigorously defending the case.
Regulatory bodies have contacted the Company and have requested
information relating to market timing and late trading of mutual funds and
variable insurance products and, generally, the marketing of products. The
Company believes that many of these inquiries are similar to those made to many
financial services companies as part of industry-wide investigations by various
regulatory agencies. State Street Research Investment Services, one of the
Company's indirect broker/dealer subsidiaries, has entered into a settlement
with the NASD resolving all outstanding issues relating to its investigation.
The SEC has commenced an investigation with respect to market timing and late
trading in a limited number of privately-placed variable insurance contracts
that were sold through General American. As previously reported, in May 2004,
General American received a so-called "Wells Notice" stating that the SEC staff
is considering recommending that the SEC bring a civil action alleging
violations of the U.S. securities laws against General American. Under the SEC
procedures, General American can avail itself of the opportunity to respond to
the SEC staff before it makes a formal recommendation regarding whether any
action alleging violations of the U.S. securities laws should be considered.
General American has responded to the Wells Notice. The Company is fully
cooperating with regard to these information requests and investigations. The
Company at the present time 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.
As previously reported, the Company has received from the Office of the
Attorney General of the State of New York a subpoena seeking information
regarding certain compensation agreements between insurance brokers and the
Company. The Company is fully cooperating with the inquiry.
Various litigation, claims and assessments against the Company, in
addition to those discussed above and those otherwise provided for in the
Company's unaudited interim condensed consolidated financial statements, have
arisen in the course of the Company's business, including, but not limited to,
in connection with its activities as an insurer, employer, investor, investment
advisor and taxpayer. Further, state insurance regulatory authorities and other
federal and state authorities regularly make inquiries and conduct
investigations concerning the Company's compliance with applicable insurance and
other laws and regulations.
SUMMARY
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses, except as noted above in connection with specific matters. In
some of the matters referred to above, very large and/or indeterminate amounts,
including punitive and treble damages, are sought. Although in light of these
considerations it is possible that an adverse outcome in certain cases could
have a material adverse effect upon the Company's 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
26
certain matters could, from time to time, have a material adverse effect on the
Company's consolidated net income or cash flows in particular quarterly or
annual periods.
COMMITMENTS TO FUND PARTNERSHIP INVESTMENTS
The Company makes commitments to fund partnership investments in the
normal course of business. The amounts of these unfunded commitments were
approximately $1.4 billion at both June 30, 2004 and December 31, 2003,
respectively. The Company anticipates that these amounts will be invested in the
partnerships over the next three to five years.
GUARANTEES
In the course of its business, the Company has provided certain
indemnities, guarantees and commitments to third parties pursuant to which it
may be required to make payments now or in the future.
In the context of acquisition, disposition, investment and other
transactions, the Company has provided indemnities and guarantees, including
those related to tax, environmental and other specific liabilities, and other
indemnities and guarantees that are triggered by, among other things, breaches
of representations, warranties or covenants provided by the Company. In
addition, in the normal course of business, the Company provides
indemnifications to counterparties in contracts with triggers similar to the
foregoing, as well as for certain other liabilities, such as third party
lawsuits. These obligations are often subject to time limitations that vary in
duration, including contractual limitations and those that arise by operation of
law, such as applicable statutes of limitation. In some cases, the maximum
potential obligation under the indemnities and guarantees is subject to a
contractual limitation ranging from less than $1 million to $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.
For the six months ended June 30, 2004, the Company recorded liabilities
of $10 million with respect to indemnities provided in certain dispositions. The
approximate term for these liabilities is 12 to 18 months. The maximum potential
amount of future payments that MetLife could be required to pay for these
liabilities is $73 million. Due to the uncertainty in assessing changes to the
liabilities over the term, the liability on the balance sheet will remain until
either expiration or settlement of the guarantee unless evidence clearly
indicates that the estimates should be revised. The fair value of the remaining
indemnities, guarantees and commitments entered into was insignificant and thus,
no liabilities were recorded. The Company's recorded liability at June 30, 2004
and December 31, 2003 for indemnities, guarantees and commitments provided to
third parties, excluding amounts recorded during the first six months of 2004,
is insignificant.
The Company writes credit default swap obligations requiring payment of
principal due in exchange for the reference credit obligation, depending on the
nature or occurrence of specified credit events for the referenced entities. In
the event of a specified credit event, the Company's maximum amount at risk,
assuming the value of the referenced credits become worthless, is $1.3 billion
at June 30, 2004. The credit default swaps expire at various times during the
next ten years.
7. EMPLOYEE BENEFIT PLANS
PENSION BENEFIT AND OTHER BENEFIT PLANS
The Company is both the sponsor and administrator of defined benefit
pension plans covering eligible employees and sales representatives of the
Company. Retirement benefits are based upon years of credited service and final
average or career average earnings history.
The Company also provides certain postemployment benefits and certain
postretirement health care and life insurance benefits for retired employees
through insurance contracts. Substantially all of the Company's employees may,
in accordance with the plans applicable to the postretirement benefits, become
eligible for these benefits if they attain retirement age, with sufficient
service, while working for the Company.
27
The Company uses December 31 as the measurement date for all of its
pension and postretirement benefit plans.
The components of net periodic benefit cost were as follows:
PENSION BENEFITS PENSION BENEFITS OTHER BENEFITS OTHER BENEFITS
---------------- ---------------- ---------------- ---------------
FOR THE THREE FOR THE SIX FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
---------------- ---------------- ---------------- ---------------
2004 2003 2004 2003 2004 2003 2004 2003
----- ----- ----- ----- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
Service cost $ 32 $ 31 $ 65 $ 62 $ 9 $ 10 $ 18 $ 20
Interest cost 78 79 156 158 31 31 62 62
Expected return on plan assets (108) (84) (215) (168) (19) (18) (38) (36)
Amortization of prior actuarial gains (losses) 30 26 58 52 (1) (3) (2) (6)
Curtailment (credit) cost -- 3 -- 6 -- 1 -- 2
----- ----- ----- ----- ----- ----- ----- -----
Net periodic benefit (credit) cost $ 32 $ 55 $ 64 $ 110 $ 20 $ 21 $ 40 $ 42
===== ===== ===== ===== ===== ===== ===== =====
EMPLOYER CONTRIBUTIONS
As of June 30, 2004, contributions of $485 million have been made to the
pension plans and the Company presently anticipates contributing an additional
$33 million to fund its pension plans in 2004 for a total of $518 million.
Contributions to the postretirement benefit plans are expected to be $89
million.
8. STOCK COMPENSATION PLANS
Under the MetLife, Inc. 2000 Stock Incentive Plan, as amended, (the "Stock
Incentive Plan"), awards granted may be in the form of non-qualified or
incentive stock options qualifying under Section 422A of the Internal Revenue
Code. Under the MetLife, Inc. 2000 Directors Stock Plan, as amended (the
"Directors Stock Plan"), awards granted may be in the form of stock awards,
non-qualified stock options, or a combination of the foregoing to outside
Directors of the Company. The aggregate number of options to purchase shares of
stock that may be awarded under the Stock Incentive Plan and the Directors Stock
Plan is subject to a maximum limit of 37,823,333, of which no more than 378,233
may be awarded under the Directors Stock Plan. The Directors Stock Plan has a
maximum limit of 500,000 stock awards.
All options granted have an exercise price equal to the fair market value
price of the Company's common stock on the date of grant, and an option's
maximum term is ten years. Certain options under the Stock Incentive Plan become
exercisable over a three year period commencing with the date of grant, while
other options become exercisable three years after the date of grant. Options
issued under the Directors Stock Plan are exercisable immediately.
28
The Company has elected to apply the fair value method of accounting for
stock options granted by the Company subsequent to December 31, 2002. Options
granted prior to January 1, 2003 continue to be accounted for under the
intrinsic value method. Had compensation costs for grants prior to January 1,
2003 been determined based on fair value at the date of grant, the Company's
earnings and earnings per share amounts would have been reduced to the following
pro forma amounts for the:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------- -----------------------
2004 2003 2004 2003
------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Net Income $ 947 $ 580 $ 1,470 $ 942
Charge for conversion of company-obligated mandatorily
redeemable securities of a subsidiary trust (1) -- -- -- (21)
------- ------- ------- -------
Net income available to common shareholders 947 580 1,470 921
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 7 3 13 6
Deduct: Total Stock-based employee compensation determined under
fair value based method for all awards, net of related tax effects (11) (9) (24) (21)
------- ------- ------- -------
Pro forma net income available to common shareholders (2) (3) $ 943 $ 574 $ 1,459 $ 906
======= ======= ======= =======
BASIC EARNINGS PER SHARE
As reported $ 1.26 $ 0.79 $ 1.95 $ 1.29
======= ======= ======= =======
Pro forma (2)(3) $ 1.25 $ 0.78 $ 1.93 $ 1.27
======= ======= ======= =======
DILUTED EARNINGS PER SHARE
As reported $ 1.25 $ 0.79 $ 1.94 $ 1.29
======= ======= ======= =======
Pro forma (2)(3) $ 1.24 $ 0.78 $ 1.92 $ 1.27
======= ======= ======= =======
- ----------
(1) MetLife Capital Trust I ("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.
(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 ("RGA"), incentive stock
plan and the stock compensation costs related to the incentive stock plans
at SSRM Holdings, Inc. ("State Street Research"), determined in accordance
with the fair value method.
29
9. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Net income $ 947 $ 580 $ 1,470 $ 942
Other comprehensive income (loss):
Unrealized gains (losses) on derivative instruments, net of
income taxes 81 (71) 85 (69)
Unrealized investment gains (losses), net of related offsets,
reclassification adjustments and income taxes (1,737) 936 (1,155) 1,234
Cumulative effect of a change in accounting, net of income taxes 90 --
Foreign currency translation adjustments (71) 129 (95) 143
Minimum pension liability adjustment -- -- -- (9)
------- ------- ------- -------
Other comprehensive income (loss): (1,727) 994 (1,075) 1,299
------- ------- ------- -------
Comprehensive income (loss) $ (780) $ 1,574 $ 395 $ 2,241
======= ======= ======= =======
30
10. EARNINGS PER SHARE
The following table presents the weighted average shares used in
calculating basic earnings per share and those used in calculating diluted
earnings per share for each income category presented below:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------- ------------- ------------- -------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
Weighted average common stock outstanding for basic
earnings per share 753,331,966 731,242,226 754,915,747 715,866,466
Incremental shares from assumed:
Exercise of stock options 3,455,800 14,228 3,284,270 --
Issuance under deferred stock compensation 1,183,084 -- 935,759 --
------------- ------------- ------------- -------------
Weighted average common stock outstanding for diluted
earnings per share 757,970,850 731,256,454 759,135,776 715,866,466
============= ============= ============= =============
INCOME FROM CONTINUING OPERATIONS $ 852 $ 572 $ 1,510 $ 866
Charge for conversion of company-obligated mandatorily
redeemable securities of a subsidiary trust (1) -- -- -- (21)
INCOME FROM CONTINUING OPERATIONS AVAILABLE ------------- ------------- ------------- -------------
TO COMMON SHAREHOLDERS $ 852 $ 572 $ 1,510 $ 845
============= ============= ============= =============
Basic earnings per share $ 1.13 $ 0.78 $ 2.00 $ 1.18
============= ============= ============= =============
Diluted earnings per share $ 1.12 $ 0.78 $ 1.99 $ 1.18
============= ============= ============= =============
INCOME FROM DISCONTINUED OPERATIONS AVAILABLE
TO COMMON SHAREHOLDERS $ 95 $ 8 $ 118 $ 76
============= ============= ============= =============
Basic earnings per share $ 0.13 $ 0.01 $ 0.16 $ 0.11
============= ============= ============= =============
Diluted earnings per share $ 0.13 $ 0.01 $ 0.16 $ 0.11
============= ============= ============= =============
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING, NET
OF INCOME TAXES $ -- $ -- $ (158) $ --
============= ============= ============= =============
Basic earnings per share $ -- $ -- $ (0.21) $ --
============= ============= ============= =============
Diluted earnings per share $ -- $ -- $ (0.21) $ --
============= ============= ============= =============
NET INCOME $ 947 $ 580 $ 1,470 $ 942
Charge for conversion of company-obligated mandatorily
redeemable securities of a subsidiary trust (1) -- -- -- (21)
============= ============= ============= =============
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 947 $ 580 $ 1,470 $ 921
============= ============= ============= =============
Basic earnings per share $ 1.26 $ 0.79 $ 1.95 $ 1.29
============= ============= ============= =============
Diluted earnings per share $ 1.25 $ 0.79 $ 1.94 $ 1.29
============= ============= ============= =============
- ----------
(1) See Note 8 for a discussion of this charge included in the calculation of
net income available to common shareholders.
On February 19, 2002, the Holding Company's Board of Directors authorized
a $1 billion common stock repurchase program. Under this authorization, the
Holding Company may purchase common stock from the MetLife Policyholder Trust,
in the open market and in privately negotiated transactions. The Holding Company
acquired 7,935,381 shares of common stock for approximately $275 million during
the six months ended June 30, 2004. The Holding Company did not acquire any
shares of common stock during the six months ended June 30, 2003. The Holding
Company issued 805,262 shares of common stock from treasury stock for $25
million during the six months ended June 30, 2004. During the six months ended
June 30, 2003, 59,865,424 shares of common stock were issued from treasury
stock, 59,771,221 of which were issued in connection with the settlement of
common stock purchase contracts
31
for approximately $1,006 million. At June 30, 2004, the Holding Company had
approximately $434 million remaining on its existing share repurchase program.
11. BUSINESS SEGMENT INFORMATION
The Company provides insurance and financial services to customers in the
United States, Canada, Central America, South America, South Africa, and Asia.
The Company's business is divided into six 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.
32
Set forth in the tables below is certain financial information with
respect to the Company's operating segments for the three months and six months
ended June 30, 2004 and 2003. 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 (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 (losses),
net of income taxes, and the impact from the cumulative effect of changes in
accounting, net of income taxes. Scheduled periodic settlement payments on
derivative instruments not qualifying for hedge accounting are included in net
investment gains (losses). The Company allocates certain non-recurring items,
such as expenses associated with certain legal proceedings, to Corporate &
Other.
FOR THE THREE MONTHS ENDED AUTO & ASSET CORPORATE &
JUNE 30, 2004 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE MANAGEMENT OTHER TOTAL
- --------------------------- ------------- ---------- ------ ------------- ----------- ---------- ----- -----
(DOLLARS IN MILLIONS)
Premiums $2,382 $1,007 $ 734 $ 405 $ 807 $ -- $ (4) $5,331
Universal life and investment-
type product policy fees 187 455 -- 86 -- -- -- 728
Net investment income 1,121 1,543 44 137 136 18 118 3,117
Other revenues 155 106 6 8 15 73 (7) 356
Net investment gains (losses) 32 35 (5) (3) 31 -- (43) 47
Income (loss) from continuing
operations before provision
for income taxes 576 341 91 101 46 26 (75) 1,106
FOR THE THREE MONTHS ENDED AUTO & ASSET CORPORATE &
JUNE 30, 2003 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE MANAGEMENT OTHER TOTAL
- -------------------------- ------------- ---------- ------ ------------- ----------- ---------- ----- -----
(DOLLARS IN MILLIONS)
Premiums $ 2,334 $ 1,055 $ 721 $ 390 $ 588 $ -- $ (5) $ 5,083
Universal life and investment-
type product policy fees 154 378 -- 71 -- -- -- 603
Net investment income 997 1,532 41 131 121 16 26 2,864
Other revenues 152 109 4 26 12 37 15 355
Net investment gains (losses) 1 (22) (2) (1) 5 -- (23) (42)
Income (loss) from continuing
operations before provision
for income taxes 394 215 51 92 33 9 (10) 784
FOR THE SIX MONTHS ENDED AUTO & ASSET CORPORATE &
JUNE 30, 2004 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE MANAGEMENT OTHER TOTAL
- ------------------------ ------------- ---------- ------ ------------- ----------- ---------- ----- -----
(DOLLARS IN MILLIONS)
Premiums $ 4,807 $ 1,985 $ 1,471 $ 817 $ 1,623 $ -- $ (5) $10,698
Universal life and investment-
type product policy fees 358 877 -- 169 -- -- -- 1,404
Net investment income 2,208 3,058 90 260 266 36 174 6,092
Other revenues 319 223 15 12 27 113 -- 709
Net investment gains (losses) 142 12 (5) 23 52 -- (61) 163
Income (loss) from continuing
operations before provision
for income taxes 1,134 621 149 195 82 35 (149) 2,067
FOR THE SIX MONTHS ENDED AUTO & ASSET CORPORATE &
JUNE 30, 2003 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE MANAGEMENT OTHER TOTAL
- ------------------------ ------------- ---------- ------ ------------- ----------- ---------- ----- -----
(DOLLARS IN MILLIONS)
Premiums $ 4,470 $ 2,096 $ 1,433 $ 785 $ 1,140 $ -- $ (9) $ 9,915
Universal life and investment-
type product policy fees 315 738 -- 122 -- -- -- 1,175
Net investment income 1,972 3,087 80 254 231 32 81 5,737
Other revenues 294 195 13 34 24 66 27 653
Net investment gains (losses) (108) (123) (6) (1) 1 8 (65) (294)
Income (loss) from continuing
operations before provision
for income taxes 621 391 74 134 63 19 (109) 1,193
33
The following amounts are reported as discontinued operations in
accordance with SFAS 144:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN MILLIONS)
Net investment income
Institutional $ 1 $ 1 $ 3 $ 4
Individual 1 -- 1 3
Corporate & Other 23 11 39 23
---- ---- ---- ----
Total net investment income $ 25 $ 12 $ 43 $ 30
==== ==== ==== ====
Net investment gains (losses)
Institutional $ -- $ (1) $ 2 $ 40
Individual 2 7 3 47
Corporate & Other 129 (6) 147 3
---- ---- ---- ----
Total net investment gains (losses) $131 $ -- $152 $ 90
==== ==== ==== ====
The following table presents assets with respect to the Company's
operating segments at:
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
(DOLLARS IN MILLIONS)
Assets
Institutional $119,565 $113,743
Individual 170,616 165,774
Auto & Home 5,008 4,698
International 9,175 9,935
Reinsurance 13,234 12,833
Asset Management 263 302
Corporate & Other 20,368 19,556
-------- --------
Total $338,229 $326,841
======== ========
Corporate & Other includes various start-up and run-off entities, as well
as the elimination of all intersegment amounts. The elimination of intersegment
amounts relates to intersegment loans, which bear interest rates commensurate
with related borrowings, as well as intersegment reinsurance transactions.
Net investment income and net investment gains (losses) are based upon the
actual results of each segment's specifically identifiable asset portfolio
adjusted for allocated capital. Other costs are allocated to each of the
segments based upon: (i) a review of the nature of such costs; (ii) time studies
analyzing the amount of employee compensation costs incurred by each segment;
and (iii) cost estimates included in the Company's product pricing.
