1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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 NO.)
ONE MADISON AVENUE
NEW YORK, NEW YORK 10010-3690
(212) 578-2211
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, PAR VALUE $.01 NEW YORK STOCK EXCHANGE
8.00% EQUITY SECURITY UNITS NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of March 2, 2001 was approximately $24
billion. As of March 2, 2001, 757,051,660 shares of the registrant's Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED TO BE FURNISHED PURSUANT TO PART III OF THIS FORM
10-K IS SET FORTH IN, AND IS HEREBY INCORPORATED BY REFERENCE HEREIN FROM, THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 24, 2001, TO BE FILED BY THE REGISTRANT WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT LATER THAN 120 DAYS AFTER
THE YEAR ENDED DECEMBER 31, 2000.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2
TABLE OF CONTENTS
PAGE
NUMBER
-------
PART I Item 1. Business........................................... 2
Item 2. Properties......................................... 24
Item 3. Legal Proceedings.................................. 25
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 31
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 31
Item 6. Selected Financial Data............................ 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 37
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk........................................ 74
Item 8. Financial Statements and Supplementary Data........ 78
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................ 79
PART III Item 10. Directors and Executive Officers of the
Registrant......................................... 79
Item 11. Executive Compensation............................. 79
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 79
Item 13. Certain Relationships and Related Transactions..... 79
PART IV Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................ 79
SIGNATURES................................................................ 87
EXHIBIT INDEX............................................................. E-1
This Annual Report on Form 10-K, 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 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) the Company'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; (iv)
catastrophe losses; (v) regulatory, accounting or tax changes that may affect
the cost of, or demand for, the Company's products or services; (vi) downgrades
in the Company's affiliates' financial strength ratings; (vii) 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; (viii) adverse litigation or
arbitration results and (ix) other risks and uncertainties described from time
to time in the Company's filings with the Securities and Exchange Commission,
including its S-1 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.
1
3
As used in this Form 10-K, "MetLife" or the "Company" refers to MetLife,
Inc., a Delaware corporation (the "Holding Company"), and its subsidiaries,
including Metropolitan Life Insurance Company ("Metropolitan Life").
PART I
ITEM 1. BUSINESS.
MetLife is a leading provider of insurance and financial services to a
broad spectrum of individual and institutional customers. It currently provides
individual insurance, annuities and investment products to approximately nine
million households, or one of every 11 households in the U.S. It also provides
group insurance and retirement and savings products and services to
approximately 64,000 corporations and other institutions, including 87 of the
FORTUNE 100 largest companies. MetLife's institutional clients have
approximately 33 million employees and members.
MetLife is a leader in each of its major U.S. businesses. The Company
believes that its franchises and brand names uniquely position it to be the
preeminent provider of insurance and financial services in the U.S. businesses
in which it competes.
MetLife is one of the largest and best capitalized insurance and financial
services companies in the U.S. with revenues of $31.9 billion and net income of
$953 million for the year ended December 31, 2000. The Company had total
consolidated assets of $255.0 billion and equity of $16.4 billion at December
31, 2000.
MetLife's mission is to build financial freedom for everyone. Consistent
with this mission, its goal is to be the preeminent provider of insurance and
financial services in each of the U.S. businesses in which it competes. In order
to achieve that goal, the following strategies will be pursued across all of its
business segments:
- Build on widely recognized brand names
- Capitalize on large customer base
- Expand multiple distribution channels
- Continue to introduce innovative and competitive products
- Increase focus on asset accumulation products
- Reduce operating expenses
- Strengthen performance-oriented culture
- Continue to optimize operating returns within the Company's investment
portfolio
- Enhance capital efficiency of the Company's operations
- Focus international operations on growing markets
MetLife is organized into six major business segments: Individual Business,
Institutional Business, Reinsurance, Asset Management, Auto & Home and
International.
INDIVIDUAL BUSINESS
MetLife's Individual Business 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
Business include insurance products, such as traditional, universal and variable
life insurance, individual disability insurance and long-term care insurance,
and annuities and investment products, such as variable and fixed annuities and
mutual funds. Individual Business' principal franchises are MetLife Financial
Services, New England Financial, GenAmerica Financial and MetLife Investors
Group. Individual Business also distributes its products through several
additional distribution channels, including Nathan & Lewis, Independent
Distribution Network, MetLife Resources and Texas Life. In total, MetLife had
approximately 12,300 active sales representatives at the end of 2000.
2
4
MetLife's broadly recognized brand names and strong distribution channels
have allowed it to maintain its position as the largest provider of individual
life insurance and annuities in the U.S., with $11.9 billion of total statutory
individual life and annuity premiums and deposits in 1999, the latest year for
which the OneSource survey is available. According to a study done by
Tillinghast Towers Perrin, through September 30, 2000, MetLife was also the
second largest issuer of individual variable life insurance in the U.S. based on
first-year premiums and deposits. In addition, according to a survey done by the
Variable Annuity Resource Data Service, as of September 30, 2000, MetLife was
the eighth largest variable annuity writer as measured by variable annuity
assets managed.
Reflecting overall trends in the insurance industry, sales of MetLife's
traditional life insurance products have declined in recent years, while
first-year premiums and deposits from variable and universal life insurance
products have grown at a compound annual rate of 31.2% from 1996 to 2000,
excluding GenAmerica Financial. This increase includes the results of a customer
retention exchange program. Excluding the exchange program, the compound annual
rate is 22.3%. Excluding GenAmerica Financial, variable and universal sales
represented 72.1% of total life insurance sales for Individual Business in 2000.
Including GenAmerica Financial, Individual Business had $13.4 billion of
revenues, or 42.0% of MetLife's total revenues in 2000.
Marketing and Distribution
The Company targets the large middle-income market, as well as affluent
individuals, owners of small businesses and executives of small- to medium-sized
companies. It has also been successful in selling its products in various
multicultural markets. Individual products are distributed nationwide through
multiple channels, with the primary distribution systems being the MetLife
Financial Services career agency system, the New England Financial general
agency system, the GenAmerica Financial independent general agency system and
MetLife Investors Group's distribution through financial intermediaries. While
continuing to invest in its traditional distribution channels, the Company also
expanded into additional channels in order to supplement its growth or penetrate
specific target markets.