Revenues derived from any customer did not exceed 10% of consolidated
revenues. Revenues from U.S. operations were $8,645 million and $8,019 million
for the three months ended June 30, 2004 and 2003, respectively, which
represented 90% and 90%, respectively, of consolidated revenues. Revenues from
U.S. operations were $17,181 million and $15,567 million for the six months
ended June 30, 2004 and 2003, respectively, which represented 90% and 91%,
respectively, of consolidated revenues.
34
12. DISCONTINUED OPERATIONS
The Company actively manages its real estate portfolio with the objective
to maximize earnings through selective acquisitions and dispositions. Income
related to real estate classified as held-for-sale 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2004 2003 2004 2003
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Investment income $ 32 $ 32 $ 65 $ 71
Investment expense (7) (20) (22) (41)
Net investment gains (losses) 131 -- 152 90
----- ----- ----- -----
Total revenues 156 12 195 120
Interest expense 11 -- 13 --
Provision for income taxes 50 4 64 44
----- ----- ----- -----
Income from discontinued operations $ 95 $ 8 $ 118 $ 76
===== ===== ===== =====
The carrying value of real estate related to discontinued operations was
$44 million and $832 million at June 30, 2004 and December 31, 2003,
respectively.
In February of 2004, MetLife entered into a marketing agreement to sell
one of its real estate investments, Sears Tower, and reclassified the property
from Real Estate -- Held-for-Investments to Real Estate -- Held-for-Sale. The
sale, which occurred in April 2004, resulted in an after-tax gain of $85
million.
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of this discussion, the terms "MetLife" or the "Company"
refers to MetLife, Inc., a Delaware corporation (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.
SUMMARY OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the unaudited interim condensed consolidated
financial statements. The critical accounting policies, estimates and related
judgments underlying the Company's unaudited interim condensed consolidated
financial statements are summarized below. In applying these policies,
management makes subjective and complex judgments that frequently require
estimates about matters that are inherently uncertain. Many of these policies,
estimates and related judgments are common in the insurance and financial
services industries; others are specific to the Company's businesses and
operations.
INVESTMENTS
The Company's principal investments are in fixed maturities, mortgage
loans and real estate, all of which are exposed to three primary sources of
investment risk: credit, interest rate and market valuation. The financial
statement risks are those associated with the recognition of impairments and
income, as well as the determination of fair values. The assessment of whether
impairments have occurred is based on management's case-by-case evaluation of
the underlying reasons for the decline in fair value. Management considers a
wide range of factors about the security issuer and uses its best judgment in
evaluating the cause of the decline in the estimated fair value of the security
and in assessing the prospects for near-term recovery. Inherent in management's
evaluation of the security are assumptions and estimates about the operations of
the issuer and its future earnings potential. Considerations used by the Company
in the impairment evaluation process include, but are not limited to: (i) the
length of time and the extent to which the market value has been below amortized
cost; (ii) the potential for impairments of securities when the issuer is
experiencing significant financial difficulties; (iii) the potential for
impairments in an entire industry sector or sub-sector; (iv) the potential for
impairments in certain economically depressed geographic locations; (v) the
potential for impairments of securities where the issuer, series of issuers or
industry has suffered a catastrophic type of loss or has exhausted natural
resources; (vi) the Company's ability and intent to hold the security for a
period of time sufficient to allow for the recovery of its value to an amount
equal to or greater than amortized cost; (vii) unfavorable changes in forecasted
cash flows on asset-backed securities; and (viii) 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. In addition, the Company enters into certain structured
investment transactions, real estate joint ventures and limited partnerships for
which the Company may be deemed to be the primary beneficiary and, therefore,
may be required to consolidate such investments. The accounting rules for the
determination of the primary beneficiary are complex and require evaluation of
the contractual rights and obligations associated with each party involved in
the entity, an estimate of the entity's expected losses and expected residual
returns and the allocation of such estimates to each party.
DERIVATIVES
The Company enters into freestanding derivative transactions primarily to
manage the risk associated with variability in cash flows or changes in fair
values related to the Company's financial assets and liabilities or to changing
fair values. The Company also uses derivative instruments to hedge its currency
exposure associated with net investments in certain foreign operations. The
Company also purchases investment securities, issues certain insurance policies
and engages in certain reinsurance contracts that embed 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; (ii) ineffectiveness of designated hedges; and (iii)
counterparty default. In addition, there is a risk that embedded derivatives
requiring bifurcation are not identified and reported at fair value in the
unaudited interim condensed consolidated financial statements. 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
36
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 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 and
renewal insurance business. These costs, which vary with and are primarily
related to the production of that 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 in excess
of the amounts credited to policyholders, mortality, morbidity, persistency,
interest crediting rates, 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 capitalization and amortization
of deferred policy acquisition costs ("DAC"), including value of business
acquired ("VOBA"). This practice assumes that the expectation for long-term
appreciation in equity markets is not changed by minor short-term market
fluctuations, but that it does change when large interim deviations have
occurred.
FUTURE POLICY BENEFITS
The Company establishes liabilities for amounts payable under insurance
policies, including traditional life insurance, annuities and disability
insurance. Generally, amounts are payable over an extended period of time and
liabilities are established based on methods and underlying assumptions in
accordance with GAAP and applicable actuarial standards. Principal assumptions
used in the establishment of liabilities for future policy benefits are
mortality, morbidity, expenses, persistency, investment returns and inflation.
The Company also establishes liabilities for unpaid claims and claims
expenses for property and casualty insurance. 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 with respect
to 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 previously. 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.
LITIGATION
The Company is a party to a number of legal actions and regulatory
investigations. Given the inherent unpredictability of these matters, it is
difficult to estimate the impact 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
37
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 and regulatory investigations, including
asbestos-related cases, or the use of different assumptions in the determination
of amounts recorded could have a material effect upon 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 expected return on plan
assets includes an expectation of long-term market appreciation in equity
markets which is not changed by short-term market fluctuations. These
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 unaudited interim condensed consolidated
financial statements and liquidity.
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
MetLife, Inc., through its subsidiaries and affiliates, is a leading
provider of insurance and other financial services to individual and
institutional customers. The MetLife companies serve individuals in
approximately 13 million households in the U.S. and provide benefits to 37
million employees and family members through their plan sponsors. Outside the
U.S., the MetLife companies serve approximately 8 million customers through
direct insurance operations in Argentina, Brazil, Chile, China, Hong Kong,
India, Indonesia, Mexico, South Korea, Taiwan and Uruguay. MetLife is organized
into six business segments: Institutional, Individual, Auto & Home,
International, Reinsurance and Asset Management.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003
The Company reported $947 million in net income and diluted earnings per
share of $1.25 for the three months ended June 30, 2004 compared to $580 million
in net income and diluted earnings per share of $0.79 for the three months ended
June 30, 2003. Continued top-line revenue growth across all of the Company's
business segments, strong investment spreads, favorable claim experience and an
improvement in net investment gains (losses) and the impact of certain
transactions or events that result in net income not being indicative of future
earnings are the leading contributors to the 63% increase in net income in the
second quarter of 2004 over the comparable 2003 period. Total premiums and fees
increased to $6.1 billion, up 7%, from the second quarter of 2003, which
primarily stems from continued sales growth across most of the Company's
business segments, as well as the positive impact of the U.S. financial markets
on policy fees. Continued improvement in investment spreads is largely due to
higher net investment income from corporate joint ventures, bond prepayments
fees and commercial mortgage prepayments. In addition an improvement in net
investment gains (losses), net of income taxes, of $57 million is primarily
attributable to lower credit-related losses and the recognition of equity gains,
reflecting the improved market conditions.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003
The Company reported $1,470 million in net income and diluted earnings per
share of $1.94 for the six months ended June 30, 2004 compared to $942 million
in net income and diluted earnings per share of $1.29 for the six months ended
June 30, 2003. Continued top-line revenue growth across all of the Company's
business segments, strong investment spreads, favorable claim experience and an
improvement in net investment gains (losses), and the impact of certain
transactions or events that result in net income not being indicative of future
earnings are the leading contributors to the 56% increase in net income in the
first six months of 2004 over the comparable 2003 period. Total premiums and
fees increased to $12.1 billion, up 9%, from the first six months of 2003, which
primarily stems from continued sales growth across most of the Company's
business segments as well as the positive impact of the U.S. financial markets
on policy fees. Continued improvement in investment spreads was primarily
attributable to higher net investment income from corporate joint ventures, bond
prepayments fees and commercial mortgage prepayments. In addition an
38
improvement in net investment gains (losses), net of income taxes, of $290
million is primarily attributable to lower credit-related losses and the
recognition of equity gains, reflecting the improved market conditions. These
increases are partially offset by a $158 million cumulative effect of a change
in accounting in accordance with Statement of Position 03-1, Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts ("SOP 03-1").
INDUSTRY TRENDS
The Company's segments continue to be influenced by a variety of industry
trends and the Company believes that each of its businesses is well positioned
to capitalize on those trends. In general, the Company sees more employers, both
large and small, outsourcing their benefits functions. Further, companies are
offering broader arrays of voluntary benefits to help retain employees while
adding little to their overall benefits costs. These trends will likely continue
and in fact expand across companies of all sizes. Employers are also demanding
substantial online access for their employees for various self-service
functions. This functionality requires substantial information technology
investment that smaller companies will find difficult to absorb. This will put
pressure on those smaller and mid-size companies to gain scale quickly or exit
the business. Additionally, the Company is seeing a trend of employers moving to
defined contribution plans over defined benefit plans.
In addition, alternative benefit structures, such as simple fixed benefit
products, are becoming more popular as the cost of traditional medical indemnity
products has continued to increase rapidly. These low cost fixed benefit
products can provide effective catastrophic protection for high cost illnesses
to supplement the basic health coverage provided by medical indemnity insurance.
From a demographics standpoint, the bulk of the U.S. population is moving
from an asset accumulation phase to an asset distribution phase. People within
ten years of retirement hold significant assets. With continually lengthening
lifespans and unstructured asset distribution, the Company believes many of
these people may outlive their retirement savings and/or require long-term care.
As a result, the Company expects that the demand for retirement payout solutions
with guarantees will increase dramatically over the next decade. In each of
these demographic scenarios, the quality of the guarantee will be a key driver
of growth. The Company believes that these guarantees will be evaluated through
balance sheet strength, the claims paying ability and financial strength ratings
of the guarantor, as well as the reputation of the Company. The Company believes
that in each of these comparisons, it will be at a distinct advantage versus the
industry on average.
The combination of these trends will continue to favor those with scale,
breadth of distribution and product, ability to provide advice and financial
strength to support long-term guarantees.
39
DISCUSSION OF RESULTS
The following table presents consolidated financial information for the
Company for the periods indicated:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2004 2003 2004 2003
---------- -------- -------- ---------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 5,331 $ 5,083 $ 10,698 $ 9,915
Universal life and investment-type product policy fees 728 603 1,404 1,175
Net investment income 3,117 2,864 6,092 5,737
Other revenues 356 355 709 653
Net investment gains (losses) 47 (42) 163 (294)
-------- -------- -------- --------
Total revenues 9,579 8,863 19,066 17,186
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims 5,335 4,970 10,795 9,895
Interest credited to policyholder account balances 751 761 1,494 1,508
Policyholder dividends 471 507 913 1,010
Other expenses 1,916 1,841 3,797 3,580
-------- -------- -------- --------
Total expenses 8,473 8,079 16,999 15,993
-------- -------- -------- --------
Income from continuing operations before provision
for income taxes 1,106 784 2,067 1,193
Provision for income taxes 254 212 557 327
-------- -------- -------- --------
Income from continuing operations 852 572 1,510 866
Income from discontinued operations, net of income taxes 95 8 118 76
-------- -------- -------- --------
Income before cumulative effect of a change in accounting 947 580 1,628 942
Cumulative effect of a change in accounting, net of income taxes -- -- (158) --
-------- -------- -------- --------
Net income $ 947 $ 580 $ 1,470 $ 942
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003 -- THE COMPANY
Income from continuing operations increased by $280 million, or 49%, to $852
million for the three months ended June 30, 2004 from $572 million in the
comparable 2003 period. Income from continuing operations for the three months
ended June 30, 2004 and 2003 includes the impact of certain transactions or
events that result in net income not being indicative of future earnings, which
are described in the applicable segment's results of operations discussions.
These items contributed an after-tax benefit of $104 million for the three
months ended June 30, 2004 and an after-tax benefit of $95 million in the
comparable 2003 period. Excluding the impact of these items, income from
continuing operations increased by $271 million for the three months ended June
30, 2004 compared to the prior 2003 period. An improvement in net investment
gains (losses), net of income taxes, account for $57 million of this increase.
The remainder is primarily attributable to higher net investment income along
with favorable results in the Auto & Home, Institutional and Individual
segments. The results for these segments were primarily attributable to an
improvement in the combined loss ratio; business growth and favorable
underwriting results; and wider interest spreads and higher fee income,
respectively.
Premiums, fees and other revenues increased by $374 million, or 6%, to
$6,415 million for the three months ended June 30, 2004 from $6,041 million for
the comparable 2003 period. This increase primarily results from the
Reinsurance, Institutional and Asset Management segments. The Reinsurance
segment represents approximately 59% of the contribution to the Company's period
over period increase. This growth is primarily attributable to this segment's
coinsurance agreement with Allianz Life Insurance Company of North America
("Allianz Life"). The Institutional segment contributed 22% to the year over
year increase. This increase stems primarily from sales growth as well as the
acquisitions of new businesses in the group life and the non-medical health and
other businesses. Additionally, the Asset Management segment contributed 10% to
the overall increase primarily due to higher performance fees, as well as an
increase in fees earned on average assets under management.
Investment spreads, which generally represent the margin between net
investment income and interest credited to policyholder account balances,
continued to strengthen during the three months ended June 30, 2004 and were
considerably higher, compared to the prior
40
year period. The improvement in the investment spreads is primarily the result
of higher net investment income, which stems in part, from corporate joint
ventures, bond prepayment fees and commercial mortgage prepayments.
Underwriting results in 2004 were largely favorable compared to the second
quarter of 2003. The Individual life mortality incurred ratio, which represents
actual life claims as a percentage of assumed claims incurred used in the
determination of future policy benefits, was favorable at 78.1%, compared with
99.4% in the prior year period. This reflects an overall improvement in
mortality, on direct business, in both traditional and variable and universal
life products. In addition, the prior year period includes the impact of a
single large claim in the variable and universal product line. Group
disability's morbidity incurred loss ratio, which represents actual disability
claims as a percentage of assumed claims incurred used in the determination of
future policy benefits, decreased to 92.7%, from 95.1% in the comparable 2003
period. This improvement is predominately due to lower long-term disability
incidence, partially offset by lower net claim closures within the quarter. The
group term life mortality incurred ratio, which represents incurred claims as a
percentage of premiums earned, increased to 93.3%, from 92.0% in the prior year
period, reflecting a modest increase in mortality, however this is still below
management's expected range. The Auto & Home combined ratio, which is a measure
of both the loss and loss adjustment expense ratio, as well as the other expense
ratio, declined to 88.1% excluding catastrophes, from 95.6% in the prior year
period. This result is largely due to continued improvement in both auto and
homeowner claim frequencies, as well as an increase in average earned premiums.
Other expenses increased by $75 million, or 4%, to $1,916 million for the
three months ended June 30, 2004 from $1,841 million for the comparable 2003
period. The 2003 quarter includes the impact of $100 million reduction of a
previously established liability related to the Company's race-conscious
underwriting settlement. In addition, the 2003 period includes a $48 million
charge related to certain improperly deferred expenses and a $45 million charge
related to a change in reserve methodology in the Company's International
segment. The current period quarter reflects a $49 million reduction of a
premium tax liability and a reduction of a liability of $22 million of interest
associated with the resolution of all issues relating to the Internal Revenue
Service's audit of Metropolitan Life's and its subsidiaries' tax returns for the
years 1997-1999. These decreases were partially offset by a $50 million
contribution to MetLife Foundation. Excluding the impact of these transactions,
other expenses increased by $89 million, or 5%, from the comparable 2003 period.
The transaction with Allianz Life, mentioned above, is mostly offset by the sale
of the Spanish operations. The remaining variance is primarily attributable to
an increase in non-deferrable volume related expenses associated with general
business growth.
Net investment gains (losses) improved by $89 million, or 212%, to $47
million for the three months ended June 30, 2004 from ($42) million for the
comparable 2003 period. This improvement is primarily due to lower
credit-related losses and the recognition of equity gains, reflecting the
improved market conditions.
Income tax expense for the three months ended June 30, 2004 was $254
million, or 23% of income from continuing operations before provision for income
taxes, compared with $212 million, or 27%, for the comparable 2003 period. The
2004 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, decreasing the deferred tax valuation allowance to recognize
the effect of foreign net operating loss carryforward in Korea, and the
contribution of appreciated stock to the MetLife Foundation. In addition, the
2004 effective tax rate reflects an adjustment for the resolution of all issues
relating to the Internal Revenue Service's audit of Metropolitan Life's and its
subsidiaries' tax returns for the years 1997-1999. 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 decreasing the deferred tax valuation allowance to recognize the
effect of certain foreign net operating loss carryforwards.
Income from discontinued operations, net of income taxes, increased $87
million, or 1,088%, to $95 million for the three months ended June 30, 2004 from
$8 million for the comparable 2003 period. The increase is primarily due to the
$85 million gain on the sale of Sears Tower in April 2004. The income from
discontinued operations is comprised of net investment income and net investment
gains related to properties that the Company has classified as
available-for-sale. For the three months ended June 30, 2004 and 2003, the
Company recognized $131 million and $0 million of net investment gains,
respectively, from discontinued operations related to real estate properties
sold or held-for-sale.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003
- -- THE COMPANY
Income from continuing operations increased by $644 million, or 74%, to
$1,510 million for the six months ended June 30, 2004 from $866 million in the
comparable 2003 period. Income from continuing operations for the six months
ended June 30, 2004 and 2003 includes the impact of certain transactions or
events that result in net income not being indicative of future earnings, which
are described in the applicable segment's results of operations discussions.
These items contributed an after-tax benefit of $104 million for the six months
ended June 30, 2004 and an after-tax benefit of $95 million in the comparable
2003 period. Excluding the impact of these items, income from continuing
operations increased by $635 million for the six months ended June 30, 2004
compared to the
41
prior 2003 period. An improvement in net investment gains (losses), net of
income taxes, account for $290 million of this increase. The remainder of the
variance is attributable to the Institutional, Individual, and Auto & Home
segments and Corporate & Other. This increase was primarily attributable to
higher net investment income along with favorable results in the Institutional,
Individual and Auto & Home segments. The results for these segments were
primarily attributable to business growth and favorable underwriting results,
wider interest spreads and higher fee income, and an improvement in the combined
loss ratio, respectively.