MetLife Financial Services career agency system. MetLife Financial
Services career agency system had 6,619 agents in 255 agencies at December 31,
2000. The career agency sales force focuses on the large middle-income market,
including multicultural markets. The Company supports its efforts in
multicultural markets through targeted advertising, specially trained agents and
sales literature written in non-English languages. The Company estimates that
sales in multicultural markets represented 27% of MetLife Financial Services'
individual life sales in 2000. The average face amount of a life insurance
policy sold through the career agency system in 2000 was approximately $180,000.
Agents in the career agency system are full-time MetLife employees who are
compensated primarily with commissions based on sales. As MetLife employees,
they also receive certain benefits. Agents in the career agency system may not
offer products of other insurers without MetLife's approval. At December 31,
2000, approximately 97% of the agents in the MetLife career agency system were
licensed to sell one or more of the following products: variable life insurance,
variable annuities or mutual funds.
From 1996 to 2000, the number of agents in the MetLife Financial Services
career agency system declined from 7,610 to 6,619. This decline was primarily
the result of MetLife Financial Services' more stringent company-wide criteria
for recruiting and retaining agents, the consolidation of sales offices and
modifications in compensation practices for its sales force. However, during the
same period, the career agency system increased productivity, with net sales
credits per agent, an industry measure for agent productivity, growing at a
compound annual rate of 13.2%.
New England Financial general agency system. New England Financial's
general agency system targets affluent individuals, owners of small businesses
and executives of small- to medium-sized companies. The average face amount of a
life insurance policy sold through the New England Financial general agency
system in 2000 was approximately $320,000.
3
5
At December 31, 2000, New England Financial's sales force included 80
general agencies providing support to over 3,000 agents and a network of
independent brokers throughout the U.S. The compensation of both agents, who are
independent contractors, and general agents, who have exclusive contracts with
New England Financial, is based on sales, although general agents are also
provided with an allowance for benefits and other expenses. At December 31,
2000, approximately 87% of New England Financial's general agents were licensed
to sell variable products and mutual funds.
The number of agents in New England Financial's general agency sales force
increased by 176 agents in 2000. Productivity of the New England Financial
general agency force, as measured by net sales credits, grew at a compound
annual rate of 8.0% for the five years ended 2000.
GenAmerica Financial independent general agency system. The GenAmerica
Financial independent general agency system markets a portfolio of individual
life insurance, annuity contracts, securities, and related financial services to
individuals and businesses through multiple distribution channels. These
distribution systems include a network of independent general agents, several
securities firms, consultants, insurance brokers, and a number of alternate
distribution channels, such as banks, private placements, and the Internet. The
average face amount of a life insurance policy sold through the GenAmerica
Financial general agency system in 2000 was approximately $270,000.
The GenAmerica Financial distribution system sells universal life, variable
universal life, and traditional life insurance products through approximately
450 independent general agencies with which it has contractual arrangements.
This reflects a 23% increase in independent general agencies from 1999 to 2000.
The independent general agents that market GenAmerica products are independent
contractors and are generally responsible for the expenses of operating their
agencies, including office and overhead expenses and the recruiting, selection,
contracting, training, and development of agents and brokers in their agency.
Recruiting and wholesaling efforts are directed from six regional offices.
The GenAmerica Financial distribution system is actively developing and
implementing programs designed to increase the productivity of its independent
general agents. This includes the GenAmerica Business Advisor Program,
introduced in 1998, which offers enhanced client services, product development
support, training, and other resources to member agents.
MetLife Investors Group. MetLife Investors Group ("MLI") uses selling
agreements with financial intermediaries to provide a financial distribution
system that develops insurance products for distribution through banks, regional
broker/dealers, New York Stock Exchange broker/dealers and financial planners.
MLI was created in 2000 by consolidating the operations of two existing
MetLife entities, Security First Group ("SFG") and Cova Corporation ("Cova").
SFG, a MetLife subsidiary acquired in 1997, distributes proprietary and third
party fixed and variable annuity products and mutual funds to customers of
national, regional and community banks. Cova, a subsidiary acquired in the
GenAmerica acquisition, described below, focuses on distributing annuity
products through regional broker/dealers.
MLI plans to grow existing distribution relationships and acquire new
relationships by capitalizing on an experienced management team, leveraging the
MetLife brands and resources, and developing high service, low-cost operations.
Additional distribution channels. The Company also distributes its
individual insurance and investment products through several additional
distribution channels, including Nathan & Lewis, Independent Distribution
Network, MetLife Resources and Texas Life.
Nathan & Lewis. Nathan & Lewis Securities, Inc., a MetLife subsidiary
acquired in 1998, is a broker/dealer that markets mutual funds and other
securities, as well as variable life insurance and variable annuity
products, through approximately 1,100 independent registered
representatives. With this acquisition, the Company obtained the use of
Nathan & Lewis' account information and client management systems.
4
6
Independent Distribution Network. In 1999, Individual Business
combined MetLife Brokerage, a division of Metropolitan Life, and New
England Financial's Independent Producer Network to create the Independent
Distribution Network ("IDN"). IDN markets integrated, specially-designed
insurance products to upper income customers in the wealth preservation
market through approximately 1,500 independent retail and wholesale
insurance brokerage agencies, independent producers, and agents in the
career and general agency systems.
MetLife Resources. MetLife Resources, a division of Metropolitan
Life, markets retirement, annuity and other financial products on a
national basis through over 400 agents and independent brokers. MetLife
Resources targets the nonprofit, educational and health care markets.
Texas Life. Texas Life, a MetLife subsidiary, markets whole life and
universal life insurance products under the Texas Life name through
approximately 1,500 active independent insurance brokers. These brokers are
independent contractors who sell insurance for Texas Life on a nonexclusive
basis. Recently, a number of MetLife career agents have also begun to
market Texas Life products. Texas Life sells permanent life insurance
policies with low cash values that are marketed through the use of
brochures, as well as payroll deduction life insurance products.
Products
The Company offers a wide variety of individual insurance, annuities, and
investment products aimed at serving its customers' financial needs throughout
their entire life cycle.
Insurance Products
The Company's individual insurance products include variable life products,
universal life products, traditional life products, including whole life and
term insurance, and other insurance products, including individual disability
insurance and long-term care insurance products, which are designed to meet
consumer needs.
The Company continually reviews and updates its products. It has introduced
new products and features designed to increase the competitiveness of its
portfolio and the flexibility of its products to meet the broad range of asset
accumulation, protection and distribution needs of its customers. Some of these
updates have included the introduction of level premium term fully guaranteed,
variable survivorship life plus, flexible annuity products with innovative
riders, private placements, a corporate-owned life insurance product and an
equity additions feature to the traditional participating whole life insurance
product, which allows policyholder dividends to be invested in a stock index
investment account.
Variable life. Variable life products provide insurance coverage through a
contract that gives the policyholder flexibility in investment choices and,
depending on the product, in premium payments and coverage amounts, with certain
guarantees. Most importantly, with variable life products, premiums and account
balances can be directed by the policyholder into a variety of separate
investment accounts or directed to the Company's general account. In the
separate investment accounts, the policyholder bears the entire risk of the
investment results. MetLife collects specified fees for the management of these
various investment accounts and any net return is credited directly to the
policyholder's account. In some instances, third-party money management firms
manage investment accounts that support variable insurance products. With some
products, by maintaining a certain premium level, policyholders may have the
benefit of various death benefit guarantees that may protect the death benefit
from adverse investment experience.
Universal life. Universal life products provide insurance coverage on the
same basis as variable life, except that they allow premiums, and the resulting
accumulated balances, to be allocated only to the MetLife general account.
Universal life products may allow the insured to increase or decrease the amount
of death benefit coverage over the term of the contract and may allow the owner
to adjust the frequency and amount of premium payments. The Company credits
premiums, net of specified expenses, to an account maintained for the
policyholder, as well as interest, at rates it determines, subject to specified
minimums. Specific charges are made against the account for the cost of
insurance protection and for expenses.
5
7
Whole life insurance. Whole life insurance products provide a guaranteed
benefit upon the death of the insured in return for the periodic payment of a
fixed premium over a predetermined period. Premium payments may be required for
the whole of the contract period, to a specified age or for a specified period,
and may be level or change in accordance with a predetermined schedule. Whole
life insurance includes policies that provide a participation feature in the
form of dividends. Policyholders may receive dividends in cash or apply them to
increase death benefits, increase cash values available upon surrender or reduce
the premiums required to maintain the contract in-force. Because the use of
dividends is specified by the policyholder, this group of products provides
significant flexibility to individuals to tailor the product to suit their
specific needs and circumstances, while at the same time providing guaranteed
benefits.
Term insurance. Term insurance provides a guaranteed benefit upon the
death of the insured within a specified time period in return for the periodic
payment of premiums. Specified coverage periods range from one year to 20 years,
but in no event are they longer than the period over which premiums are paid.
Death benefits may be level over the period or decreasing. Decreasing coverage
is used principally to provide for loan repayment in the event of death.
Premiums may be guaranteed at a level amount for the coverage period or may be
non-level and non-guaranteed. Term insurance products are sometimes referred to
as pure protection products, in that there are normally no savings or investment
elements. Term contracts expire without value at the end of the coverage period
if the insured party is still alive.
Other individual insurance products. Individual disability products
provide a benefit in the event of the disability of the insured. In most
instances, this benefit is in the form of monthly income paid until the insured
reaches age 65. In addition to income replacement, the product may be used to
provide for the payment of business overhead expenses for disabled business
owners or mortgage payment protection. MetLife also distributes individual
disability policies through a joint venture between New England Financial and
UNUM Provident Companies, Inc. Although policies are issued in New England
Financial's name, all underwriting, administration and servicing is handled by
UNUM Provident, and 80% of the risk on all these new disability policies is
reinsured by UNUM Provident.
MetLife's long-term care insurance provides reimbursement for certain costs
associated with nursing home care and other services that may be provided to
older individuals unable to perform the activities of daily living.
In addition to these products, MetLife operates a closed block of small
face amount life insurance policies, known as industrial policies, that its
agents sold until 1964. New England Financial also sells a small amount of
employee benefit products and group pension products, which are included in the
financial results of the Individual Business segment.
Annuities and Investment Products
The Company offers a variety of individual annuities and investment
products, including variable and fixed annuities and mutual funds.
Variable annuities. The Company offers variable annuities for both asset
accumulation and asset distribution needs. Variable annuities allow the
contractholder to make deposits into various investment accounts, as determined
by the contractholder. The investment accounts are separate accounts and risks
associated with such investments are borne entirely by the contractholders.
Contractholders may also choose to allocate all or a portion of their account to
the Company's general account and are credited with interest at rates the
Company determines, subject to certain minimums. In addition, contractholders
may also elect certain death benefit guarantees.
Fixed annuities. Fixed annuities are used for both asset accumulation and
asset distribution needs. Fixed annuities do not allow the same investment
flexibility provided by variable annuities but provide guarantees related to
preservation of principal and credited interest. Deposits made into these
contracts are allocated to the general account and are credited with interest at
rates the Company determines, subject to certain minimums. Credited interest
rates may be guaranteed not to change for certain limited periods of time,
normally one year.
6
8
Mutual funds and securities. MetLife offers both proprietary and
non-proprietary mutual funds. Proprietary funds include those offered by State
Street Research & Management Company, a subsidiary of Metropolitan Life. MetLife
also offers investment accounts for mutual funds and general securities that
allow customers to buy, sell and retain holdings in one centralized location, as
well as brokerage accounts that offer the accessibility and liquidity of a money
market mutual fund. Of the mutual funds sold by the Company in 2000, $1.8
billion of the deposited assets were managed by the Company's Asset Management
segment and $3.0 billion by third parties.