Premiums, fees and other revenues increased by $1,068 million, or 9%, to
$12,811 million for the six months ended June 30, 2004 from $11,743 million from
the comparable 2003 period. This increase primarily results from the
Reinsurance, Institutional, Individual and International segments. The
Reinsurance segment represents approximately 46% of the contribution to the
Company's period over period increase. This growth is primarily attributable to
this segment's coinsurance agreement with Allianz Life. The Institutional
segment contributed 38% to the period over period increase. This increase stems
primarily from sales growth as well as the acquisitions of new businesses in the
group life and the non-medical health and other businesses. In addition, the
Individual segment's growth accounted for 5% of the period over period increase.
This stems in part from fee income earned on $6.3 billion of annuity deposits in
2004, which increased 14% from the prior year period. In addition, the annuity
separate account balance is $33.0 billion at June 30, 2004, up 49% versus the
prior year quarter end. Partially offsetting this increase is a decline in
traditional life premiums, which is largely attributable to the run off in the
Company's closed block of business. The International segment represents 5% of
the Company's growth period over period. This increase is primarily due to
higher sales in South Korea, Mexico, Chile and Taiwan.
Investment spreads, which generally represent the margin between net
investment income and interest credited to policyholder account balances,
continued to strengthen during the six months ended June 30, 2004 and were
considerably higher, compared to the prior year period. The improvement in the
investment spreads were primarily the result of higher net investment income,
which stems in part, from corporate joint ventures, bond prepayment fees and
commercial mortgage prepayments.
Underwriting results in 2004 were largely favorable compared to the 2003
period. Group disability's morbidity incurred loss ratio, which represents
actual disability claims as a percentage of premiums earned used in the
determination of future policy benefits, decreased to 93.0%, from 95.8% in the
comparable 2003 period. This improvement is predominately due to lower long-term
disability incidence, partially offset by lower net claim closures within the
period. The group term life mortality incurred ratio, which represents actual
life claims as a percentage of premiums earned used in the determination of
future policy benefits, increased to 94.5%, from 92.6% in the prior year period,
reflecting a modest increase in mortality; however, this is still below
management's expected range. The Individual life mortality incurred ratio, which
represents actual life claims as a percentage of assumed claims incurred, was
favorable at 81.8%, compared with 93.3% in the prior year period. This reflects
an overall improvement in mortality, on direct business, in both traditional and
variable and universal life products. In addition, the prior year period
includes the impact of a single large claim in the variable and universal
product line. The Auto & Home combined ratio, which is a measure of both the
loss and loss adjustment expense ratio, as well as the other expense ratio,
declined to 92.4% excluding catastrophes, from 98.4% in the prior year period.
This result is largely due to continued improvement in both auto and homeowner
claim frequencies, as well as an increase in average earned premiums.
Other expenses increased by $217 million, or 6%, to $3,797 million for the
six months ended June 30, 2004 from $3,580 million for the comparable 2003
period. The 2003 quarter includes the impact of $100 million reduction of a
previously established liability related to the Company's race-conscious
underwriting settlement. In addition, the 2003 period includes a $48 million
charge related to certain improperly deferred expenses and a $45 million charge
related to a change in reserve methodology in the Company's International
segment. The current period quarter reflects a $49 million reduction of a
premium tax liability and a reduction of a liability of $22 million of interest
associated with the resolution of all issues relating to the Internal Revenue
Service's audit of Metropolitan Life's and its subsidiaries' tax returns for the
years 1997-1999. These decreases were partially offset by a $50 million
contribution to MetLife Foundation. Excluding the impact of these transactions,
other expenses increased by $231 million, or 6%, from the comparable 2003
period. The transaction with Allianz Life mentioned above is mostly offset by
the sale of the Spanish operations. The remaining variance is primarily
attributable to an increase in non-deferrable volume related expenses associated
with general business growth. In addition, other expenses include cost
associated with office consolidations and related fixed assets write-offs in the
first half of 2004.
Net investment gains (losses) improved by $457 million, or 155%, to $163
million for the six months ended June 30, 2004 from ($294) million for the
comparable 2003 period. This improvement is primarily due to lower
credit-related losses and the recognition of equity gains, reflecting the
improved market conditions.
Income tax expense for the six months ended June 30, 2004 was $557 million,
or 27% of income from continuing operations before provision for income taxes,
compared with $327 million, or 27%, for the comparable 2003 period. The 2004
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, decreasing the deferred tax valuation allowance to
42
recognize the effect of certain foreign net operating loss carryforward in
Korea, and the contribution of appreciated stock to the MetLife Foundation. In
addition, the 2004 effective tax rate reflects an adjustment for the resolution
of all issues relating to the Internal Revenue Service's audit of Metropolitan
Life's and its subsidiaries' tax returns for the years 1997-1999. 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, tax adjustment for a recovery of prior year tax overpayments on
tax-exempt bonds, and decreasing the deferred tax valuation allowance to
recognize the effect of certain foreign net operating loss carryforwards.
Income from discontinued operations, net of income taxes, increased $42
million, or 55%, to $118 million for the six months ended June 30, 2004 from $76
million for the comparable 2003 period. The increase is primarily due to the
gain of $85 million on the sale of Sears Tower in April 2004, partially offset
by lower recognized net investment gains from real estate properties sold in the
six months ended June 30, 2004 as compared to the prior 2003 period. The income
from discontinued operations is comprised of net investment income and net
investment gains related to properties that the Company has classified as
available-for-sale. For the six months ended June 30, 2004 and 2003, the Company
recognized $152 million and $90 million of net investment gains, respectively,
from discontinued operations related to real estate properties sold or
held-for-sale.
During the six months ended June 30, 2004, the Company recorded a $158
million charge for a cumulative effect of a change in accounting in accordance
with SOP 03-1, which provides guidance on (i) the classification and valuation
of long-duration contract liabilities; (ii) the accounting for sales
inducements; and (iii) separate account presentation and valuation.
INSTITUTIONAL
The following table presents consolidated financial information for the
Institutional segment for the periods indicated:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2004 2003 2004 2003
------ ------ ------ ------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 2,382 $ 2,334 $ 4,807 $ 4,470
Universal life and investment-type product policy fees 187 154 358 315
Net investment income 1,121 997 2,208 1,972
Other revenues 155 152 319 294
Net investment gains (losses) 32 1 142 (108)
------- ------- ------- -------
Total revenues 3,877 3,638 7,834 6,943
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 2,583 2,506 5,292 4,885
Interest credited to policyholder account balances 240 228 472 452
Policyholder dividends 38 54 45 93
Other expenses 440 456 891 892
------- ------- ------- -------
Total expenses 3,301 3,244 6,700 6,322
------- ------- ------- -------
Income from continuing operations before
provision for income taxes 576 394 1,134 621
Provision for income taxes 200 140 390 220
------- ------- ------- -------
Income from continuing operations 376 254 744 401
Income from discontinued operations, net of income taxes 1 -- 3 28
------- ------- ------- -------
Income before cumulative effect of a change in accounting 377 254 747 429
Cumulative effect of a change in accounting, net of income taxes -- -- (60) --
------- ------- ------- -------
Net income $ 377 $ 254 $ 687 $ 429
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003 -- INSTITUTIONAL
The Company's Institutional segment offers a broad range of group insurance
and retirement and savings products and services to corporations and other
institutions. Group insurance products are offered as either an
employer-contributed benefit, or as a voluntary benefit with premiums paid by
the employee. Retirement and savings products and services include an array of
annuity and investment products, as well as bundled administrative and
investment services sold to sponsors of small- and mid-sized 401(k) and other
defined contribution plans.
43
Income from continuing operations increased by $122 million, or 48%, to $376
million for the three months ended June 30, 2004 from $254 million for the
comparable 2003 period. Favorable interest spreads are estimated to contribute
$70 million after-tax compared to the prior year period. In addition, the
application of SOP 03-1 in the current period contributed $53 million after-tax
to the decrease in policyholder liabilities as a result of the decline in the
fair value of the assets associated with these contracts. A reduction in a
premium tax liability of $31 million after-tax and an improvement of $20 million
after-tax in net investment gains (losses) also contributed to the increase.
These increases were partially offset by an estimated $41 million after-tax
decrease in earnings, which management attributes to lower underwriting results
in several products in the retirement and savings and the non-medical health and
other businesses.
Total revenues, excluding net investment gains (losses), increased by $208
million, or 6%, to $3,845 million for the three months ended June 30, 2004 from
$3,637 million for the comparable 2003 period. This increase is due in part to a
$124 million increase in net investment income, which is primarily due to higher
income from growth in the asset base, corporate joint ventures and mortgage
prepayments, partially offset by lower yields. This increase was a component of
the favorable interest spreads discussed above. In addition, growth of $84
million in premiums, fees, and other revenues contributed to the revenue
increase. Group life insurance business' premiums, fees and other revenues
increased by $102 million, which management primarily attributes to continued
strong sales and favorable persistency, as well as the late 2003 acquisition of
the John Hancock group life insurance business, which contributed $26 million to
the increase. A $105 million increase in premiums, fees and other revenue in the
non-medical health and other business is primarily attributable to continued
growth in dental of $39 million and disability of $18 million. In addition,
long-term care grew $35 million compared to the prior year period, $9 million of
which is related to the 2003 acquisition of TIAA/CREF's long-term care business.
These increases in premiums, fees and other revenues were partially offset by a
decline in the retirement and savings business of $123 million. This decrease is
primarily attributable to an unusually high amount of structured settlement
deposits in 2003. Premiums, fees and other revenues from retirement and savings
products are significantly influenced by large transactions and as a result can
fluctuate from period to period.
Total expenses increased by $57 million, or 2%, to $3,301 million for the
three months ended June 30, 2004 from $3,244 million for the comparable 2003
period. Policyholder related expenses increased $73 million. An increase of $48
million is commensurate with the aforementioned revenue growth. Less favorable
mortality and morbidity results in several products in the retirement and
savings and non-medical health and other business contributed an estimated $64
million compared to the prior year period. In addition, the acquisition of
certain businesses from John Hancock and TIAA/CREF contributed $32 million and
$11 million, respectively. These increases are partially offset by the
aforementioned $82 million pre-tax decrease in policyholder liabilities
resulting from the change in reserve valuation from the application of SOP 03-1.
Other operating expenses decreased $16 million, which is primarily due to a
reduction of a premium tax liability of $49 million, partially offset by a $33
million increase due primarily to growth in the business.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003
- -- INSTITUTIONAL
Income from continuing operations increased by $343 million, or 86%, to $744
million for the six months ended June 30, 2004 from $401 million for the
comparable 2003 period. Net investment gains increased by $159 million after-tax
compared to the prior year period. Favorable interest spreads are estimated to
contribute $140 million after-tax compared to the prior year period. In
addition, the application of SOP 03-1 in the current period contributed $42
million after-tax to the decrease in policyholder liabilities as a result of the
decline in the fair value of the assets associated with these contracts. A
reduction in a premium tax liability of $31 million after-tax also contributed
to the increase compared to the prior year period. These increases were
partially offset by lower underwriting results in the group life insurance and
non-medical health and other segments, which management estimates decreased
approximately $34 million after-tax compared to the prior year period.
Total revenues, excluding net investment gains (losses), increased by $641
million, or 9%, to $7,692 million for the six months ended June 30, 2004 from
$7,051 million for the comparable 2003 period. This increase is due in part to a
$236 million increase in net investment income, which is primarily due to higher
income from growth in the asset base, corporate joint ventures and mortgage
prepayments, partially offset by lower yields. This increase was a component of
the favorable interest spreads discussed above. In addition, growth of $405
million in premiums, fees and other revenues contributed to the increase. Group
life insurance business' premiums, fees and other revenues increased by $234
million, which management primarily attributes to continued strong sales and
favorable persistency, as well as the late 2003 acquisition of the John Hancock
group life insurance business, which contributed $50 million to the increase. A
$191 million increase in premiums, fees and other revenue in the non-medical
health and other business is primarily attributable to continued growth in
dental of $80 million and disability of $28 million. In addition, long-term care
grew $56 million compared to the prior year period, $9 million of which is
related to the acquisition of TIAA/CREF's long-term care business. These
increases in premiums, fees and other revenues were partially offset by a
decline in the retirement and savings business of $20 million. Premiums, fees
and other revenues
44
from retirement and savings products are significantly influenced by large
transactions and as a result can fluctuate from period to period
Total expenses increased by $378 million, or 6%, to $6,700 million for the
six months ended June 30, 2004 from $6,322 million for the comparable 2003
period. Policyholder related expenses increased $379 million. An increase of
$330 million is commensurate with the aforementioned revenue growth. Less
favorable mortality and morbidity results primarily in the group life insurance
and non-medical health and other business contributed an estimated $54 million
compared to the prior year period. In addition, the acquisition of certain
businesses from John Hancock and TIAA/CREF contributed $49 million and $11
million, respectively. These increases are partially offset by the
aforementioned $65 million pre-tax reserve valuations resulting from the
application of SOP 03-1. Other operating expenses decreased $1 million,
primarily due to 2004 including a reduction in a premium tax related liability
of $49 million pre-tax. This decrease is offset by growth in operating expenses
related to the direct business support expenses primarily related to business
growth.
INDIVIDUAL
The following table presents consolidated financial information for the
Individual segment for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 1,007 $ 1,055 $ 1,985 $ 2,096
Universal life and investment-type product policy fees 455 378 877 738
Net investment income 1,543 1,532 3,058 3,087
Other revenues 106 109 223 195
Net investment gains (losses) 35 (22) 12 (123)
------- ------- ------- -------
Total revenues 3,146 3,052 6,155 5,993
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 1,261 1,191 2,447 2,415
Interest credited to policyholder account balances 427 452 850 895
Policyholder dividends 413 439 831 879
Other expenses 704 755 1,406 1,413
------- ------- ------- -------
Total expenses 2,805 2,837 5,534 5,602
------- ------- ------- -------
Income from continuing operations before provision
for income taxes 341 215 621 391
Provision for income taxes 104 76 199 138
------- ------- ------- -------
Income from continuing operations 237 139 422 253
Income from discontinued operations, net of income taxes 2 5 3 32
------- ------- ------- -------
Income before cumulative effect of a change in accounting 239 144 425 285
Cumulative effect of a change in accounting, net of income taxes -- -- (70) --
------- ------- ------- -------
Net income $ 239 $ 144 $ 355 $ 285
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003 -- INDIVIDUAL
MetLife's Individual segment offers a wide variety of protection and asset
accumulation products aimed at serving the financial needs of its customers
throughout their entire life cycle. Products offered by Individual include
insurance products, such as traditional, universal and variable life insurance
and variable and fixed annuities. In addition, Individual sales representatives
distribute disability insurance and long-term care insurance products offered
through the Institutional segment, investment products, such as mutual funds,
and other products offered by the Company's other businesses.
Income from continuing operations increased by $98 million, or 71%, to $237
million for the three months ended June 30, 2004 from $139 million for the
comparable 2003 period. This increase period over period is largely attributable
to increased fee income of $50 million. Higher net investment income of $7
million and lower interest credited of $16 million to policyholder account
balances, resulted in higher spreads. In addition, lower operating expenses
contributed $33 million to the year over year increase, which is primarily
driven by charges recorded in the prior year period and a decline in the
policyholder dividend expense of $17 million compared to the prior year period.
Partially offsetting the increase to income from continuing operations, were
higher policyholder benefits of $45 million which management primarily
attributes to an increase in the closed block related policyholder dividend
obligation and favorable mortality in the prior year.
45
Total revenues, excluding net investment gains (losses), increased by $37
million, or 1%, to $3,111 million for the three months ended June 30, 2004 from
$3,074 million for the comparable 2003 period. Higher fee income of $77 million
is largely attributable to a $67 million increase in fees from separate
accounts. Management attributes the increase in separate account asset balances
to higher sales of variable annuities and overall positive market performance.
Net investment income increased $11 million primarily due to higher income from
corporate joint ventures, mortgage prepayments and growth in the asset base
offset by lower yields. This increase was a component of the favorable interest
spreads discussed above. Partially offsetting the increase in revenues are lower
premiums associated with the Company's closed block of business of $49 million,
which continues to run off at management's expected range of 3% to 6% per year.
Total expenses decreased by $32 million, or 1%, to $2,805 million for the
three months ended June 30, 2004 from $2,837 million for the comparable 2003
period. The decrease is primarily attributable to a $25 million decline in
interest credited to policyholder account balances primarily due to lower
crediting rates and a $26 million decline in policyholder dividends, which is
largely due to the reductions in the dividend scale in late 2003. In addition,
the prior period includes a charge related to certain improperly deferred
expenses at New England Financial of $48 million and expenses associated with
office consolidations and fixed asset write-offs of $18 million. Partially
offsetting the decreases in expenses are higher policyholder benefits of $70
million, which includes a $39 million increase in the closed block related
policyholder dividend obligation and an increase of $31 million, which
management attributes to better than expected mortality in the prior year
period.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003
- -- INDIVIDUAL
Income from continuing operations increased by $169 million, or 67%, to $422
million for the six months ended June 31, 2004 from $253 million for the
comparable 2003 period. This increase period over period is largely attributable
to increased fee income of $90 million. Lower interest credited of $29 million
to policyholder account balances partially offset by lower net investment income
of $19 million resulted in higher spreads. In addition, a decline in the
policyholder dividend expense of $31 million and lower operating expenses
contributed $5 million to the year over year increase, which is primarily driven
by charges recorded in the prior year period. Partially offsetting the increase
to income from continuing operations were higher policyholder benefits of $21
million which management attributes primarily to favorable mortality in the
prior year.
Total revenues, excluding net investment gains (losses), increased by $27
million, or 1%, to $6,143 million for the six months ended June 30, 2004 from
$6,116 million for the comparable 2003 period. Higher fee income of $139 million
is largely attributable to a $138 million increase in fees earned on separate
accounts. Management attributes the increase in separate account asset balances
to higher sales of variable annuities and overall positive market performance.
Partially offsetting the increase in revenues are lower premiums associated with
the Company's closed block of business of $100 million, which continues to run
off at the expected range of 3% to 6% per year. In addition, net investment
income decreased by $29 million due to lower yields partially offset by growth
in the asset base and higher income from corporate joint ventures, and mortgage
prepayments.
Total expenses decreased by $68 million, or 1%, to $5,534 million for the
six months ended June 30, 2004 from $5,602 million for the comparable 2003
period. This decrease is primarily attributed to a $45 million decline in
interest credited to policyholder account balances largely due to lower
crediting rates and a $48 million decline in policyholder dividends, which is
primarily due to the reductions in the dividend scale in late 2003. In addition,
the prior period included a charge related to certain improperly deferred
expenses at New England Financial of $48 million. Partially offsetting the
decrease in expenses is a $40 million increase in the closed block related
policyholder dividend obligation. In addition, expenses increased $21 million
over the prior year period as a result of an acceleration of DAC amortization
associated with an increase in net investment gains (losses).