INSTITUTIONAL BUSINESS
The Company's Institutional Business segment offers a broad range of group
insurance and retirement and savings products and services to corporations and
other institutions.
Group insurance products and services include group life insurance,
non-medical health insurance, such as short- and long-term disability, long-term
care and dental insurance and related administrative services, as well as other
benefits such as employer-sponsored auto and homeowners insurance provided
through the MetLife Auto & Home segment and prepaid legal services plans. The
Company sells these products either as an employer-paid benefit or as a
voluntary benefit in which the premiums are paid by the employee. Revenues from
these group insurance products and services were $8.2 billion in 2000,
representing 70.7% of total Institutional Business revenues of $11.6 billion.
MetLife has built a leading position in the U.S. group insurance market
through long-standing relationships with many of the largest corporate employers
in the U.S. In 2000, 87 of the FORTUNE 100 largest companies purchased its
products; these companies have been MetLife customers for an average of
approximately 20 years.
MetLife's retirement and savings products and services include
administrative services sold to sponsors of 401(k) and other defined
contribution plans, guaranteed interest products and other retirement and
savings products and services, including separate account contracts for the
investment of defined benefit and defined contribution plan assets. Revenues
from MetLife's retirement and savings products were $3.4 billion in 2000,
representing 29.3% of total Institutional Business revenues.
The employee benefit market served by Institutional Business has begun to
change dramatically in recent years. As the U.S. employment market has become
more competitive, employers are seeking to enhance their ability to hire and
retain employees by providing attractive benefit plans. The market also reflects
employees' increasing concern about the future of government-funded retirement
and safety-net programs, an increasingly mobile workforce and the desire of
employers to share the market risk of retirement benefits with employees.
MetLife believes these trends are facilitating the introduction of "voluntary"
products, such as long-term care and auto and homeowners insurance, as well as
leading more employers to adopt defined contribution pension arrangements such
as 401(k) plans.
Marketing and Distribution
Institutional Business markets its products and services through separate
sales forces, comprised of MetLife employees, for both its group insurance and
retirement and savings lines.
MetLife distributes its group insurance products and services through a
regional sales force that is segmented by the size of the target customer.
Marketing representatives sell either directly to corporate and other
institutional customers or through an intermediary, such as a broker or a
consultant. Voluntary products are sold through the same sales channels, as well
as by specialists for these products. As of December 31, 2000, the group
insurance sales channels had approximately 400 marketing representatives.
MetLife group insurance products and services are distributed through the
following channels:
- The National Accounts unit focuses exclusively on MetLife's largest 125
customers, generally those having more than 25,000 employees. This unit
assigns account executives and other administrative
7
9
and technical personnel to a discrete customer or group of customers in order to
provide them with individualized products and services;
- The regional sales force operates from 27 offices and generally
concentrates on sales to employers with fewer than 25,000 employees,
through selected national and regional brokers, as well as through
consultants; and
- The Small Business Center focuses on improving MetLife's position in the
smaller end of the market. Currently, 20 individual offices staffed with
sales and administrative employees are located throughout the U.S. These
centers provide comprehensive support services on a local basis to
brokers and other intermediaries by providing an array of products and
services designed for smaller businesses.
MetLife markets pension and other investment-related products to sponsors
of retirement and savings plans covering employees of large private sector
companies with plan assets in excess of $600 million, mid-size and smaller
private sector companies, plans covering public employees, collective bargaining
units, nonprofit organizations and other institutions and individuals. MetLife
distributes its retirement and savings products primarily through separate sales
forces for each of the major product groups, as follows:
- Pension and other investment-related products are marketed and sold
through approximately 50 marketing representatives; and
- Defined contribution services are marketed through several distribution
channels depending on the target market.
For mid- and large-size employers, a dedicated sales force focuses on new
relationships and cross-selling opportunities with other Institutional Business
distribution channels. With respect to the small plan segment, generally those
with less than 500 lives, defined contribution services are distributed through
the agency system, the Small Business Center and the group regional sales force.
The Company has entered into several joint ventures and other arrangements
with third parties to expand the marketing and distribution opportunities of
Institutional Business products and services. The Company also seeks to sell its
Institutional Business products and services through sponsoring organizations
and affinity groups. For example, the Company is a preferred provider of
long-term care products for AARP and the National Long Term Care Coalition, a
group of some of the nations's largest employers.
Group Insurance Products and Services
MetLife's group insurance products and services include:
Group life. Group life insurance products and services include group term,
group universal life, group variable universal life, dependent life and survivor
benefits. These products and services can be standard products or tailored to
meet specific customer needs. This category also includes high face amount life
insurance products covering senior executives for compensation-related or
benefit-funding purposes.
Non-medical health. Non-medical health insurance consists of short- and
long-term disability, long-term care, dental and accidental death and
dismemberment. MetLife also sells excess risk and administrative services only
arrangements to some employers. MetLife sold its medical insurance operations in
1995.
Other products and services. Other products and services include
employer-sponsored auto and homeowners insurance provided through the Auto &
Home segment and prepaid legal plans.
Retirement and Savings Products and Services
MetLife's retirement and savings products and services include:
Defined contribution plan services. MetLife provides full service defined
contribution programs to companies of all sizes in the 401(k) plan market, as
well as to the nonprofit, educational and health care markets.
Guaranteed interest products. MetLife offers guaranteed interest
contracts, known as GICs, the Met Managed GIC, funding agreements and similar
products. MetLife also sells annuity guarantee products, generally in connection
with the termination of pension plans, funds available from defined contribution
plans or the funding of structured settlements. Substantially all of MetLife's
GICs contain provisions limiting early terminations, including penalties and
minimum notice requirements.
8
10
Other retirement and savings products and services. Other retirement and
savings products and services include separate account contracts for the
investment and management of defined benefit and defined contribution plans on
behalf of corporations and other institutions.
REINSURANCE
MetLife's Reinsurance segment is comprised of the life reinsurance business
of Reinsurance Group of America, Incorporated ("RGA") and MetLife's ancillary
life reinsurance business. The ancillary life reinsurance business was an
immaterial component of MetLife's Individual Business segment for periods prior
to January 1, 2000. MetLife acquired 48% of RGA's outstanding common shares
through the acquisition of GenAmerica Financial Corporation ("GenAmerica"), the
parent corporation of General American Life Insurance Company ("General
American"), on January 6, 2000. This acquisition, together with a private
placement of approximately 4.8 million shares completed in November 1999, makes
MetLife RGA's majority shareholder. As of December 31, 2000, MetLife
beneficially owns approximately 59% of RGA's outstanding common shares.
RGA's operations in North America are its largest and include RGA
Reinsurance Company and RGA Life Reinsurance Company of Canada. In addition to
its North American operations, RGA has subsidiary companies or branch offices in
Argentina, Australia, Barbados, Hong Kong, Japan, Mexico, South Africa, Spain,
Taiwan and the United Kingdom.
In addition to its life reinsurance business, RGA provides reinsurance of
non-traditional business, including asset-intensive products and financial
reinsurance. RGA and its predecessor, the reinsurance division of General
American, have been engaged in the business of life reinsurance since 1973. As
of December 31, 2000, RGA had approximately $6.1 billion in consolidated assets.
As of December 31, 2000, RGA's worldwide life reinsurance in-force totaled
approximately $546 billion.
RGA's Products and Services
RGA has five main operational segments segregated primarily by geographic
region: U.S., Canada, Latin America, Asia/Pacific, and other international
operations. The U.S. operations, which represented 74% of RGA's net premiums,
provide traditional life reinsurance and non-traditional reinsurance to domestic
clients. Non-traditional business includes asset-intensive and financial
reinsurance. Asset-intensive products primarily include reinsurance of
corporate-owned life insurance and annuities. The Canadian operations, which
represented 12% of RGA's net premiums, provide insurers with traditional
reinsurance as well as assistance with capital management activity. The Latin
America operations, which represented 5% of RGA's net premiums, provide
traditional reinsurance and reinsurance of privatized pension products primarily
in Argentina. The Asia/Pacific operations, which represented 7% of RGA's net
premiums, provide primarily traditional life reinsurance. Other international
operations, which represented 2% of RGA's net premiums, provide traditional
business from Europe and South Africa, in addition to other markets being
developed by RGA.
ASSET MANAGEMENT
Through MetLife's Asset Management distribution channels, State Street
Research and Conning, Asset Management provides a broad variety of asset
management products and services to MetLife, third-party institutions and
individuals. Asset Management had total assets under management of $78.8 billion
at December 31, 2000. Included in this total was $31.5 billion in separate
accounts supporting MetLife's asset accumulation products. At December 31, 2000,
Asset Management's assets under management consisted of fixed income
investments, equities, real estate and money market investments representing
62%, 30%, 6% and 2%, respectively, of Asset Management's total assets under
management.
MetLife distributes its asset management products and services through
numerous distribution channels, including State Street Research's and Conning's
dedicated sales forces, and also through the Company's Individual Business and
Institutional Business distribution channels.
State Street Research
State Street Research conducts its operations through two wholly-owned
subsidiaries, State Street Research & Management Company, a full-service
investment management firm, and SSR Realty Advisors,
9
11
Inc., a full-service real estate investment advisor. State Street Research
offers investment management services in all major investment disciplines
through multiple channels of distribution in both the retail and institutional
marketplaces. At December 31, 2000, State Street Research had assets under
management of $55.6 billion, representing a compound annual growth rate of 10%
for the five year period then ended. At December 31, 2000, State Street
Research's assets under management consisted of fixed income investments,
equities, real estate and money market investments, representing 54%, 39%, 6%
and 1%, respectively, of State Street Research's total assets under management.
State Street Research is an investment manager for ten of the 15 largest
U.S. corporate pension plans. The majority of State Street Research's
institutional business is concentrated in qualified retirement funds, including
both defined benefit and defined contribution plans. State Street Research also
provides investment management services to foundations and endowments. In
addition, State Street Research serves as an advisor or subadvisor for 45 mutual
funds, as well as six portfolios, aggregating $8.1 billion at December 31, 2000,
underlying MetLife's variable life and variable annuity products.
State Street Research distributes its investment products to institutions
through its own institutional sales force, MetLife's institutional sales force
and pension consultants. State Street Research's mutual fund products are
distributed primarily through large retail brokerage firms (62.6% of mutual fund
sales) and by the MetLife career agency sales force (28.4% of mutual fund
sales). In addition to the primary distribution channels, State Street Research
has developed distribution capabilities through regional brokerage firms, mutual
fund supermarkets, registered investment advisors and financial planners. State
Street Research offers its products to the defined contribution market directly,
as well as through Institutional Business' defined contribution group.
Conning
Conning conducts its operations through two wholly-owned subsidiaries,
Conning & Company, a registered investment adviser and broker/dealer, and
Conning Asset Management Company, a registered investment adviser. As of
December 31, 2000, Conning had approximately $23.2 billion of assets under
management. Conning has four primary lines of business: Asset Management,
Private Equity, Mortgage Loan & Real Estate and Research. Additionally, Conning
from time to time participates in the underwriting of equity securities for
insurance and insurance-related companies' public offerings. Since 1993, Conning
has participated in syndicates for more than 140 insurance-related underwritings
for both initial and secondary public offerings.
Marketing and distribution of Conning's products and services vary by each
of its lines of business. The majority of its products and services are marketed
to institutions through its own sales force for its lines of business. Conning
also distributes institutional products through MetLife's institutional sales
force and pension consultants.
Conning's primary market focus is institutional asset management serving
the insurance and pension fund industries and research on the insurance industry
for large financial institutions and mutual funds.
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 through employer-sponsored programs, as well as
through a variety of retail distribution channels, including the MetLife
Financial Services career agency system, independent agents and Auto & Home
specialists. Auto & Home primarily sells auto insurance, which represented 74.0%
of Auto & Home's total net premiums earned in 2000, and homeowners insurance,
which represented 24.0% of Auto & Home's total net premiums earned in 2000. Auto
insurance includes both standard and non-standard policies. Non-standard
policies provide insurance for risks having higher loss experience or loss
potential than risks covered by standard insurance.