46
AUTO & HOME
The following table presents consolidated financial information for the Auto
& Home segment for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2004 2003 2004 2003
------- ------- ------- -------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 734 $ 721 $ 1,471 $ 1,433
Net investment income 44 41 90 80
Other revenues 6 4 15 13
Net investment gains (losses) (5) (2) (5) (6)
------- ------- ------- -------
Total revenues 779 764 1,571 1,520
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 495 527 1,031 1,061
Policyholder dividends -- -- -- --
Other expenses 193 186 391 385
------- ------- ------- -------
Total expenses 688 713 1,422 1,446
------- ------- ------- -------
Income before provision (benefit) for income taxes 91 51 149 74
Provision (benefit) for income taxes 23 10 35 6
------- ------- ------- -------
Net income $ 68 $ 41 $ 114 $ 68
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003 -- AUTO & HOME
Auto & Home, operating through Metropolitan Property and Casualty Insurance
Company, and its subsidiaries, offers personal lines property and casualty
insurance directly to employees at the workplace, as well as through a variety
of retail distribution channels. Auto & Home primarily sells auto insurance
and homeowners insurance.
Net income increased by $27 million, or 66%, to $68 million for the three
months ended June 30, 2004 from $41 million for the comparable 2003 period. This
increase is primarily attributable to a $26 million after-tax contribution from
a lower combined ratio, which was driven by improved automobile and homeowners
claim frequencies and $7 million after-tax from less adverse claim development
related to prior years, partially offset by $9 million after-tax from increased
catastrophes.
Total revenues, excluding net investment gains (losses), increased by $18
million, or 2%, to $784 million for the three months ended June 30, 2004 from
$766 million for the comparable 2003 period. This variance is primarily due to a
$13 million increase in premiums, which are primarily attributable to an
increase in the average earned premium from continued rate increases. In
addition, a $3 million increase in net investment income is largely due to
growth in the underlying asset base.
Total expenses decreased by $25 million, or 4%, to $688 million for the
three months ended June 30, 2004 from $713 million for the comparable 2003
period. This decrease is largely the result of a decline in policyholder
benefits and claims resulting from improved automobile and homeowners claim
frequencies and less adverse claims development related to prior accident years.
Together, these items contributed $50 million to the decline in expenses. These
decreases are partially offset by increases in catastrophes of $13 million and
an increase in other expenses due to higher agent and employee related expenses
of $3 million and $4 million, respectively. The combined ratio excluding
catastrophes declined to 88.1% for the three months ended June 30, 2004 versus
95.6 % for the comparable 2003 period.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003
- -- AUTO & HOME
Net income increased by $46 million, or 68%, to $114 million for the six
months ended June 30, 2004 from $68 million for the comparable 2003 period. This
increase is primarily attributable to less adverse claim development related to
prior accident years of $31 million, after-tax. In addition, a $20 million
after-tax contribution resulted from a lower combined ratio, which was driven by
improved automobile and homeowner claim frequencies, and higher investment
income.
Total revenues, excluding net investment gains (losses), increased by $50
million, or 3%, to $1,576 million for the six months ended June 30, 2004 from
$1,526 million for the comparable 2003 period. This variance is primarily due to
a $38 million increase in
47
premiums, which are largely attributable to an increase in the average earned
premium from continued rate increases. In addition, a $10 million increase in
net investment income is largely due to growth in the underlying asset base.
Total expenses decreased by $24 million, or 2%, to $1,422 for the six
months ended June 30, 2004 from $1,446 million for the comparable 2003 period.
This decrease is the result of an improvement in policyholder benefits and
claims due to a $48 million improvement in adverse prior year claim development,
as well as an improved combined ratio primarily due to lower non-catastrophe
automobile and homeowners claim frequencies of $31 million. This is partially
offset by an increase due to growth in the business of $37 million and higher
catastrophes of $18 million. The combined ratio excluding catastrophes declined
to 92.4% for the six months ended June 30, 2004 from 98.4 % for the comparable
2003 period.
INTERNATIONAL
The following table presents consolidated financial information for the
International segment for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
2004 2003 2004 2003
------- ------- ------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 405 $ 390 $ 817 $ 785
Universal life and investment-type product policy fees 86 71 169 122
Net investment income 137 131 260 254
Other revenues 8 26 12 34
Net investment gains (losses) (3) (1) 23 (1)
------- ------- ------- -------
Total revenues 633 617 1,281 1,194
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 348 286 721 644
Interest credited to policyholder account balances 32 36 69 73
Policyholder dividends 15 8 27 27
Other expenses 137 195 269 316
------- ------- ------- -------
Total expenses 532 525 1,086 1,060
------- ------- ------- -------
Income from continuing operations before provision
for income taxes 101 92 195 134
Provision for income taxes 31 (6) 59 8
------- ------- ------- -------
Income from continuing operations 70 98 136 126
Cumulative effect of a change in accounting, net
of income taxes -- -- (30) --
------- ------- ------- -------
Net income $ 70 $ 98 $ 106 $ 126
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003 -- INTERNATIONAL
International provides life insurance, accident and health insurance,
annuities and savings and retirement products to both individuals and groups.
The Company focuses on emerging markets in the Latin America and Asia/Pacific
regions.
Income from continuing operations decreased by $28 million, or 29%, to $70
million for the three months ended June 30, 2004 from $98 million for the
comparable 2003 period. The prior year period includes a $62 million after-tax
benefit from both the merger of the Mexican operations and a reduction in
policyholder liabilities resulting from a change in reserve methodology.
Excluding these items, net income increased by $34 million. The most significant
component of this increase is attributable to the application of SOP 03-1 in the
current period, which resulted in a $32 million after-tax decrease in
policyholder liabilities in Mexico as a result of the decline in the fair value
of the assets associated with these contracts. In addition, South Korea's
results include approximately $8 million of certain tax-related benefits.
Total revenues, excluding net investment gains (losses), increased by $18
million, or 3%, to $636 million for the three months ended June 30, 2004 from
$618 million for the comparable 2003 period. The sale of the Spanish operation
reduced revenues by $52 million over the year ago period. Excluding this event,
revenues increased by $70 million, or 12%, of which $9 million, or 13%, was due
to foreign currency exchange rates. South Korea's, Mexico's and Chile's revenues
increased by $27 million, $16 million and $14 million, respectively, primarily
due to growth in the business as well higher net investment income.
48
Total expenses increased by $7 million, or 1%, to $532 million for the
three months ended June 30, 2004 from $525 million for the comparable 2003
period. The sale of the Spanish operation reduced expenses by $47 million over
the year ago period. Excluding this event, expenses increased by $54 million, or
11%, of which $5 million, or 8%, was due to foreign currency exchange rates. The
prior 2003 period includes a $79 million reduction in Mexico's policyholder
liabilities resulting from a change in reserve methodology, partially offset by
a related increase of $45 million in amortization of value of business acquired.
Other than this reduction, Mexico's expenses increased by $10 million in line
with the revenue growth outlined above. Chile's expenses also increased by $16
million primarily in line with the revenue growth outlined above. South Korea's
expenses increased by $24 million, net of a partial offset of a $6 million
reduction to a tax-related liability. The remainder of the increase in total
expenses is primarily related to the ongoing investment in International's
infrastructure. Partially offsetting these increases is the aforementioned $50
million decrease in policyholder liabilities resulting from the application of
SOP 03-1.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003
- -- INTERNATIONAL
Income from continuing operations increased by $10 million, or 8%, to $136
million for the six months ended June 30, 2004 from $126 million for the
comparable 2003 period. The prior year period includes a $62 million after-tax
benefit from both the merger of the Mexican operations and a reduction in
policyholder liabilities resulting from a change in reserve methodology.
Excluding these items, income from continuing operations increased by $72
million. The most significant component of this increase is attributable to the
application of SOP 03-1 in the current period, which resulted in a $34 million
after-tax decrease in policyholder liabilities in Mexico as a result of the
decline in the fair value of the assets associated with these contracts. The
increase of $24 million in net investment gains (losses) is primarily due to the
gain on the sale of the Spanish operations. In addition, South Korea's results
include approximately $8 million of certain tax-related benefits.
Total revenues, excluding net investment gains (losses), increased by $63
million, or 5%, to $1,258 million for the six months ended June 30, 2004 from
$1,195 million for the comparable 2003 period. The sale of the Spanish operation
reduced revenues by $103 million over the year ago period. Excluding this,
revenues increased by $166 million, or 15% of which $7 million, or 4%, was due
to foreign currency exchange rates. South Korea's, Mexico's, Chile's and
Taiwan's revenues increased by $49 million, $47 million, $33 million, and $16
million, respectively, primarily due to planned growth in the business, as well
as better investment earnings.
Total expenses increased by $26 million, or 2%, to $1,086 million for the
six months ended June 30, 2004 from $1,060 million for the comparable 2003
period. The sale of the Spanish operation reduced expenses by $97 million over
the year ago period. Excluding this, expenses increased by $123 million, or 13%,
of which $9 million, or 7%, was due to foreign currency exchange rates. The
prior 2003 period includes a $79 million reduction in Mexico's policyholder
liabilities resulting from a change in reserve methodology, partially offset by
a related increase of $45 million in amortization of value of business acquired.
Other than this reduction, Mexico's expenses increased by $22 million in line
with the revenue growth outlined above. Chile and Taiwan's expenses increased by
$35 million and $17 million, respectively, primarily in line with the revenue
growth outlined above. South Korea's expenses increased by $43 million, net of a
partial offset of a $6 million reduction to a tax-related liability. The
remainder of the increase in total expenses is primarily related to the ongoing
investment in International's infrastructure. Partially offsetting these
increases is the aforementioned $53 million decrease in policyholder liabilities
resulting from the application of SOP 03-1.
49
REINSURANCE
The following table presents consolidated financial information for the
Reinsurance segment for the periods indicated:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
2004 2003 2004 2003
------ ------ ------ ------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 807 $ 588 $1,623 $1,140
Net investment income 136 121 266 231
Other revenues 15 12 27 24
Net investment gains (losses) 31 5 52 1
------ ------ ------ ------
Total revenues 989 726 1,968 1,396
------ ------ ------ ------
EXPENSES
Policyholder benefits and claims 646 460 1,300 888
Interest credited to policyholder account balances 52 45 103 88
Policyholder dividends 5 6 10 11
Other expenses 240 182 473 346
------ ------ ------ ------
Total expenses 943 693 1,886 1,333
------ ------ ------ ------
Income before provision for income taxes 46 33 82 63
Provision for income taxes 16 11 28 21
------ ------ ------ ------
Income from continuing operations 30 22 54 42
Cumulative effect of a change in accounting, net of
income taxes -- -- 3 --
------ ------ ------ ------
Net income $ 30 $ 22 $ 57 $ 42
====== ====== ====== ======
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003 -- REINSURANCE
MetLife's Reinsurance segment is comprised of the life reinsurance business
of Reinsurance Group of America, Incorporated ("RGA"), a publicly traded
company, and MetLife's ancillary life reinsurance business. RGA has operations
in North America and has subsidiary companies, branch offices, or representative
offices in Australia, Barbados, Hong Kong, India, Ireland, Japan, Mexico, South
Africa, South Korea, Spain, Taiwan and the United Kingdom.
Income from continuing operations increased by $8 million, or 36%, to $30
million for the three months ended June 30, 2004 from $22 million for the
comparable 2003 period. This increase is primarily attributable to a $17 million
after-tax increase in net investment gains, offset in part by a $13 million
after-tax increase in other expenses on the related change in deferred
acquisition and minority interest costs. Operations from RGA provided an
additional $10 million in net income, but are almost entirely offset by an
increase in minority interest expense as MetLife's ownership in RGA fell from
59% to 52% in the comparable periods. Operations from MetLife's ancillary life
reinsurance business provided an additional $3 million in net income.
Total revenues, excluding net investment gains (losses), increased by $237
million, or 33%, to $958 million for the three months ended June 30, 2004 from
$721 million for the comparable 2003 period. Approximately $129 million of the
increase during the second quarter of 2004 was a result of RGA's coinsurance
agreement with Allianz Life under which RGA assumed 100% of Allianz Life's U.S.
traditional life reinsurance business. This transaction closed during the fourth
quarter of 2003 and was effective retroactive to July 1, 2003. The balance of
the increase in total revenues relates to new premiums from facultative and
automatic treaties and renewal premiums on existing blocks of business in the
U.S. and certain international operations. Premium levels are significantly
influenced by large transactions, such as the Allianz Life transaction, and
reporting practices of ceding companies and, as a result, can fluctuate from
period to period.
Total expenses increased by $250 million, or 36%, to $943 million for the
three months ended June 30, 2004 from $693 million for the comparable 2003
period. This increase is primarily attributable to an increase of $186 million
in policyholder benefits and claims associated with RGA's growth in insurance in
force, including the Allianz Life transaction. Additionally, other expenses
increased primarily due to higher allowances paid on assumed reinsurance of $27
million associated with RGA's growth in insurance in force and the
aforementioned increase in minority interest expense of $22 million. In
addition, expenses increased $13 million over the prior year period as a result
of an acceleration of DAC amortization associated with an increase in net
investment gains (losses).
50
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003
- - REINSURANCE
Income from continuing operations increased $12 million, or 29%, to $54
million for the six months ended June 30, 2004 from $42 million for the
comparable 2003 period. This increase was primarily attributable to a $32
million increase in after-tax net investment gains, offset in part by a $23
million after-tax increase in other expenses on the related change in deferred
acquisition and minority interest costs. Additionally, operations from RGA
provided an increase of $21 million in net income, but were offset by $18
million after-tax in higher minority interest expense as MetLife's ownership in
RGA fell from 59% to 52% in the comparable periods. Operations from MetLife's
ancillary life reinsurance business decreased net income by $1 million in the
comparable periods.
Total revenues, excluding net investment gains (losses), increased by $521
million, or 37%, to $1,916 million for the six months ended June 30, 2004 from
$1,395 million for the comparable 2003 period. Approximately $258 million of the
increase during the six months ended June 30, 2004 was the result of the
coinsurance agreement with Allianz Life. The balance of the increase in total
revenues relates to new premiums from facultative and automatic treaties and
renewal premiums on existing blocks of business in the U.S. and certain
international operations. Premium levels are significantly influenced by large
transactions, such as the Allianz Life transaction, and reporting practices of
ceding companies and, as a result, can fluctuate from period to period.
Total expenses increased by $553 million, or 41%, to $1,886 million for the
six months ended June 30, 2004 from $1,333 million for the comparable 2003
period. This increase was primarily attributable to an increase of $412 million
in policyholder benefits and claims associated with RGA's growth in insurance in
force, including the Allianz Life transaction. Additionally, other expenses
increased primarily due to higher allowances paid on assumed reinsurance of $60
million associated with RGA's growth in insurance in force and the
aforementioned increase in pre-tax minority interest expense of $46 million. In
addition, expenses increased $17 million over the prior year period as a result
of an acceleration of DAC amortization associated with an increase in net
investment gains (losses).
ASSET MANAGEMENT
The following table presents consolidated financial information for the
Asset Management segment for the periods indicated:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN MILLIONS)
REVENUES
Net investment income $ 18 $ 16 $ 36 $ 32
Other revenues 73 37 113 66
Net investment gains (losses) -- -- -- 8
---- ---- ---- ----
Total revenues 91 53 149 106
---- ---- ---- ----
OTHER EXPENSES 65 44 114 87
---- ---- ---- ----
Income before provision for income taxes 26 9 35 19
Provision for income taxes 10 4 14 8
---- ---- ---- ----
Net income $ 16 $ 5 $ 21 $ 11
==== ==== ==== ====
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003 -- ASSET MANAGEMENT
Asset Management, through SSRM Holdings, Inc. ("State Street Research"),
provides a broad variety of asset management products and services to MetLife,
third-party institutions and individuals. State Street Research offers
investment management services in all major investment disciplines through
multiple channels of distribution in both the retail and institutional
marketplaces.
Net income increased by $11 million, or 220%, to $16 million for the three
months ended June 30, 2004 from $5 million for the comparable 2003 period. This
increase is primarily due to higher performance fees earned, as well as revenue
earned on higher average assets under management. This was partially offset by
expense increases resulting from compensation related to the performance fees
and higher average assets under management.
Total revenues, excluding net investment gains (losses), increased by $38
million, or 72%, to $91 million for the three months ended June 30, 2004 from
$53 million for the comparable 2003 period. The increase is primarily the result
of $25 million in higher performance fees earned on certain hedge products and
real estate investments. Excluding the performance fees, total revenue increased
$13 million as a result of higher fees earned on higher average assets under
management. Assets under management
51
increased 12% to $51.7 billion as of June 30, 2004, from $46.1 billion as of
June 30, 2003, and is primarily attributable to positive net sales and market
appreciation from strong equity market performance.
Other expenses increased by $21 million, or 48%, to $65 million for the
three months ended June 30, 2004 from $44 million for the comparable 2003
period. Compensation and benefits increased $17 million, of which $10 million
are commensurate with the revenue earned from the performance fees and the
remaining $7 million variance being primarily attributable to higher salaries
and compensation-related expenses. Higher average mutual fund assets under
management resulted in an increase of approximately $5 million in promoting and
servicing expenses.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003
- -- ASSET MANAGEMENT
Net income increased $10 million, or 91%, to $21 million for the six months
ended June 30, 2004 from $11 million for the comparable 2003 period. This
increase is primarily due to higher revenue earned on higher average assets
under management, as well as higher performance fees earned in the second
quarter of 2004. These increases are partially offset by a regulatory settlement
and associated legal costs, in addition to expense increases resulting from
higher average assets under management.
Total revenues, excluding net investment gains (losses), increased by $51
million, or 52%, to $149 million for the six months ended June 30, 2004 from $98
million for the comparable 2003 period. This increase is primarily the result of
$25 million in higher performance fees earned on certain hedge products and real
estate investments in the second quarter. Excluding performance fees, total
revenues increased $26 million as a result of an increase in fees earned on
higher average assets under management.
Other expenses increased by $27 million, or 31%, to $114 million for the
six months ended June 30, 2004 from $87 million for the comparable 2003 period.
The increase is primarily attributable to an increase in compensation related
expenses of approximately $17 million of which approximately $10 million related
to the performance fees and the remainder of the variance is primarily
attributable to a $7 million increase in salaries and compensation-related
expenses. Higher average assets under management also contributed to higher
promoting and servicing expenses of approximately $8 million. The increase is
also attributable to a regulatory settlement and associated legal costs incurred
in the first quarter of 2004 of approximately $4 million.
52
CORPORATE & OTHER
The following table presents consolidated financial information for
Corporate & Other for the periods indicated:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ----------------
2004 2003 2004 2003
----- ----- ----- -----
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ (4) $ (5) $ (5) $ (9)
Net investment income 118 26 174 81
Other revenues (7) 15 -- 27
Net investment gains (losses) (43) (23) (61) (65)
----- ----- ----- -----
Total revenues 64 13 108 34
----- ----- ----- -----
EXPENSES
Policyholder benefits and claims 2 -- 4 2
Other expenses 137 23 253 141
----- ----- ----- -----
Total expenses 139 23 257 143
----- ----- ----- -----
Income (loss) from continuing operations before income tax benefit (75) (10) (149) (109)
Income tax benefit (130) (23) (168) (74)
----- ----- ----- -----
Income (loss) from continuing operations 55 13 19 (35)
Income from discontinued operations, net of income taxes 92 3 112 16
----- ----- ----- -----
Income (loss) before cumulative effect of change in accounting 147 16 131 (19)
Cumulative effect of a change in accounting, net of income taxes -- -- (1) --
----- ----- ----- -----
Net income (loss) $ 147 $ 16 $ 130 $ (19)
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2003 -- CORPORATE & OTHER
Corporate & Other contains the excess capital not allocated to the business
segments, as well as expenses associated with the resolution of certain legal
proceedings, and interest expense related to the majority of the Company's
outstanding debt.
Income from continuing operations improved by $42 million, or 323%, to $55
million for the three months ended June 30, 2004 from $13 million for the
comparable 2003 period. The 2004 period includes a $105 million benefit, net of
income tax, associated with the resolution of all issues relating to the
Internal Revenue Service's audit of Metropolitan Life's and its subsidiaries'
tax returns for the years 1997-1999. Also included in the 2004 period is a $32
million after-tax contribution to the MetLife Foundation. The 2003 period
includes a $64 million after-tax benefit from a reduction of a previously
established liability related to the Company's race-conscious underwriting
settlement. Excluding the impact of these items, income from continuing
operations increased by $33 million. The increase in earnings over the prior
year period is mainly due to $58 million of higher after-tax investment income,
partially offset by $13 million of after-tax net investment gains (losses).
Total revenues, excluding net investment gains (losses), increased by $71
million, or 197%, to $107 million for the three months ended June 30, 2004 from
$36 million for the comparable 2003 period. This variance is mainly due to $107
million of higher investment income resulting from increases in income from
long-term bonds, and real estate and corporate joint ventures. This increase is
partially offset by an increase of $15 million in interest paid on allocated
capital and a decrease of $15 million in the elimination of underlying
affiliated activity.
Total expenses increased by $116 million, or 504%, to $139 million for the
three months ended June 30, 2004 from $23 million for the comparable 2003
period. The 2004 period includes a $50 million contribution to the MetLife
Foundation, partially offset by a reduction of a liability of $22 million of
interest associated with the resolution of all issues relating to the Internal
Revenue Service's audit of Metropolitan Life's and its subsidiaries' tax returns
for the years 1997-1999. The 2003 period includes a $100 million benefit from a
reduction of a previously established liability associated with the Company's
race-conscious underwriting settlement. This is partially offset by a decrease
of $15 million in the elimination of underlying affiliated activity.
53
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2003
- -- CORPORATE & OTHER
Income (loss) from continuing operations improved by $54 million, or 154%,
to $19 million for the six months ended June 30, 2004 from ($35) million for the
comparable 2003 period. The 2004 period includes a $105 million benefit, net of
income tax, associated with the resolution of all issues relating to the
Internal Revenue Service's audit of Metropolitan Life's and its subsidiaries'
tax returns for the years 1997-1999. Also included in the 2004 period is a $32
million after-tax contribution to the MetLife Foundation. The 2003 period
includes a $64 million after-tax benefit from a reduction of a previously
established liability related to the Company's race-conscious underwriting
settlement. Excluding the impact of these items, income from continuing
operations increased by $45 million. The increase in earnings over the prior
period is mainly due to $59 million of higher after-tax investment income.
Total revenues, excluding net investment gains (losses), increased by $70
million, or 71%, to $169 million for the six months ended June 30, 2004 from $99
million for the comparable 2003 period. This variance is mainly due to $123
million of higher investment income resulting from increases in income from
long-term bonds, and real estate and corporate joint ventures. This increase is
partially offset by an increase of $30 million in interest paid on allocated
capital and a decrease of $22 million in the elimination of underlying
affiliated activity.
Total expenses increased by $114 million, or 80%, to $257 million for the
six months ended June 30, 2004 from $143 million for the comparable 2003 period.
The 2004 period includes a $50 million contribution to the MetLife Foundation,
partially offset by a reduction of a liability of $22 million of interest
associated with the resolution of all issues relating to the Internal Revenue
Service's audit of Metropolitan Life's and its subsidiaries' tax returns for the
years 1997-1999. The 2003 period includes a $100 million benefit from a
reduction of a previously established liability associated with the Company's
race-conscious underwriting settlement. This is partially offset by a decrease
of $22 million in the elimination of underlying affiliated activity.
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, MetLife Bank, N.A. ("MetLife Bank"), a national bank,
are subject to risk-based and leverage capital guidelines issued by the federal
banking regulatory agencies for banks and financial holding companies. The
federal banking regulatory agencies are required by law to take specific prompt
corrective actions with respect to institutions that do not meet minimum capital
standards. At June 30, 2004, MetLife, Inc. and MetLife Bank 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 debt transactions and exposure to contingent draws on the
Holding Company's liquidity.
54
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 cash 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 cash 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 similar
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.
Liquid Assets. An integral part of the Holding Company's liquidity
management is the amount of liquid assets that it holds. Liquid assets include
cash, cash equivalents, short-term investments and marketable fixed maturity and
equity securities. Liquid assets exclude assets relating to securities lending
and dollar roll activities. At June 30, 2004 and December 31, 2003, the Holding
Company had $1,376 million and $1,320 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 June 30, 2004, the Holding Company had no short-term debt outstanding as
compared to $106 million at December 31, 2003. At June 30, 2004 and December 31,
2003, the Holding Company had $4.5 billion and $4.0 billion in long-term debt
outstanding, respectively.
As of July 23, 2004, the Holding Company has issued an aggregate principal
amount of senior debt of $1.1 billion under the $5.0 billion shelf registration
statement filed with the U.S. Securities and Exchange Commission ("SEC") during
the first quarter of 2004. The shelf registration will permit the registration
and issuance of a wide range of debt and equity securities. Approximately $44
million of registered but unissued securities remaining from the Company's 2001
$4.0 billion shelf registration statement was carried over to this shelf
registration.
The Holding Company issued and remarketed senior debt in the aggregate
principal amount of $3.96 billion under the 2001 $4.0 billion shelf registration
statement. Under this shelf registration statement, the Holding Company
remarketed $1,006 million aggregate principal amount of debentures previously
issued in connection with the issuance of equity security units in February of
2003.
55
The following table summarizes the Holding Company's senior debt
issuances:
ISSUE DATE PRINCIPAL INTEREST RATE MATURITY
---------- --------- ------------- --------
(DOLLARS IN MILLIONS)
June 2004 (1) $350 5.50% 2014
June 2004 (1) $750 6.38% 2034
November 2003 $500 5.00% 2013
November 2003 $200 5.88% 2033
December 2002 $400 5.38% 2012
December 2002 $600 6.50% 2032
November 2001 $500 5.25% 2006
November 2001 $750 6.13% 2011
- ----------
(1) On July 23, 2004, the Holding Company reopened its June 3, 2004 senior
notes offering and increased the principal outstanding on the 5.50% notes
due June 2014, from $200 million to $350 million and on the 6.38% notes
due June 2034, from $400 million to $750 million.
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 committed and unsecured
credit facilities aggregating $2.5 billion ($1 billion expiring in 2005 and $1.5
billion expiring in 2009) which it shares with Metropolitan Life and MetLife
Funding, Inc. ("MetLife Funding"). 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 June 30, 2004, neither the Holding
Company, Metropolitan Life nor 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, capital contributions to
subsidiaries, payment of general operating expenses and the repurchase of the
Holding Company's common stock.
Dividends. On October 21, 2003, the Holding Company's Board of Directors
approved an annual dividend for 2003 of $0.23 per share. The dividend was paid
on December 15, 2003 to shareholders of record on November 7, 2003. The 2003
dividend represents an increase of $0.02 per share from the 2002 annual dividend
of $0.21 per share. Future dividend decisions 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 six months ended June
30, 2004 and 2003, the Holding Company contributed an aggregate of $271 million
and $42 million to various subsidiaries, respectively.
Share Repurchase. On February 19, 2002, the Holding Company's Board of
Directors authorized a $1 billion common stock repurchase program. Under this
authorization, the Holding Company may purchase its common stock from the
MetLife Policyholder Trust, in the open market and in privately negotiated
transactions. The following table summarizes the Company's repurchase activity:
SIX MONTHS
ENDED JUNE 30,
--------------
2004 2003
---- ----
(DOLLARS IN
MILLIONS)
Shares Repurchased 7,935,381 --
Cost $ 275 --
56
At June 30, 2004, the Holding Company had approximately $434 million
remaining on its existing share repurchase program. See Part II, Item 2,
"Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity
Securities."
In the fourth quarter of 2003, RGA offered to the public 12,075,000 shares
of its common stock at $36.65 per share. MetLife and its affiliates purchased
3,000,000 shares of the common stock offered by RGA. As a result of this
offering, MetLife's ownership percentage of outstanding shares of RGA common
stock was reduced from approximately 59% at December 31, 2002 to approximately
52% at December 31, 2003.
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
RBC, as defined by state insurance statutes, and liquidity necessary to enable
it to meet its current obligations on a timely basis. At June 30, 2004, the
capital and surplus of each of these subsidiaries is 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, 2003.
Based on management's analysis and comparison of its current and future
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 cash dividend payments on its
common stock, contribute capital to its subsidiaries, pay all operating
expenses, and meet its cash needs.
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, 2003, 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.
ASSET/LIABILITY MANAGEMENT
The Company actively manages its assets using an approach that balances
quality, diversification, asset/liability matching, liquidity and investment
return. The goals of the investment process are to optimize after-tax,
risk-adjusted investment income and after-tax, risk-adjusted total return while
ensuring that the assets and liabilities are managed on a cash flow and duration
basis.
The Company establishes target asset portfolios for each major insurance
product, which represent the investment strategies used to profitably fund its
liabilities within acceptable levels of risk. These strategies include
objectives for effective duration, yield curve sensitivity, convexity,
liquidity, asset sector concentration and credit quality.
57
The Company's liquidity position (cash and cash equivalents and short-term
investments) was $6.5 billion and $5.6 billion at June 30, 2004 and December 31,
2003, respectively. Liquidity needs are determined from a rolling 12-month
forecast by portfolio and are monitored daily. Asset mix and maturities are
adjusted based on forecast. Cash flow testing and stress testing provide
additional perspectives on liquidity.
LIQUIDITY
The Company believes that it has sufficient liquidity to fund its cash
needs under various scenarios that include the potential risk of early
contractholder and policyholder withdrawal. The Company includes 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 funds liabilities) sold to employee
benefit plan sponsors.
In the event of significant unanticipated cash requirements beyond normal
liquidity, the Company has multiple liquidity alternatives available based on
market conditions and the amount and timing of the liquidity need. These options
include cash flow from operations (insurance premiums, annuity considerations
and deposit funds), borrowings under committed credit facilities, secured
borrowings, the ability to issue commercial paper, long-term debt, capital
securities, common equity and, if necessary, the sale of liquid long-term
assets.
The Company's ability to sell investment assets could be limited by
accounting rules including rules relating to the intent and ability to hold
impaired securities until the market value of those securities recovers.
In extreme circumstances, all general account assets within a statutory
legal entity are available to fund any obligation of the general account.
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
includes 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 come
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 fixed maturity and equity
securities. Liquid assets exclude assets relating to securities lending and
dollar roll activities. At June 30, 2004 and December 31, 2003, the Company had
$128 billion and $125 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, limits dependence on any one source of funds and generally lowers
the cost of funds.
At June 30, 2004 and December 31, 2003, the Company had $3.2 billion and
$3.6 billion in short-term debt outstanding and $6.2 billion and $5.7 billion in
long-term debt outstanding, respectively. On November 1, 2003, the Company
redeemed the $300 million of 7.45% Surplus Notes outstanding 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 June 30,
2004 and December 31, 2003, MetLife Funding had a tangible net worth of $10.9
million and $10.8 million, respectively. MetLife Funding raises funds from
various funding
58
sources and uses the proceeds to extend loans, through MetLife Credit Corp., a
subsidiary of Metropolitan Life, to the Holding Company, Metropolitan Life and
other affiliates. MetLife Funding manages its funding sources to enhance the
financial flexibility and liquidity of Metropolitan Life and other affiliated
companies. At June 30, 2004 and December 31, 2003, MetLife Funding had total
outstanding liabilities, including accrued interest payable, of $846 million and
$1,042 million, respectively, consisting primarily of commercial paper.
Credit Facilities. The Company maintains committed and unsecured credit
facilities aggregating $2.7 billion ($1 billion expiring in 2005, $175 million
expiring in 2006 and $1.5 billion expiring in 2009). 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 June 30, 2004, the Company had drawn approximately $52 million under the
facilities expiring in 2005 at interest rates ranging from 5.32% to 6.18% and
approximately $50 million under a facility expiring in 2006 at an interest rate
of 1.94%.
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 and dollar roll activities, investments in
real estate, limited partnerships and joint ventures, as well as
litigation-related liabilities.
The following table summarizes the Company's major contractual obligations
as of June 30, 2004:
LESS THAN THREE THREE TO FIVE MORE THAN FIVE
CONTRACTUAL OBLIGATIONS TOTAL YEARS YEARS YEARS
- ----------------------- ----- --------------- ------------- --------------
(DOLLARS IN MILLIONS)
Other long-term liabilities (1) $ 89,798 $ 12,421 $ 6,852 $ 70,525
Long-term debt (2) 6,180 2,126 60 3,994
Partnership investments (3) 1,443 1,443 -- --
Operating leases 1,273 468 252 553
Mortgage commitments 1,580 1,580 -- --
Shares subject to mandatory redemption (2) 350 -- -- 350
Capital leases 70 27 23 20
-------- -------- -------- --------
Total $100,694 $ 18,065 $ 7,187 $ 75,442
======== ======== ======== ========
- ------------
(1) Other long-term liabilities include various investment-type products
with contractually scheduled maturities including guaranteed
interest contracts, structured settlements, pension closeouts and
certain annuity policies. This line item also includes claim
reserves for which the amount of the claim payment is generally
known, including life insurance and property and casualty insurance
incurred and reported claims. Where the claim payment timing is not
known, the Company uses historical experience to estimate the payout
pattern.
(2) Amounts differ from the balances presented on the consolidated
balance sheets. The amounts above do not include related premiums
and discounts or capital leases which are presented separately.
(3) The Company anticipates that these amounts could be invested in
these partnerships any time over the next five years, but are
presented in the current period, as the timing of the fulfillment of
the obligation cannot be predicted.
A significant portion of the Company's insurance liabilities, including
most future policy benefits, are excluded from the contractual obligations table
because such amounts and/or their timing are inherently subjective.
As of June 30, 2004, and relative to its liquidity program, the Company
had no material (individually or in the aggregate) purchase obligations or
material (individually or in the aggregate) unfunded pension or other
postretirement benefit obligations due within one year.
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 approximately $16 million at June 30, 2004. 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.
59
Letters of Credit. At June 30, 2004 and December 31, 2003, the Company had
outstanding approximately $742 million and $828 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 New England Mutual Life Insurance Company. 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 June 30, 2004, 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, 2003.
In connection with the Company's acquisition of GenAmerica Financial
Corporation ("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 June 30, 2004, 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, 2003.
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 contractual obligations of
its subsidiary, Paragon Life Insurance Company, and certain contractual
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 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 June 30, 2004, 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, 2003.
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 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.
60
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 cash dividend payments on its common stock, pay all
operating expenses, and meet its cash needs. The nature of the Company's diverse
product portfolio and customer base lessens the likelihood that normal
operations will result in any significant strain on liquidity.
Consolidated cash flows. Net cash provided by operating activities was
$3,380 million and $3,201 million for the six months ended June 30, 2004 and
2003, respectively. The $179 million increase in operating cash flows in 2004
over the comparable 2003 period is primarily attributable to continued growth in
the group life, disability and long-term care businesses. The late 2003
acquisition of John Hancock's group life business and the acquisition of
TIAA-CREF's long-term care business also contributed to growth in the 2004
period. In addition, increase in MetLife Bank's customer deposits, particularly
in personal and business savings accounts, contributed to the increase in
operating cash flows.
Net cash used in investing activities was $6,304 million and $8,049
million for the six months ended June 30, 2004 and 2003, respectively. The
$1,745 million decrease in net cash used in investing activities in 2004 over
the comparable 2003 period is primarily due to a decrease in the purchase of
fixed maturities, additional proceeds from sales of fixed maturities, and a
decrease in cash used for the purpose of short-term investments. In addition,
the 2004 period includes proceeds associated with the sale of Sears Tower in
April 2004. These items were partially offset by an increase in mortgage loans
funded and a reduction of net payables under securities loaned in 2004 over the
comparable 2003 period.
Net cash provided by financing activities was $3,650 million and $8,239
million for the six months ended June 30, 2004 and 2003, respectively. The
$4,589 million decrease in net cash provided by financing activities in 2004
over the comparable 2003 period is primarily attributable to the repayment of
short-term debt related to dollar roll activity. In addition, the 2004 period
includes the purchase of treasury stock under the authorization of the Company's
common stock repurchase program. The 2003 period included cash received from the
settlement of common stock purchase contracts. These items were somewhat offset
by an increase in long-term debt issued in connection with the Holding Company's
shelf registration.
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.
APPLICATION OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Emerging Issues Task Force ("EITF") reached further
consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments, ("EITF 03-1"). EITF 03-1 provides
accounting guidance regarding the determination of when an impairment of debt
and marketable equity securities and investments accounted for under the cost
method should be considered other-than-temporary and recognized in income. An
EITF 03-1 consensus reached in November 2003 also requires certain quantitative
and qualitative disclosures for debt and marketable equity securities classified
as available-for-sale or held-to-maturity under Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities, that are impaired at the balance sheet date but for
which an other-than-temporary impairment has not been recognized. The disclosure
requirements of EITF 03-1 were effective December 31, 2003. The accounting
guidance of EITF 03-1 will be effective in the third quarter of 2004 and is not
expected to have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
In March 2004, the EITF reached consensuses on Issue No. 03-6,
Participating Securities and the Two-Class Method under FASB Statement No. 128
("EITF 03-6"). EITF 03-6 provides guidance in determining whether a security
should be considered a participating security for purposes of computing earnings
per share and how earnings should be allocated to the participating security.
EITF 03-6, which was effective for the Company in the second quarter of 2004,
did not have an impact on the Company's earnings per share calculations.
In March 2004, the EITF reached consensus on Issue No. 03-16, Accounting
for Investments in Limited Liability Companies ("EITF 03-16"). EITF 03-16
provides guidance regarding whether a limited liability company should be viewed
as similar to a corporation or similar to a partnership for purposes of
determining whether a noncontrolling investment should be accounted for using
61
the cost method or the equity method of accounting. EITF 03-16, which will be
effective in the third quarter of 2004, is not expected to have a material
impact on the Company's unaudited interim condensed consolidated financial
statements.