On September 30, 1999, MetLife's Auto & Home segment acquired the standard
personal lines property and casualty insurance operations of The St. Paul
Companies, which had in-force premiums of approximately $1.1 billion and
approximately 3,000 independent agents and brokers. This acquisition
substantially increased the size of this segment's business, making Auto & Home
the eleventh largest personal lines property and casualty insurer in the U.S.,
based on 1999 net premiums written, according to
10
12
A.M. Best Company, Inc., and gave MetLife greater geographic diversification and
a strong presence in a number of additional states.
Products
Auto & Home's insurance products include:
- auto, including both standard and non-standard private passenger;
- homeowners, including renters, condominium and dwelling fire; and
- other personal lines, including umbrella (protection against losses in
excess of amounts covered by other liability insurance policies),
recreational vehicles and boat owners.
Auto coverages. Auto insurance policies include coverages for private
passenger automobiles, utility automobiles and vans, motorcycles, motor homes,
antique or classic automobiles and trailers. Auto & Home offers traditional
coverages such as liability, uninsured motorist, no fault or personal injury
protection and collision and comprehensive coverages. Auto & Home also offers
non-standard auto insurance, which accounted for $132 million in net premiums
earned in 2000.
Homeowners coverages. Homeowners insurance provides protection for
homeowners, renters, condominium owners and residential landlords against losses
arising out of damage to dwellings and contents from a wide variety of perils,
as well as coverage for liability arising from ownership or occupancy.
Traditional insurance policies for dwellings represent the majority of Auto
& Home's homeowners policies providing protection for loss on a "replacement
cost" basis. These policies provide additional coverage for reasonable expenses
for normal living expenses incurred by policyholders who have been displaced
from their homes.
Marketing and Distribution
Personal lines auto and homeowners insurance products are directly marketed
to employees through employer-sponsored programs. Auto & Home products are also
marketed and sold by the MetLife Financial Services career agency sales force,
independent agents and Auto & Home specialists.
Employer-sponsored programs
Net premiums earned through Auto & Home's employer-sponsored distribution
channel have grown at a compound annual rate of 13.7%, from $381 million in 1996
to $638 million in 2000. As of December 31, 1999, Auto & Home was the leading
provider of employer-sponsored auto and homeowners products, according to a
study conducted by IBIS Associates on behalf of MetLife. At December 31, 2000,
over 1,000 employers offered MetLife Auto & Home products to their employees.
Institutional Business marketing representatives market the
employer-sponsored Auto & Home products to employers through a variety of means,
including broker referrals and cross-selling to MetLife group customers. Once
endorsed by the employer, MetLife commences marketing efforts to employees.
Employees who are interested in the employer-sponsored auto and homeowners
products can call a toll-free number for a quote, purchase coverage and
authorize payroll deduction over the telephone. Auto & Home has also developed
proprietary software that permits an employee to obtain a quote for
employer-sponsored auto insurance through Auto & Home's Internet website.
Retail distribution channels
MetLife markets and sells Auto & Home products through its career agency
sales force, independent agents and Auto & Home specialists. In recent years,
MetLife has increased its use of independent agents and Auto & Home specialists
to sell these products.
Independent agents. At December 31, 2000, Auto & Home maintained contracts
with approximately 6,000 agents and brokers.
Auto & Home specialists. Approximately 430 Auto & Home specialists sell
products for Auto & Home in 19 states. Auto & Home's strategy is to utilize Auto
& Home specialists, who are MetLife employees, in geographic markets that are
underserved by its career agents.
11
13
MetLife career agency system. Approximately 2,250 agents in the MetLife
career agency system sell Auto & Home insurance products. Sales of Auto & Home
products by agents have been declining since the early 1990s, due principally to
the reduction in the number of agents in the MetLife Financial Services career
agency sales force. See "-- Individual Business -- Marketing and Distribution."
Other distribution channels. The Company believes that Auto & Home's
experience with direct response marketing in connection with the
employer-sponsored marketing distribution channel, plus the strength of the
MetLife brand name, give Auto & Home advantages that can successfully be used to
establish a direct response marketing operation. The direct response marketing
channel permits sales to be generated through sources such as target mailings,
broad advertising, affinity groups, career agent referrals, bank relationships
and the Internet.
In 2000, Auto & Home's lines of business were concentrated in the following
states, as measured by net premiums earned: New York ($347 million or 13.2% of
total net premiums earned), Massachusetts ($293 million or 11.1%), Illinois
($249 million or 9.4%), Minnesota ($130 million or 4.9%), and Florida ($129
million or 4.9%).
Claims
Auto & Home's claims department includes approximately 2,300 employees
located in Auto & Home's Warwick, Rhode Island home office, 15 field claim
offices, four in-house counsel offices and drive-in inspection and other sites
throughout the United States. These employees include claim adjusters,
appraisers, attorneys, managers, medical specialists, investigators, customer
service representatives, claim financial analysts and support staff. Claim
adjusters, representing the majority of employees, investigate, evaluate and
settle over 900,000 claims annually, principally by telephone.
INTERNATIONAL
International provides life insurance, accident and health insurance,
annuities and savings and retirement products to both individuals and groups,
and auto and homeowners coverage to individuals. The Company focuses on the
Asia/Pacific region, Latin America and selected European countries and currently
has insurance operations in South Korea, Taiwan, Hong Kong, Indonesia, the
Philippines, Mexico, Argentina, Brazil, Uruguay, Spain, Portugal and Poland. The
Company operates in international markets through subsidiaries and joint
ventures. In 2000, International had 2.9 million customers.
Asia/Pacific
The Company operates in the Asia/Pacific region in the following countries:
South Korea, Taiwan, Hong Kong, Indonesia, and the Philippines. The operations
in South Korea and Taiwan account for 98% of the total premiums and fees in this
region. The South Korean operation offers individual life insurance, savings and
retirement and non-medical health products, as well as group life and retirement
products. The Taiwanese operation offers individual life, accident and health,
and personal travel insurance products, as well as group life and accident and
health insurance products.