Effective January 1, 2004, the Company adopted Statement of Position 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 (i) the classification and valuation of long-duration
contract liabilities; (ii) the accounting for sales inducements; and (iii)
separate account presentation and valuation. At adoption, the Company increased
future policyholder benefits for changes in the methodology relating to various
guaranteed death and annuitization benefits and for determining reserves for
certain universal life insurance contracts by approximately $68 million, which
has been reported as a cumulative effect of a change in accounting. This amount
is net of corresponding changes in DAC and unearned revenue liability
("offsets") under certain variable annuity and life contracts and income taxes.
In June 2004, the Financial Accounting Standards Board ("FASB") released Staff
Position paper No. 97-1, Situations in Which Paragraphs 17(b) and 20 of FASB
Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments, Permit or Require Accrual of an Unearned Revenue Liability ("FSP
97-1") which included clarification that unearned revenue liabilities should be
considered in determining the necessary insurance benefit liability required
under SOP 03-1. FSP 97-1 is effective July 1, 2004. However, additional industry
guidance related to SOP 03-1 continues to evolve. Although currently evaluating
FSP 97-1 and the possible additional accounting guidance, the Company
anticipates a reduction of the initial liability established under SOP 03-1 in
subsequent accounting periods. Certain other contracts sold by the Company
provide for a return through periodic crediting rates, surrender adjustments or
termination adjustments based on the total return of a contractually referenced
pool of assets owned by the Company. To the extent that such contracts are not
accounted for under the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133") and not already credited to the
contract account balance, under SOP 03-1 the change relating to the fair value
of the referenced pool of assets is recorded as a liability through policyholder
benefits and claims. Prior to the adoption of SOP 03-1, the Company recorded the
change in such liability as other comprehensive income. At adoption, this change
decreased net income and increased other comprehensive income by $63 million,
net of income taxes, which were recorded as cumulative effects of a change in
accounting. Effective with the adoption of SOP 03-1, costs associated with
enhanced or bonus crediting rates to contractholders must be deferred and
amortized over the life of the related contract using assumptions consistent
with the amortization of DAC. Since the Company followed a similar approach
prior to adoption of SOP 03-1, the provisions of SOP 03-1 relating to sales
inducements had no significant impact on the Company's unaudited interim
condensed consolidated financial statements. At adoption, the Company
reclassified $155 million of ownership in its own separate accounts from other
assets to fixed maturities, equity securities and cash and cash equivalents.
This reclassification had no significant impact on net income or other
comprehensive income at adoption. In accordance with SOP 03-1's guidance for the
reporting of certain separate accounts, at adoption, the Company also
reclassified $1.7 billion of separate account assets to general account
investments and $1.7 billion of separate account liabilities to future policy
benefits and policyholder account balances. This reclassification decreased net
income and increased other comprehensive income by $27 million, net of income
taxes, which were reported as cumulative effects of a change in accounting. For
the three months and six months ended June 30, 2004, the impact of SOP 03-1
increased the Company's net income by $78 million and $64 million, respectively.
In December 2003, FASB revised SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits -- an Amendment of FASB Statements
No. 87, 88 and 106 ("SFAS 132(r)"). SFAS 132(r) retains most of the disclosure
requirements of SFAS 132 and requires additional disclosure about assets,
obligations, cash flows and net periodic benefit cost of defined benefit pension
plans and other defined postretirement plans. SFAS 132(r) was primarily
effective for fiscal years ending after December 15, 2003; however, certain
disclosures about foreign plans and estimated future benefit payments are
effective for fiscal years ending after June 15, 2004. The Company's adoption of
SFAS 132(r) on December 31, 2003 did not have a significant impact on its
consolidated financial statements since it only revised disclosure requirements.
In May 2004, the FASB issued FASB Staff Position ("FSP") No. 106-2, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("FSP 106-2"), which provides
accounting guidance to a sponsor of a postretirement health care plan that
provides prescription drug benefits. The Company expects to receive subsidies on
prescription drug benefits beginning in 2006 under the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 based on the Company's
determination that the prescription drug benefits offered under certain
postretirement plans are actuarially equivalent to the benefits offered under
Medicare Part D. FSP 106-2 is effective for interim periods beginning after June
15, 2004 and provides for either retroactive application to the date of
enactment of the legislation or prospective application from the date of
adoption of FSP 106-2. The Company is in the process of evaluating the
alternatives, however, neither alternative is expected to have a significant
impact on the Company's unaudited interim condensed consolidated financial
statements.
Effective October 1, 2003, the Company adopted 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 is measured at
fair value on the balance sheet and changes in fair value are reported in
income. As a result of the adoption of Issue B36, the Company recognized net
income of $22 million and $13 million, net of amortization of DAC and income
taxes, for the three months and six months ended June 30, 2004, respectively.
62
Effective July 1, 2003, the Company adopted SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149").
SFAS 149 amended and clarified the accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Except for certain previously issued and
effective guidance that was incorporated in SFAS 149, SFAS 149 is effective for
contracts entered into or modified after June 30, 2003. The Company's adoption
of SFAS 149 did not have a significant impact on its unaudited interim condensed
consolidated financial statements.
During 2003, the Company adopted FASB Interpretation No. 46, Consolidation
of Variable Interest Entities -- An Interpretation of ARB No. 51 ("FIN 46"), and
its December 2003 revision ("FIN 46(r)"). 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 variable interest entities
("VIEs") and must be consolidated, in accordance with the transition rules and
effective dates, because the Company is deemed to be the primary beneficiary.
A VIE is defined as (i) any entity in which the equity investments 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 support from other parties. Effective
February 1, 2003, the Company adopted FIN 46 for VIEs created or acquired on or
after February 1, 2003 and, effective December 31, 2003, the Company adopted FIN
46(r) with respect to interests in entities formerly considered special purpose
entities ("SPEs"), including interests in asset-backed securities and
collateralized debt obligations. The adoption of FIN 46 as of February 1, 2003
did not have a significant impact on the Company's unaudited interim condensed
consolidated financial statements. The adoption of the provisions of FIN 46(r)
at December 31, 2003 did not require the Company to consolidate any additional
VIEs that were not previously consolidated. In accordance with the provisions of
FIN 46(r), the Company elected to defer until March 31, 2004 the consolidation
of interests in VIEs for non SPEs acquired prior to February 1, 2003 for which
it is the primary beneficiary. The transition effect recorded at March 31, 2004
as a result of such consolidations was insignificant. As of June 30, 2004, the
Company consolidated assets and liabilities relating to real estate joint
ventures of $16 million and $3 million, respectively, and assets and liabilities
relating to other limited partnerships of $82 million and $15 million,
respectively, for VIEs for which the Company was deemed to be the primary
beneficiary.
63
INVESTMENTS
The Company had total cash and invested assets at June 30, 2004 and
December 31, 2003 of $227.4 billion and $221.8 billion, respectively. In
addition, the Company had $79.7 billion and $75.8 billion held in its separate
accounts, for which the Company generally does not bear investment risk, as of
June 30, 2004 and December 31, 2003, respectively.
The following table summarizes the Company's cash and invested assets at:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Fixed maturities available-for-sale, at fair value $170,192 74.7% $167,752 75.6%
Mortgage loans on real estate 28,118 12.4 26,249 11.8
Real estate and real estate joint ventures held-for-investment 4,110 1.8 3,848 1.8
Real estate held-for-sale 44 0.0 832 0.4
Policy loans 8,766 3.9 8,749 3.9
Equity securities, at fair value and other limited partnership interests 4,549 2.0 4,198 1.9
Cash and cash equivalents 4,459 2.0 3,733 1.7
Short-term investments 2,089 0.9 1,826 0.8
Other invested assets 5,119 2.3 4,645 2.1
-------- ----- -------- -----
Total cash and invested assets $227,446 100.0% $221,832 100.0%
======== ===== ======== =====
INVESTMENT RESULTS
Net investment income, including net investment income from discontinued
operations and scheduled periodic 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"), on
general account cash and invested assets totaled $3,165 million and $2,889
million for the three months ended June 30, 2004 and 2003, respectively, and
$6,171 million and $5,788 million for the six months ended June 30, 2004 and
2003, respectively. The annualized yields on general account cash and invested
assets, including net investment income from discontinued operations and
scheduled periodic settlement payments on derivative instruments that do not
qualify for hedge accounting under SFAS 133, and excluding all net investment
gains (losses), were 6.60% and 6.68% for the three months ended June 30, 2004
and 2003, respectively, and 6.52% and 6.79% for the six months ended June 30,
2004 and 2003, respectively. The decline in annualized yields is due primarily
to the decline in interest rates during these periods.
64
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 six months ended June 30, 2004 and 2003:
AT OR FOR THE THREE MONTHS ENDED JUNE 30, AT OR FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------------- ---------------------------------------
2004 2003 2004 2003
------------------ ----------------- ------------------ ------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- ------ -------- ------ -------- ------ -------- ------
(DOLLARS IN MILLIONS)
FIXED MATURITIES: (2)
Investment income 6.64% $ 2,291 6.87% $ 2,073 6.64% $ 4,523 6.91% $ 4,117
Net investment gains (losses) (3) (43) 31 (192)
-------- -------- -------- --------
Total $ 2,288 $ 2,030 $ 4,554 $ 3,925
-------- -------- -------- --------
Ending assets $170,192 $158,822 $170,192 $158,822
-------- -------- -------- --------
MORTGAGE LOANS ON REAL ESTATE: (3)
Investment income 6.83% $ 468 7.50% $ 472 6.80% $ 917 7.50% $ 942
Net investment gains (losses) -- (8) -- (22)
-------- -------- -------- --------
Total $ 468 $ 464 $ 917 $ 920
-------- -------- -------- --------
Ending assets $ 28,118 $ 25,289 $ 28,118 $ 25,289
-------- -------- -------- --------
REAL ESTATE AND REAL ESTATE JOINT
VENTURES HELD-FOR-INVESTMENT: (4)
Investment income, net of expenses 13.36% $ 148 11.20% $ 125 12.71% $ 287 11.14% $ 252
Net investment gains (losses) 133 (6) 154 86
-------- -------- -------- --------
Total $ 281 $ 119 $ 441 $ 338
-------- -------- -------- --------
Ending assets $ 4,154 $ 4,491 $ 4,154 $ 4,491
-------- -------- -------- --------
POLICY LOANS:
Investment income 6.13% $ 134 6.46% $ 139 6.12% $ 268 6.47% $ 278
-------- -------- -------- --------
Ending assets $ 8,766 $ 8,627 $ 8,766 $ 8,627
-------- -------- -------- --------
EQUITY SECURITIES AND OTHER LIMITED
PARTNERSHIP INTERESTS:
Investment income 10.27% $ 100 3.62% $ 32 6.70% $ 129 4.80% $ 86
Net investment gains (losses) 87 1 87 (70)
-------- -------- -------- --------
Total $ 187 $ 33 $ 216 $ 16
-------- -------- -------- --------
Ending assets $ 4,549 $ 4,117 $ 4,549 $ 4,117
-------- -------- -------- --------
CASH, CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS:
Investment income 2.37% $ 30 2.23% $ 42 2.45% $ 60 3.40% $ 106
Net investment gains (losses) -- -- -- (4)
-------- -------- -------- --------
Total $ 30 $ 42 $ 60 $ 102
-------- -------- -------- --------
Ending assets $ 6,548 $ 8,354 $ 6,548 $ 8,354
-------- -------- -------- --------
OTHER INVESTED ASSETS: (5)
Investment income 5.10% $ 55 8.47% $ 69 5.39% $ 112 8.43% $ 132
Net investment gains (losses), (6) (60) 2 8 (22)
-------- -------- -------- --------
Total $ (5) $ 71 $ 120 $ 110
-------- -------- -------- --------
Ending assets $ 5,119 $ 4,261 $ 5,119 $ 4,261
-------- -------- -------- --------
TOTAL INVESTMENTS:
Investment income before expenses
and fees 6.73% $ 3,226 6.82% $ 2,952 6.65% $ 6,296 6.94% $ 5,913
Investment expenses and fees (0.13%) (61) (0.14%) (63) (0.13%) (125) (0.15%) (125)
------ -------- ------ -------- ------ -------- ------ --------
Net investment income 6.60% $ 3,165 6.68% $ 2,889 6.52% $ 6,171 6.79% $ 5,788
Net investment gains (losses) 157 (54) 280 (224)
-------- -------- -------- --------
Total $ 3,322 $ 2,835 $ 6,451 $ 5,564
======== ======== ======== ========
- ------ ----
(1) Yields are based on quarterly average asset carrying values, excluding
recognized and unrealized gains (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 $906 million and
$887 million at June 30, 2004 and 2003, 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 $42 million and $43 million for the three months
65
ended June 30, 2004 and 2003, respectively, and $86 million and $88
million for the six months ended June 30, 2004 and 2003, respectively.
Real estate and real estate joint venture income includes amounts
classified as discontinued operations of $25 million and $12 million for
the three months ended June 30, 2004 and 2003, respectively, and $43
million and $30 million for the six months ended June 30, 2004 and 2003,
respectively. These amounts are net of depreciation of $1 million and $5
million for the three months ended June 30, 2004 and 2003, respectively,
and $3 million and $11 million for the six months ended June 30, 2004 and
2003, respectively. Net investment gains (losses) include $131 million and
$0 million of gains classified as discontinued operations for the three
months ended June 30, 2004 and 2003, respectively, and $152 million and
$90 million of gains classified as discontinued operations for the six
months ended June 30, 2004 and 2003, respectively.
(5) Investment income from other invested assets includes scheduled periodic
settlement payments on derivative instruments that do not qualify for
hedge accounting under SFAS 133 of $22 million and $12 million for the
three months ended June 30, 2004 and 2003, respectively, and $36 million
and $20 million for the six months ended June 30, 2004 and 2003,
respectively. These amounts are excluded from net investment gains
(losses).
(6) Included in net investment gains (losses) for the six months ended June
30, 2004 is a $23 million gain from the sale of a subsidiary.
FIXED MATURITIES
Fixed maturities consist principally of publicly traded and privately
placed debt securities, and represented 74.7% and 75.6% of total cash and
invested assets at June 30, 2004 and December 31, 2003, respectively. Based on
estimated fair value, public fixed maturities represented $149,949 million, or
88.1% and $147,489 million, or 87.9%, of total fixed maturities at June 30, 2004
and December 31, 2003, respectively. Based on estimated fair value, private
fixed maturities represented $20,243 million, or 11.9% and $20,263 million, or
12.1%, of total fixed maturities at June 30, 2004 and December 31, 2003,
respectively.
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).
66
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 is comprised of at:
JUNE 30, 2004 DECEMBER 31, 2003
-------------------------------- -----------------------------------
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 $110,622 $113,607 66.8% $106,779 $112,333 67.0%
2 Baa 42,035 43,829 25.8 39,006 42,057 25.0
3 Ba 6,923 7,334 4.3 7,388 8,011 4.8
4 B 3,963 4,086 2.4 3,578 3,814 2.3
5 Caa and lower 562 583 0.3 630 629 0.4
6 In or near default 184 211 0.1 341 371 0.2
-------- -------- ----- -------- -------- -----
Subtotal 164,289 169,650 99.7 157,722 167,215 99.7
Redeemable preferred stock 613 542 0.3 611 537 0.3
-------- -------- ----- -------- -------- -----
Total fixed maturities $164,902 $170,192 100.0% $158,333 $167,752 100.0%
======== ======== ===== ======== ======== =====
- ----------
(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 on availability and the
lower of the applicable ratings between Moody's and S&P. The current
period ratings are presented so that the consolidated rating is equal to
the Moody's or S&P rating, whichever is more conservative. If no rating is
available from a rating agency, then the MetLife rating will be used.
67
The fixed maturities portfolio is diversified across a broad range of
asset sectors, and the sector mix did not change significantly in the second
quarter of 2004. 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 sector represents at:
JUNE 30, 2004
----------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------ ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ---- ---- ---------- -----
(DOLLARS IN MILLIONS)
U.S. treasuries/agencies $ 15,838 $ 992 $ 166 $ 16,664 9.8%
State and political subdivisions 3,592 125 42 3,675 2.2
U.S. corporate securities 58,536 2,683 600 60,619 35.6
Foreign government securities 7,537 585 103 8,019 4.7
Foreign corporate securities 23,349 1,643 260 24,732 14.5
Residential mortgage-backed securities 30,464 524 290 30,698 18.0
Commercial mortgage-backed securities 11,801 361 143 12,019 7.1
Asset-backed securities 12,378 136 70 12,444 7.3
Other fixed income assets 794 38 52 780 0.5
-------- -------- -------- -------- -----
Total bonds 164,289 7,087 1,726 169,650 99.7
Redeemable preferred stocks 613 -- 71 542 0.3
-------- -------- -------- -------- -----
Total fixed maturities $164,902 $ 7,087 $ 1,797 $170,192 100.0%
======== ======== ======== ======== =====
DECEMBER 31, 2003
----------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------ ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
---------- ---- ---- ---------- -----
(DOLLARS IN MILLIONS)
U.S. treasuries/agencies $ 14,707 $ 1,264 $ 26 $ 15,945 9.5%
State and political subdivisions 3,155 209 15 3,349 2.0
U.S. corporate securities 56,757 3,886 252 60,391 36.0
Foreign government securities 7,789 1,003 28 8,764 5.2
Foreign corporate securities 21,727 2,194 79 23,842 14.2
Residential mortgage-backed securities 30,836 720 102 31,454 18.8
Commercial mortgage-backed securities 10,523 530 22 11,031 6.6
Asset-backed securities 11,736 187 60 11,863 7.1
Other fixed income assets 492 167 83 576 0.3
-------- -------- ---- -------- -----
Total bonds 157,722 10,160 667 167,215 99.7
Redeemable preferred stocks 611 2 76 537 0.3
-------- -------- ---- -------- -----
Total fixed maturities $158,333 $ 10,162 $743 $167,752 100.0%
======== ======== ==== ======== =====
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;
68
- - 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;
- - the Company's ability and intent to hold the security for a period of time
sufficient to allow for the recovery of its value to an amount equal to or
greater than cost;
- - unfavorable changes in forecasted cash flows on asset-backed securities;
and
- - other subjective factors, including concentrations and information
obtained from regulators and rating agencies.
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 fair value had declined and
remained below amortized 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.
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 $46 million and $63 million for the three months ended June 30,
2004 and 2003, respectively, and $52 million and $239 million for the six months
ended June 30, 2004 and 2003, respectively. The Company's three largest
writedowns totaled $32 million and $25 million for the three months ended June
30, 2004 and 2003, respectively, and $32 million and $101 million for the six
months ended June 30, 2004 and 2003, respectively. The circumstances that gave
rise to these impairments were either financial restructurings or bankruptcy
filings. During the three months ended June 30, 2004 and 2003, the Company sold
fixed maturities with a fair value of $5,920 million and $3,543 million,
respectively, at a loss of $113 million and $55 million, respectively. During
the six months ended June 30, 2004 and 2003, the Company sold fixed maturities
with a fair value of $8,878 million and $7,752 million, respectively, at a loss
of $178 million and $120 million, respectively.
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:
JUNE 30, 2004
------------------------
GROSS
UNREALIZED % OF
LOSSES TOTAL
----------- -----
(DOLLARS IN MILLIONS)
Less than 20% $1,735 96.6%
20% or more for less than six months 47 2.6
20% or more for six months or greater 15 0.8
------ ------
Total $1,797 100.0%
====== ======
The gross unrealized loss related to the Company's fixed maturities at
June 30, 2004 was $1,797 million. These fixed maturities mature as follows: 2%
due in one year or less; 21% due in greater than one year to five years; 16% due
in greater than five years to ten years; and 61% due in greater than ten years
(calculated as a percentage of amortized cost). Additionally, such securities
are concentrated by sector in U.S. corporates (33%); mortgage-backed (24%); and
foreign corporates (14%); and are concentrated by industry in mortgage-backed
(24%); utilities (12%); and finance (10%) (calculated as a percentage of gross
unrealized loss). Non-investment grade securities represent 4% of the $66,940
million fair value and 8% of the $1,797 million gross unrealized loss.
69
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:
JUNE 30, 2004
--------------------------------------------------------------------------
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 $62,568 $ 140 $ 1,445 $ 47 4,761 40
Six months or greater but less than nine months 979 31 30 11 102 2
Nine months or greater but less than twelve months 1,883 -- 93 -- 221 1
Twelve months or greater 3,132 4 167 4 511 8
------- ------- ------- ------- ------- -------
Total $68,562 $ 175 $ 1,735 $ 62 5,595 51
======= ======= ======= ======= ===== =======
The category of fixed maturity securities where the estimated fair value
has declined and remained below amortized cost by less than 20% matures as
follows: 2% due in one year or less; 21% due in greater than one year to five
years; 16% due in greater than five years to ten years; and 61% due in greater
than ten years (calculated as a percentage of amortized cost). Additionally,
such securities are concentrated by sector in U.S. corporates (33%);
mortgage-backed (25%); and foreign corporates (14%); and are concentrated by
industry in mortgage-backed (25%); utilities (12%); and finance (10%)
(calculated as a percentage of gross unrealized loss). Non-investment grade
securities represent 3% of the $66,827 million fair value and 7% of the $1,735
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 matures as follows: 4% due in one year or less; 45% due in greater than
five years to ten years; and 51% due in greater than ten years (calculated as a
percentage of amortized cost). Additionally, such securities are concentrated by
sector in U.S. corporates (40%); foreign corporates (19%); and asset-backed
(16%); and are concentrated by industry in asset-backed (16%); services (15%);
and finance (10%) (calculated as a percentage of gross unrealized loss).
Non-investment grade securities represent 45% of the $93 million fair value and
42% of the $47 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 matures as follows: 86% due in greater than five years to ten years; and
14% due in greater than ten years (calculated as a percentage of amortized
cost). Additionally, such securities are concentrated by sector in foreign
government (73%); and asset-backed (21%); and are concentrated by industry in
government (73%); and finance (5%) (calculated as a percentage of gross
unrealized loss). Non-investment grade securities represent 97% of the $20
million fair value and 78% of the $15 million gross unrealized loss.
The Company held five fixed maturity securities each with a gross
unrealized loss at June 30, 2004 greater than $10 million. One of these
securities represents 73% 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.
70
Corporate Fixed Maturities. The table below shows the major industry types
that comprise the corporate bond holdings at:
JUNE 30, 2004 DECEMBER 31, 2003
---------------------- --------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Industrial $34,849 40.8% $34,474 40.9%
Utility 10,493 12.3 9,955 11.8
Finance 14,665 17.2 14,287 17.0
Yankee/Foreign (1) 24,732 29.0 23,842 28.3
Other 612 0.7 1,675 2.0
------- ----- ------- -----
Total $85,351 100.0% $84,233 100.0%
======= ===== ======= =====
- ----------
(1) Includes publicly traded, U.S. dollar-denominated debt obligations of
foreign obligors, known as Yankee bonds, and other foreign investments.
The Company maintains a diversified corporate bond portfolio across
industries and issuers. The portfolio does not have exposure to any single
issuer in excess of 1% of the total invested assets of the portfolio. At June
30, 2004, the Company's combined holdings in the ten issuers to which it had the
greatest exposure totaled $4,663 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 held at June 30, 2004 was $632 million.
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.
Structured Securities. The following table shows the types of structured
securities the Company held at:
JUNE 30, 2004 DECEMBER 31, 2003
-------------------- --------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Residential mortgage-backed securities:
Pass-through securities $14,085 25.5% $15,427 28.4%
Collateralized mortgage obligations 16,613 30.1 16,027 29.5
------- ----- ------- -----
Total residential mortgage-backed securities 30,698 55.6 31,454 57.9
Commercial mortgage-backed securities 12,019 21.8 11,031 20.3
Asset-backed securities 12,444 22.6 11,863 21.8
------- ----- ------- -----
Total $55,161 100.0% $54,348 100.0%
======= ===== ======= =====
The majority of the residential mortgage-backed securities are guaranteed
or otherwise supported by the Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation or the Government National Mortgage Association.
At June 30, 2004 and December 31, 2003, $29,838 million and $31,210 million,
respectively, or 97.2% and 99.2%, respectively, of the residential
mortgage-backed securities were rated Aaa/AAA by Moody's or S&P.
At June 30, 2004 and December 31, 2003, $8,387 million and $6,992 million,
respectively, or 69.8% and 63.4%, respectively, of the commercial
mortgage-backed securities were rated Aaa/AAA by Moody's or S&P.
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 income. The Company's asset-backed securities are
diversified both by sector and by issuer. Credit card and home equity loan
securitizations, each accounting for about 29% and 27% of the total holdings,
respectively, constitute the largest exposures in the Company's asset-backed
securities portfolio. Asset-backed securities generally have limited sensitivity
to changes in interest rates. Approximately $8,195
71
million and $7,528 million, or 65.9% and 63.5%, of total asset-backed securities
were rated Aaa/AAA by Moody's or S&P at June 30, 2004 and December 31, 2003,
respectively.
Structured Investment Transactions. The Company participates in structured
investment transactions, primarily asset securitizations and structured notes.
These transactions enhance the Company's total return of the investment
portfolio principally by generating management fee income on asset
securitizations and by providing equity-based returns on debt securities through
structured 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. 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 SPE and surrenders control over
the transferred assets, the transaction is accounted for as a sale. Gains or
losses on securitizations are determined with reference to the carrying amount
of the financial assets transferred, which is allocated to the assets sold and
the beneficial interests retained based on relative fair values at the date of
transfer. Beneficial interests in securitizations are carried at fair value in
fixed maturities. Income on these beneficial interests is recognized using the
prospective method in accordance with EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Certain Investments ("EITF 99-20"). The SPEs
used to securitize assets are not consolidated by the Company because the
Company has determined that it is not the primary beneficiary of these entities
based on the framework provided in FIN 46 and the December 2003 revision FIN
46(r). Prior to the adoption of FIN 46(r), such SPEs were not consolidated
because they did not meet the criteria for consolidation under previous
accounting guidance.
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. These SPEs are not consolidated
by the Company because the Company has determined that it is not the primary
beneficiary of these entities based on the framework provided in FIN 46(r).
Prior to the adoption of FIN 46(r), such SPEs were not consolidated because they
did not meet the criteria for consolidation under previous accounting guidance.
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, which are included in fixed maturities, and their income is
recognized using the retrospective interest method or the level yield method, as
appropriate. Impairments of these beneficial interests are included in net
investment gains (losses).
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans on real estate are collateralized by
commercial, agricultural and residential properties. Mortgage loans on real
estate comprised 12.4% and 11.8% of the Company's total cash and invested assets
at June 30, 2004 and December 31, 2003, respectively. The carrying value of
mortgage loans on real estate is stated at original cost net of repayments,
amortization of premiums, accretion of discounts and valuation allowances. The
following table shows the carrying value of the Company's mortgage loans on real
estate by type at:
JUNE 30, 2004 DECEMBER 31, 2003
--------------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
Commercial $22,005 78.3% $20,300 77.3%
Agricultural 5,377 19.1 5,327 20.3
Residential 736 2.6 622 2.4
------- ----- ------- -----
Total $28,118 100.0% $26,249 100.0%
======= ===== ======= =====
72
Commercial Mortgage Loans. The Company diversifies its commercial mortgage
loans by both geographic region and property type. The following table presents
the distribution across geographic regions and property types for commercial
mortgage loans at:
JUNE 30, 2004 DECEMBER 31, 2003
--------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
REGION
South Atlantic $ 5,247 23.8% $ 4,978 24.5%
Pacific 5,327 24.2 5,005 24.7
Middle Atlantic 3,513 16.0 3,455 17.0
East North Central 2,294 10.4 1,821 9.0
New England 1,302 5.9 1,278 6.3
West South Central 1,470 6.7 1,370 6.8
Mountain 785 3.6 740 3.6
West North Central 625 2.8 619 3.0
International 1,064 4.8 836 4.1
East South Central 278 1.3 198 1.0
Other 100 0.5 -- 0.0
------- ----- ------- -----
Total $22,005 100.0% $20,300 100.0%
======= ===== ======= =====
PROPERTY TYPE
Office $10,301 46.8% $ 9,170 45.2%
Retail 5,221 23.7 5,006 24.7
Apartments 3,001 13.6 2,832 13.9
Industrial 1,951 8.9 1,911 9.4
Hotel 1,098 5.0 1,032 5.1
Other 433 2.0 349 1.7
------- ----- ------- -----
Total $22,005 100.0% $20,300 100.0%
======= ===== ======= =====
Restructured, Delinquent or Under Foreclosure and Potentially Delinquent.
The Company monitors its mortgage loan investments on an ongoing basis,
including reviewing loans that are restructured, delinquent or under foreclosure
and potentially delinquent. These loan classifications are consistent with those
used in industry practice.
The Company defines potentially delinquent loans as loans that, in
management's opinion, have a high probability of becoming delinquent. 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 as loans in which foreclosure
proceedings have formally commenced. The Company defines restructured mortgage
loans 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.
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 establishes valuation allowances for loans that it deems
impaired. 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. 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 (losses).
73
The following table presents the amortized cost and valuation allowance
for commercial mortgage loans distributed by loan classification at:
JUNE 30, 2004 DECEMBER 31, 2003
------------------------------------------------ ----------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST
------- ----- --------- ---- ------- ----- --------- ----
(DOLLARS IN MILLIONS)
Performing $22,003 99.4% $ 91 0.4% $20,315 99.5% $ 95 0.5%
Restructured 61 0.3 18 29.5% 77 0.4 23 29.9%
Delinquent or under
foreclosure 13 0.1 3 23.1% -- -- -- --%
Potentially delinquent 47 0.2 7 14.9% 30 0.1 4 13.3%
------- ----- ---- ------- ----- ----
Total $22,124 100.0% $119 0.5% $20,422 100.0% $122 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:
SIX MONTHS ENDED
JUNE 30, 2004
---------------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 122
Additions --
Deductions (3)
-----
Balance, end of period $ 119
=====
Agricultural Mortgage Loans. The Company diversifies its agricultural
mortgage loans by both geographic region and product type.
Approximately 68.4% of the $5,377 million of agricultural mortgage loans
outstanding at June 30, 2004 were subject to rate resets prior to maturity. A
substantial portion of these loans generally is successfully renegotiated and
remain outstanding to maturity. The process and policies for monitoring the
agricultural mortgage loans and classifying them by performance status are
generally the same as those for the commercial loans.
The following table presents the amortized cost and valuation allowances
for agricultural mortgage loans distributed by loan classification at:
JUNE 30, 2004 DECEMBER 31, 2003
----------------------------------------------- ------------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
-------- ----- --------- -------- -------- ----- --------- --------
(DOLLARS IN MILLIONS)
Performing $5,199 96.6% $ -- --% $5,162 96.7% $ -- --%
Restructured 77 1.4 1 1.3% 111 2.1 1 0.9%
Delinquent or under
foreclosure 109 2.0 9 8.3% 36 0.7 2 5.6%
Potentially delinquent 2 -- -- --% 24 0.5 3 12.5%
------ ----- ---- ------ ----- ----
Total $5,387 100.0% $ 10 0.2% $5,333 100.0% $ 6 0.1%
====== ===== ==== ====== ===== ====
- ----------
(1) Amortized cost is equal to carrying value before valuation allowances.
74
The following table presents the changes in valuation allowances for
agricultural mortgage loans for the:
SIX MONTHS ENDED
JUNE 30, 2004
---------------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 6
Additions 4
Deductions -
-----
Balance, end of period $ 10
=====
REAL ESTATE AND REAL ESTATE JOINT VENTURES
The Company's real estate and real estate joint venture investments consist
of commercial properties located primarily throughout the U.S. At June 30, 2004
and December 31, 2003, the carrying value of the Company's real estate, real
estate joint ventures and real estate held-for-sale was $4,154 million and
$4,680 million, respectively, or 1.8%, and 2.2% of total cash and invested
assets, respectively. The carrying value of real estate is stated at depreciated
cost net of impairments and valuation allowances. The carrying value of real
estate joint ventures is stated at the Company's equity in the real estate joint
ventures net of impairments and valuation allowances. The following table
presents the carrying value of the Company's real estate, real estate joint
ventures, real estate held-for-sale and real estate acquired upon foreclosure
at:
JUNE 30, 2004 DECEMBER 31, 2003
--------------------- ---------------------
CARRYING CARRYING
TYPE VALUE % OF TOTAL VALUE % OF TOTAL
-------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
Real estate held-for-investment $3,779 91.0 % $3,531 75.4 %
Real estate joint ventures
held-for-investment 329 7.9 315 6.7
Foreclosed real estate held-for-investment 2 -- 2 0.1
------ ----- ------ -----
4,110 98.9 3,848 82.2
------ ----- ------ -----
Real estate held-for-sale 44 1.1 831 17.8
Foreclosed real estate held-for-sale -- -- 1 --
------ ----- ------ -----
44 1.1 832 17.8
------ ----- ------ -----
Total real estate, real estate joint
ventures and real estate held-for-sale $4,154 100.0 % $4,680 100.0 %
====== ===== ====== =====
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 $44 million and $832 million at June 30, 2004 and December 31,
2003, respectively, are net of valuation allowances of $0 million and $12
million, respectively. There were no impairments at June 30, 2004 and
impairments of $2 million at December 31, 2003.
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(r). See "-- Variable Interest Entities."
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
$1,744 million and $1,598 million at June 30, 2004 and December 31, 2003,
respectively. Equity securities include private equity securities with an
estimated fair value of $537 million and $432 million at June 30, 2004 and
December 31, 2003, respectively. 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 $2,805 million and $2,600
75
million at June 30, 2004 and December 31, 2003, 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% and 0.7% of cash and
invested assets at June 30, 2004 and December 31, 2003, respectively.
Some of the Company's investments in other limited partnership interests
meet the definition of a VIE under FIN 46(r). 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:
JUNE 30, 2004
----------------------------------------------------
GROSS UNREALIZED
---------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
------ ------ ------ ---------- ------
(DOLLARS IN MILLIONS)
Equity Securities:
Common stocks $ 848 $ 315 $ 20 $1,143 65.5 %
Nonredeemable preferred stocks 589 21 9 601 34.5
------ ------ ------ ------ -----
Total equity securities $1,437 $ 336 $ 29 $1,744 100.0 %
====== ====== ====== ====== =====
DECEMBER 31, 2003
----------------------------------------------------
GROSS UNREALIZED
---------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
------ ------ ------ ---------- ------
(DOLLARS IN MILLIONS)
Equity Securities:
Common stocks $ 620 $ 334 $ 2 $ 952 59.6 %
Nonredeemable preferred stocks 602 48 4 646 40.4
------ ------ ------ ------ -----
Total equity securities $1,222 $ 382 $ 6 $1,598 100.0 %
====== ====== ====== ====== =====
Equity Security Impairment. The Company classifies all of its equity
securities as available-for-sale and marks them to market through other
comprehensive income. All securities with gross unrealized losses at the
consolidated balance sheet date are subjected to the Company's process for
identifying other-than-temporary impairments. The Company writes down to fair
value securities that it deems to be other-than-temporarily impaired in the
period the securities are deemed to be so impaired. The assessment of whether
such impairment has occurred is based on management's case-by-case evaluation of
the underlying reasons for the decline in fair value. Management considers a
wide range of factors, as described below, about the security issuer and uses
its best judgment in evaluating the cause of the decline in the estimated fair
value of the security and in assessing the prospects for near-term recovery.
Inherent in management's evaluation of the security are assumptions and
estimates about the operations of the issuer and its future earnings potential.
Considerations used by the Company in the impairment evaluation process
include, but are not limited to, the following:
- length of time and the extent to which the market value has been below
cost;
- potential for impairments of securities when the issuer is experiencing
significant financial difficulties, including a review of all securities
of the issuer, including its known subsidiaries and affiliates,
regardless of the form of the Company's ownership;
- potential for impairments in an entire industry sector or sub-sector;
- potential for impairments in certain economically depressed geographic
locations;
76
- 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;
- the Company's ability and intent to hold the security for a period of
time sufficient to allow for the recovery of its value to an amount
equal to or greater than cost; 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 $4 million and $13 million for the three
months ended June 30, 2004 and 2003, respectively, and $10 million and $90
million for the six months ended June 30, 2004 and 2003, respectively. During
the three months ended June 30, 2004 and 2003, the Company sold equity
securities with an estimated fair value of $5 million and $22 million,
respectively, at a loss of $3 million and $1 million, respectively. During the
six months ended June 30, 2004 and 2003, the Company sold equity securities with
an estimated fair value of $88 million and $42 million, at a loss of $14 million
and $6 million, respectively.
The gross unrealized loss related to the Company's equity securities at June
30, 2004 was $29 million. Such securities are concentrated by security type in
mutual funds (39%); and preferred stock (35%) and are concentrated by industry
in domestic broad market mutual funds (39%); and financial (29%) (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:
JUNE 30, 2004
------------------------------------------------------------------------------
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 $ 375 $ 40 $ 13 $ 16 1,168 206
Six months or greater but less than nine months 2 -- -- -- 4 2
Nine months or greater but less than twelve
months 1 -- -- -- 2 --
Twelve months or greater 2 -- -- -- 4 --
----- ----- ----- ----- ----- ---
Total $ 380 $ 40 $ 13 $ 16 1,178 208
===== ===== ===== ===== ===== ===
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.
The following table presents the total gross unrealized losses for equity
securities at June 30, 2004 where the estimated fair value had declined and
remained below cost by:
JUNE 30, 2004
------------------------
GROSS
UNREALIZED % OF
LOSSES TOTAL
---------- ------------
(DOLLARS IN MILLIONS)
Less than 20% $ 13 44.8 %
20% or more for less than six months 16 55.2
20% or more for six months or greater -- --
----- -------
Total $ 29 100.0 %
===== =======
77
Equity securities where the estimated fair value has declined and remained
below cost by less than 20% are concentrated by security type in preferred stock
(77%); and mutual funds (12%); and concentrated by industry in financial (67%);
and domestic broad market mutual funds (12%) (calculated as a percentage of
gross unrealized loss).