Latin America
The Company operates in the Latin America region in the following
countries: Mexico, Argentina, Brazil, and Uruguay. Premiums and deposits from
Mexico and Argentina represent 75% and 20%, respectively, of the total from this
region. The Mexican operation offers insurance, annuities and retirement and
savings products to individual and institutional customers. The Argentine
operation offers insurance, deferred annuities and immediate annuities to
individual and institutional customers.
Europe
Operations were established in Spain in 1988 through a joint venture with
Banco Santander Central Hispano, S.A. ("BSCH"). In 1992, this joint venture
expanded its operations to include Portugal. The Spanish and Portuguese
affiliates sell personal life insurance, savings and retirement and non-life
insurance products through both their own agency sales force and the branch
network of BSCH. In November 1995, the product line was expanded to include a
direct auto business. In December 2000, BSCH and MetLife signed an agreement to
restructure the joint venture. It is expected that this transaction will be
completed in
12
14
the first half of 2001 pending regulatory approvals in Spain and Portugal. Under
this agreement, MetLife will own shares representing 20% of the business
distributed through the BSCH network and 80% of the other businesses (agency
force, direct auto and others), transferring full ownership of the Portuguese
branches to BSCH. The Company obtained a license to sell life insurance in
Poland in late 1999 and sales commenced in November 2000.
FUTURE POLICY BENEFITS
MetLife establishes, and carries as liabilities, actuarially determined
amounts that are calculated to meet its policy obligations at such time as an
annuitant takes income, a policy matures or surrenders or an insured dies or
becomes disabled. MetLife computes the amounts for future policy benefits in its
consolidated financial statements in conformity with generally accepted
accounting principles ("GAAP").
MetLife distinguishes between short duration and long duration contracts.
Short duration contracts arise from group life and group dental businesses. The
liability for future policy benefits for short duration contracts consists of
gross unearned premiums as of the valuation date and the discounted amount of
the future payments on pending claims as of the valuation date. Long duration
contracts consist of traditional life, term, non-participating whole life,
individual disability income, group long-term disability and long-term care
contracts. MetLife determines future policy benefits for long duration contracts
using assumptions based on current experience, plus a margin for adverse
deviation for these policies. Where they exist, MetLife amortizes deferred
policy acquisition costs in relation to the associated gross margins or premium.
MetLife also distinguishes between investment contracts, limited pay
contracts and universal life type contracts. The future policy benefits for
these products primarily consist of policyholders' account balances. The Company
also establishes liabilities for future policy benefits (associated with base
policies and riders, unearned mortality charges and future disability benefits),
for other policyholder funds (associated with unearned revenues and claims
payable) and for unearned revenue (the unamortized portion of front-end loads
charged). Investment contracts primarily consist of individual annuity and
certain group pension contracts that have limited or no mortality risk. MetLife
amortizes the deferred policy acquisition costs on these contracts in relation
to estimated gross profits. Limited pay contracts primarily consist of single
premium immediate individual and group pension annuities. For limited pay
contracts, the Company defers the excess of the gross premium over the net
premium and recognizes such excess into income in relation to anticipated future
benefit payments. Universal life type contracts consist of universal and
variable life contracts. The Company amortizes deferred policy acquisition costs
for limited pay and universal type contracts using the product's estimated gross
profits. For universal life type contracts with front-end loads, MetLife defers
the charge and amortizes the unearned revenue using the product's estimated
gross profits.
The liability for future policy benefits for participating traditional life
insurance is the net level reserve using the policy's guaranteed mortality rates
and the dividend fund interest rate or nonforfeiture interest rate, as
applicable. MetLife amortizes deferred policy acquisition costs in relation to
the product's estimated gross margins.
MetLife establishes liabilities to account for the estimated ultimate costs
of losses and loss adjustment expenses for claims that have been reported but
not yet settled, and claims incurred but not reported for the Auto & Home
segment. It bases unpaid losses and loss adjustment expenses on:
- case estimates for losses reported on direct business, adjusted in the
aggregate for ultimate loss expectations;
- estimates of incurred but not reported losses based upon past experience;
- estimates of losses on insurance assumed primarily from involuntary
market mechanisms; and
- estimates of future expenses to be incurred in settlement of claims.
MetLife deducts estimated amounts of salvage and subrogation from unpaid losses
and loss adjustment expenses. Implicit in all these estimates are underlying
inflation assumptions because it determines all estimates using expected amounts
to be paid. MetLife derives estimates for the development of reported claims and
for incurred but not reported claims principally from actuarial analyses of
historical patterns of claims and development for each line of business.
Similarly, it derives estimates of unpaid loss adjustment
13
15
expenses principally from actuarial analyses of historical development patterns
of the relationship of loss adjustment expenses to losses for each line of
business. It anticipates ultimate recoveries from salvage and subrogation
principally on the basis of historical recovery patterns.
Pursuant to state insurance laws, MetLife's insurance subsidiaries
establish statutory reserves, carried as liabilities, to meet their obligations
on their respective policies. These statutory reserves are established in
amounts sufficient to meet policy and contract obligations, when taken together
with expected future premiums and interest at assumed rates. Statutory reserves
generally differ from liabilities for future policy benefits determined using
GAAP.
The New York Insurance Law and regulations require certain MetLife entities
to submit to the New York Superintendent of Insurance, with each annual report,
an opinion and memorandum of a "qualified actuary" that the statutory reserves
and related actuarial amounts recorded in support of specified policies and
contracts, and the assets supporting such statutory reserves and related
actuarial amounts, make adequate provision for their statutory liabilities with
respect to these obligations.
Due to the nature of the underlying risks and the high degree of
uncertainty associated with the determination of its liabilities, MetLife cannot
precisely determine the amounts that it will ultimately pay with respect to
these liabilities, and the ultimate amounts may vary from the estimated amounts,
particularly when payments may not occur until well into the future.