Equity securities where the estimated fair value has declined and remained
below cost by 20% or more for less than six months are concentrated by security
type in mutual funds (61%); and common stock (38%) and concentrated by industry
in domestic broad market mutual funds (61%) (calculated as a percentage of gross
unrealized loss). The significant factors considered at June 30, 2004 in the
review of equity securities for other-than-temporary impairment were a result of
generally difficult economic and market conditions.
The Company did not hold any equity securities with a gross unrealized loss
at June 30, 2004 greater than $5 million.
OTHER INVESTED ASSETS
The Company's other invested assets consist principally of leveraged leases
and funds withheld at interest of $4.3 billion and $3.9 billion at June 30, 2004
and December 31, 2003, 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. Other invested
assets also include the fair value of embedded derivatives related to funds
withheld and modified coinsurance contracts. 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 2.3% and 2.1% of cash and invested assets at June 30, 2004
and December 31, 2003, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative instruments to manage risk through one of five
principal strategies, the hedging of: (i) liabilities; (ii) invested assets;
(iii) portfolios of assets or liabilities; (iv) net investments in certain
foreign operations; and (v) 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 swaps, caps and floors,
credit default and foreign currency swaps and foreign currency forwards and
options.
The table below provides a summary of the notional amount and fair value of
derivative financial instruments held at:
JUNE 30, 2004 DECEMBER 31, 2003
---------------------------------------- -------------------------------------
CURRENT MARKET CURRENT MARKET
OR FAIR VALUE OR FAIR VALUE
NOTIONAL ------------------------- NOTIONAL ---------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------- ----------- -------- ------- -----------
(DOLLARS IN MILLIONS)
Financial futures $ 806 $ 1 $ 9 $ 1,348 $ 8 $ 30
Interest rate swaps 13,235 264 79 9,944 189 36
Floors 325 1 -- 325 5 --
Caps 9,120 26 -- 9,345 29 --
Financial forwards 350 1 1 1,310 2 3
Foreign currency swaps 6,677 27 671 4,710 9 796
Options 3,731 4 -- 6,065 7 --
Foreign currency forwards 848 3 8 695 5 32
Credit default swaps 1,645 10 4 615 2 1
Synthetic GICs 5,459 -- -- 5,177 -- --
Other 150 -- -- -- -- --
------- ------- ------- ------- ------- -------
Total contractual commitments $42,346 $ 337 $ 772 $39,534 $ 256 $ 898
======= ======= ======= ======= ======= =======
78
VARIABLE INTEREST ENTITIES
The Company has adopted the provisions of FIN 46 and FIN 46(r). See "--
Application of Recent Accounting Pronouncements." The adoption of FIN 46(r)
required the Company to consolidate certain VIEs for which it is the primary
beneficiary. The following table presents the total assets of and maximum
exposure to loss relating to VIEs for which the Company has concluded that (i)
it is the primary beneficiary and which are consolidated in the Company's
unaudited interim condensed consolidated financial statements at June 30, 2004,
and (ii) it holds significant variable interests but it is not the primary
beneficiary and which have not been consolidated:
JUNE 30, 2004
------------------------------------------------------
PRIMARY BENEFICIARY NOT PRIMARY BENEFICIARY
------------------------ -----------------------
MAXIMUM MAXIMUM
TOTAL EXPOSURE TO TOTAL EXPOSURE TO
ASSETS (1) LOSS (2) ASSETS (1) LOSS (2)
---------- ----------- ---------- -----------
(DOLLARS IN MILLIONS)
Asset-backed securitizations
and collateralized debt obligations $ -- $ -- $2,355 $ 16
Real estate joint ventures (3) 16 13 75 --
Other limited partnerships (4) 82 84 587 60
------ ------ ------ ------
Total $ 98 $ 97 $3,017 $ 76
====== ====== ====== ======
- --------
(1) The assets of the asset-backed securitizations and collateralized debt
obligations are reflected at fair value as of June 30, 2004. 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 of the asset-backed securitizations and
collateralized debt obligations is equal to the carrying amounts of
retained interests. In addition, the Company provides collateral
management services for certain of these structures for which it
collects a management fee. 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 real estate funds, 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.
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 $26,842 million and
$25,121 million and an estimated fair value of $27,484 million and $26,387
million were on loan under the program at June 30, 2004 and December 31, 2003,
respectively. The Company was liable for cash collateral under its control of
$28,132 million and $27,083 million at June 30, 2004 and December 31, 2003,
respectively. Security collateral on deposit from customers may not be sold or
repledged and is not reflected in the consolidated financial statements.
SEPARATE ACCOUNTS
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. Effective with the adoption
of SOP 03-1, the Company reports separately, as assets and liabilities,
investments held in separate accounts and liabilities of the separate accounts
if (i) such separate accounts are legally recognized; (ii) assets supporting the
contract liabilities are legally insulated from the Company's general account
liabilities; (iii) investments are
79
directed by the contractholder; and (iv) all investment performance, net of
contract fees and assessments, is passed through to the contractholder. The
Company reports separate account assets meeting such criteria at their fair
value. Investment performance (including investment income, net investment gains
(losses) and changes in unrealized gains (losses) and the corresponding amounts
credited to contractholders are offset within the same line in the unaudited
interim condensed consolidated statements of income. The Company's revenues
reflect fees charged to the separate accounts, including mortality charges, risk
charges, policy administration fees, investment management fees and surrender
charges. Separate accounts not meeting the above criteria are combined on a
line-by-line basis with the Company's general account assets, liabilities,
revenues and expenses. Effective January 1, 2004, in accordance with the SOP
03-1 separate account reporting criteria, separate account assets with a fair
value of $1.7 billion were reclassified to general account investments with a
corresponding transfer of separate account liabilities to future policy benefits
and policyholder account balances. See "--Application of Recent Accounting
Pronouncements."
80
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 June 30,
2004 is relatively unchanged in amount from that reported on December 31, 2003,
a description of which may be found in the 2003 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
The Holding Company's management, with the participation of the Holding
Company's Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of the Holding Company's disclosure
controls and procedures as defined in Exchange Act Rule 13a-15(e) as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective. There were no changes in the
Holding Company's internal control over financial reporting as defined in
Exchange Act Rule 13a-15(f) during the quarter ended June 30, 2004 that have
materially affected, or are reasonably likely to materially affect, the Holding
Company's internal control over financial reporting.
81
PART II - OTHER INFORMATION
ITEM I. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 6 to the unaudited
interim condensed consolidated financial statements in Part I of this Report.
The Company is a defendant in a large number of litigation matters. In some
of the matters, very large and/or indeterminate amounts, including punitive and
treble damages, are sought. Modern pleading practice in the United States
permits considerable variation in the assertion of monetary damages or other
relief. Jurisdictions may permit claimants to not specify the monetary damages
sought or may permit claimants to state only that the amount sought is
sufficient to invoke the jurisdiction of the trial court. In addition,
jurisdictions may permit plaintiffs to allege monetary damages in amounts well
exceeding reasonably possible verdicts in the jurisdiction for similar matters.
This variability in pleadings, together with the actual experience of the
Company in litigating or resolving through settlement numerous claims over an
extended period of time, demonstrate to management that the monetary relief
which may be specified in a lawsuit or claim bears little relevance to its
merits or disposition value. Thus, unless stated below, the specific monetary
relief sought is not noted.
Due to the vagaries of litigation, the outcome of a litigation matter and
the amount or range of potential loss at particular points in time may normally
be inherently impossible to ascertain with any degree of certainty. Inherent
uncertainties can include how fact finders will view individually and in their
totality documentary evidence, the credibility and effectiveness of witnesses'
testimony, and how trial and appellate courts will apply the law in the context
of the pleadings or evidence presented, whether by motion practice, or at trial
or on appeal. Disposition valuations are also subject to the uncertainty of how
opposing parties and their counsel will themselves view the relevant evidence
and applicable law. In this context, unless stated below, estimates of possible
additional losses or ranges of loss for particular matters can not in the
ordinary course be made with a reasonable degree of certainty. Liabilities are
established when it is probable that a loss has been incurred and the amount of
the loss can be reasonably estimated.
SALES PRACTICES CLAIMS
As previously disclosed, over the past several years, Metropolitan Life, New
England Mutual Life Insurance Company ("New England Mutual") and General
American Life Insurance Company ("General American") have faced numerous claims,
including class action lawsuits, alleging improper marketing and sales of
individual life insurance policies or annuities. These lawsuits are generally
referred to as "sales practices claims." Settlements have been reached in the
sales practices class actions against Metropolitan Life, New England Mutual and
General American.
Certain class members have opted out of these class action settlements and
have brought or continued non-class action sales practices lawsuits. In
addition, other sales practices lawsuits have been brought. As of June 30, 2004,
there are approximately 331 sales practices lawsuits pending against
Metropolitan Life; approximately 40 sales practices lawsuits pending against New
England Mutual, New England Life Insurance Company, and New England Securities
Corporation (collectively, "New England"); and approximately 51 sales practices
lawsuits pending against General American.
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all probable and
reasonably estimable losses for sales practices claims against Metropolitan
Life, New England and General American.
ASBESTOS-RELATED CLAIMS
As previously reported, Metropolitan Life received approximately 60,300
asbestos-related claims in 2003. During the first six months of 2004 and 2003,
Metropolitan Life received approximately 13,560 and 48,000 asbestos-related
claims, respectively. 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, Alabama, Illinois, Colorado, Indiana and Arkansas. The Company intends
to defend itself vigorously against these cases.
Metropolitan Life continues 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.
82
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.
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.
DEMUTUALIZATION ACTIONS
Several lawsuits were brought in 2000 challenging the fairness of
Metropolitan Life's plan of reorganization, as amended (the "plan") and the
adequacy and accuracy of Metropolitan Life's disclosure to policyholders
regarding the plan. These actions named as defendants some or all of
Metropolitan Life, the Holding Company, the individual directors, the New York
Superintendent of Insurance (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 of the New
York State court. 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. On April
27, 2004, the appellate court modified the trial court's order by reinstating
certain claims against Metropolitan Life, the Holding Company and the individual
directors.
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 in connection with the plan. The plaintiffs in these actions, which have
been consolidated, claim that the Policyholder Information Booklets relating to
the plan failed to disclose certain material facts and seek rescission and
compensatory damages. Metropolitan Life's motion to dismiss these three cases
was denied in 2001. On February 4, 2003, plaintiffs filed a consolidated amended
complaint adding a fraud claim under the Securities Exchange Act of 1934.
Plaintiffs served a second consolidated amended complaint on April 2, 2004, and
continue to assert violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934. On June 22, 2004, the court denied the defendants' motion
to dismiss the claim of violation of the Securities Exchange Act of 1934.
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.
On April 30, 2004, a lawsuit was filed in New York state court in New York
County against the Holding Company and Metropolitan Life on behalf of a proposed
class comprised of the settlement class in the Metropolitan Life sales practices
class action settlement approved in December 1999 by the United States District
Court for the Western District of Pennsylvania. The complaint challenges the
treatment of the cost of the sales practices settlement in the demutualization
of Metropolitan Life and asserts claims of breach of fiduciary duty, common law
fraud, and unjust enrichment. Plaintiffs seek compensatory and punitive damages,
as well as attorneys' fees and costs. On May 24, 2004, the Holding Company and
Metropolitan Life served a motion to dismiss the complaint. In October 2003, the
United States District Court for the Western District of Pennsylvania dismissed
plaintiffs' similar complaint alleging that the demutualization breached the
terms of the 1999 settlement agreement and unjustly enriched the Holding Company
and Metropolitan Life. In January 2004, plaintiffs' appeal of that decision to
the United States Court of Appeals for the Third Circuit was dismissed. The
Holding Company and Metropolitan Life intend to contest this matter vigorously.
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 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 were consolidated in the United States
District Court for the Southern District of New York. On April 28, 2003, the
United States
83
District Court approved a class action settlement of the consolidated actions.
Several persons filed notices of appeal from the order approving the settlement,
but subsequently the appeals were dismissed. Metropolitan Life also entered into
settlement agreements to resolve the regulatory examination.
Twenty lawsuits involving approximately 140 plaintiffs were 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 resolved the claims of some of these plaintiffs through settlement, and
some additional plaintiffs have voluntarily dismissed their claims. Metropolitan
Life resolved claims of some additional persons who opted out of the settlement
class referenced in the preceding paragraph but who had not filed suit. The
actions filed in Alabama and Tennessee have been dismissed; two actions filed in
Mississippi remain pending. Metropolitan Life is contesting plaintiffs' claims
vigorously.
The Company believes that adequate provision has been made to cover the
costs associated with the resolution of these matters.
OTHER
A purported class action in which two policyholders seek to represent a
class of owners of participating life insurance policies is pending in state
court in New York. Plaintiffs assert that Metropolitan Life breached their
policies 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.
Plaintiffs have served their motion to certify a litigation class. MetLife is
vigorously defending the case.
Regulatory bodies have contacted the Company and have requested information
relating to market timing and late trading of mutual funds and variable
insurance products and, generally, the marketing of products. The Company
believes that many of these inquiries are similar to those made to many
financial services companies as part of industry-wide investigations by various
regulatory agencies. State Street Research Investment Services, one of the
Company's indirect broker/dealer subsidiaries, has entered into a settlement
with the NASD resolving all outstanding issues relating to its investigation.
The SEC has commenced an investigation with respect to market timing and late
trading in a limited number of privately-placed variable insurance contracts
that were sold through General American. As previously reported, in May 2004,
General American received a so-called "Wells Notice" stating that the SEC staff
is considering recommending that the SEC bring a civil action alleging
violations of the U.S. securities laws against General American. Under the SEC
procedures, General American can avail itself of the opportunity to respond to
the SEC staff before it makes a formal recommendation regarding whether any
action alleging violations of the U.S. securities laws should be considered.
General American has responded to the Wells Notice. The Company is fully
cooperating with regard to these information requests and investigations. The
Company at the present time 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.
As previously reported, the Company has received from the Office of the
Attorney General of the State of New York a subpoena seeking information
regarding certain compensation agreements between insurance brokers and the
Company. The Company is fully cooperating with the inquiry.
Various litigation, claims and assessments against the Company, in addition
to those discussed above and those otherwise provided for in the Company's
unaudited interim condensed consolidated financial statements, have arisen in
the course of the Company's business, including, but not limited to, in
connection with its activities as an insurer, employer, investor, investment
advisor and taxpayer. Further, state insurance regulatory authorities and other
federal and state authorities regularly make inquiries and conduct
investigations concerning the Company's compliance with applicable insurance and
other laws and regulations.
SUMMARY
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses, except as noted above in connection with specific matters. In
some of the matters referred to above, very large and/or indeterminate amounts,
including punitive and treble damages, are sought. Although in light of these
considerations it is possible that an adverse outcome in certain cases could
have a material adverse effect upon the Company's 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
84
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.
85
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Purchases of common stock made by or on behalf of the Holding Company during
the three months ended June 30, 2004 are set forth below:
ISSUER PURCHASES OF EQUITY SECURITIES
(D) MAXIMUM NUMBER (OR
APPROXIMATE DOLLAR
(C) TOTAL NUMBER OF VALUE) OF SHARES THAT
(B) AVERAGE PRICE SHARES PURCHASED AS PART MAY YET BE PURCHASED
(A) TOTAL NUMBER OF PAID OF PUBLICLY ANNOUNCED UNDER THE PLANS OR
SHARES PURCHASED(1) PER SHARE PLANS OR PROGRAMS(2) PROGRAMS
PERIOD ------------------- ----------------- ------------------------ ---------------------
- ------------------------
April 1 - April 30, 2004 - - - $ 644,406,343
May 1 - May 31, 2004 4,004,000 $ 33.89 4,004,000 $ 508,730,688
June 1 - June 30, 2004 2,081,881 $ 35.94 2,081,881 $ 433,901,324
Total 6,085,881 $ 34.59 6,085,881 $ 433,901,324
(1) During the periods reported above, there were no shares of Common Stock
which were repurchased by the Holding Company other than through a publicly
announced plan or program.
(2) On February 19, 2002, the Holding Company's Board of Directors authorized a
$1 billion common stock repurchase program. Under this authorization, the
Holding Company may purchase its common stock from the MetLife Policyholder
Trust, in the open market and in privately negotiated transactions.
86
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by this Item is incorporated herein by reference
to Part II, Item 4. "Submission of Matters to a Vote of Security
Holders" in MetLife, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004.
87
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.2 MetLife, Inc. Amended and Restated By-laws (effective July 27,
2004).
10.1 Five-Year Credit Agreement, dated as of April 23, 2004, among
MetLife, Inc., Metropolitan Life Insurance Company, MetLife
Funding, Inc. and the other parties signatory thereto.
10.2 364-Day Credit Agreement, dated as of April 23, 2004, among
MetLife, Inc., Metropolitan Life Insurance Company, MetLife
Funding, Inc. and the other parties signatory thereto.
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
To date, the following current reports were filed on Form 8-K:
1. Form 8-K filed May 14, 2004 (dated May 14, 2004) attaching a press
release announcing receipt by MetLife, Inc.'s subsidiary, General
American Life Insurance Company, of a "Wells Notice" from the SEC.
2. Form 8-K filed June 3, 2004 (dated June 3, 2004) regarding
offering of 5.50% senior notes and 6.375% senior notes and
attaching relevant documentation.
3. Form 8-K filed June 14, 2004 (dated June 11, 2004) attaching a
press release announcing receipt by MetLife, Inc. of a subpoena
from the Office of the Attorney General of the State of New York.
4. Form 8-K filed June 22, 2004 (dated June 22, 2004) attaching a
press release announcing certain organizational changes.
5. Form 8-K filed June 29, 2004 (dated June 29, 2004) attaching a
press release announcing the resignation of John C. Danforth from
the boards of directors of MetLife, Inc. and Metropolitan Life
Insurance Company.
6. Form 8-K filed July 23, 2004 (dated July 23, 2004) regarding
offering of additional 5.50% senior notes and additional 6.375%
senior notes and attaching relevant documentation.
7. Form 8-K filed July 30, 2004 (dated July 29, 2004) regarding the
issuance by the Internal Revenue Service of its audit report on
Metropolitan Life Insurance Company and its subsidiaries for the
years 1997-1999.
88
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/ Joseph J. Prochaska, Jr.
--------------------------------
Name: Joseph J. Prochaska, Jr.
Title: Senior Vice-President,
Finance Operations and Chief
Accounting Officer (Authorized
Signatory and Chief Accounting
Officer)
Date: August 3, 2004
89
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT NAME
------- ------------
3.2 MetLife, Inc. Amended and Restated By-laws (effective July 27,
2004).
10.1 Five-Year Credit Agreement, dated as of April 23, 2004, among
MetLife, Inc., Metropolitan Life Insurance Company, MetLife
Funding, Inc. and the other parties signatory thereto.
10.2 364-Day Credit Agreement, dated as of April 23, 2004, among
MetLife, Inc., Metropolitan Life Insurance Company, MetLife
Funding, Inc. and the other parties signatory thereto.
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.
90