Furthermore, the Company has experienced, and will likely in the future
experience, catastrophe losses that may have an adverse impact on its business,
results of operations and financial condition. Catastrophes can be caused by
various events, including, hurricanes, windstorms, earthquakes, hail, tornadoes,
explosions, severe winter weather (including snow, freezing water, ice storms
and blizzards) and fires. Due to their nature, we cannot predict the incidence,
timing and severity of catastrophes. However, MetLife believes its liabilities
for future benefits adequately cover the ultimate benefits. MetLife periodically
reviews its estimates for liabilities for future benefits and compares them with
its actual experience. It revises estimates, when appropriate, if it determines
that future expected experience differs from assumptions used in the development
of liabilities.
UNDERWRITING AND PRICING
Individual and Institutional Businesses
The Company's individual and group insurance underwriting involves an
evaluation of applications for life, disability, dental, retirement and savings,
and long-term care insurance products and services by a professional staff of
underwriters and actuaries, who determine the type and the amount of risk that
it is willing to accept. The Company employs detailed underwriting policies,
guidelines and procedures designed to assist the underwriter to properly assess
and quantify risks before issuing a policy to qualified applicants or groups.
Individual underwriting considers not only an applicant's medical history,
but also other factors such as financial profiles, foreign travel, avocations
and alcohol, drug and tobacco use. The Company's group underwriters generally
evaluate the risk characteristics of each prospective insured group, although
with certain voluntary products, employees may be underwritten on an individual
basis. Generally, the Company is not obligated to accept any risk or group of
risks from, or to issue a policy or group of policies to, any employer or
intermediary. Requests for coverage are reviewed on their merits and generally a
policy is not issued unless the particular risk or group has been examined and
approved for underwriting. Underwriting is generally done on a centralized basis
by the Company's employees, although some policies are underwritten by
intermediaries under strict guidelines established by the Company.
In order to maintain high standards of underwriting quality and
consistency, the Company engages in a multilevel series of ongoing internal
underwriting audits, and is subject to external audits by its reinsurers, at
both its remote underwriting offices and its corporate underwriting office.
The Company has established senior level oversight of this process that
facilitates quality sales and serving the needs of its customers, while
supporting its financial strength and business objectives. Its goal is to
achieve the underwriting, mortality and morbidity levels reflected in the
assumptions in its product pricing. This is accomplished by determining and
establishing underwriting policies, guidelines, philosophies and strategies that
are competitive and suitable for the customer, the representative and the
Company.
14
16
Individual and group product pricing reflects the Company's insurance
underwriting standards. Product pricing on insurance products is based on the
expected payout of benefits calculated through the use of assumptions for
mortality, morbidity, expenses, persistency and investment returns, as well as
certain macroeconomic factors such as inflation. Product specifications are
designed to prevent greater than expected mortality, and the Company
periodically monitors mortality and morbidity assumptions. Investment-oriented
products are priced based on various factors, which may include investment
return, expenses and persistency.
Unique to group insurance pricing is experience rating; the process by
which the rate charged to a group policyholder reflects credit for positive past
claim experience or a charge for poor experience. MetLife employs both
prospective and retrospective experience rating. Prospective experience rating
involves the evaluation of past experience for the purpose of determining future
premium rates. Retrospective experience rating involves the evaluation of past
experience for the purpose of determining the actual cost of providing insurance
for the customer for the time period in question.
MetLife continually reviews its underwriting and pricing guidelines so that
its policies remain competitive and supportive of its marketing strategies and
profitability goals. Decisions are based on established actuarial pricing and
risk selection principles to ensure that its underwriting and pricing guidelines
are appropriate.
Auto & Home
Auto & Home's underwriting function has six principal aspects:
- evaluating potential worksite marketing employer accounts and independent
agencies;
- establishing guidelines for the binding of risks by agents with binding
authority;
- reviewing coverage bound by agents;
- on a case by case basis, underwriting potential insureds presented by
agents outside the scope of their binding authority;
- pursuing information necessary in certain cases to enable Auto & Home to
issue a policy within the Company's guidelines; and
- ensuring that renewal policies continue to be written at rates
commensurate with risk.
Subject to very few exceptions, agents in each of MetLife's distribution
channels have binding authority for risks which fall within Auto & Home's
published underwriting guidelines. Risks falling outside the underwriting
guidelines may be submitted for approval to the underwriting department;
alternatively, agents in such a situation may call the underwriting department
to obtain authorization to bind the risk themselves. In most states, Auto & Home
generally has the right within a specified period (usually the first 60 days) to
cancel any policy.
Auto & Home establishes prices for its major lines of insurance based on
its proprietary data base, rather than relying on rating bureaus. Auto & Home
determines prices in part from a number of variables specific to each risk. The
pricing of personal lines insurance products takes into account, among other
things, the expected frequency and severity of losses, the costs of providing
coverage (including the costs of acquiring policyholders and administering
policy benefits and other administrative and overhead costs), competitive
factors and profit considerations.
The major pricing variables for personal lines automobile insurance include
characteristics of the automobile itself, such as age, make and model,
characteristics of insureds, such as driving record and experience, and the
insured's personal financial management. Auto & Home's ability to set and change
rates is subject to regulatory oversight.
As a condition of MetLife's license to do business in each state, Auto &
Home, like all other automobile insurers, is required to write or share the cost
of private passenger automobile insurance for higher risk individuals who would
otherwise be unable to obtain such insurance. This "involuntary" market, also
called the "shared market," is governed by the applicable laws and regulations
of each state, and policies written in this market are generally written at
rates higher than standard rates.
15
17
Reinsurance
Reinsurance is written on a facultative basis or an automatic treaty basis.
Facultative reinsurance is individually underwritten by the reinsurer for each
policy to be reinsured. Factors taken into account in underwriting facultative
reinsurance are medical history, impairments, employment, hobbies and financial
information. An automatic reinsurance treaty provides that risks will be ceded
on specified blocks of business where the underlying policies meet the ceding
company's underwriting criteria. In contrast to facultative reinsurance, the
reinsurer does not approve each individual risk. Automatic reinsurance treaties
generally provide that the reinsurer will be liable for a portion of the risk
associated with specified policies written by the ceding company. Factors
considered in underwriting automatic reinsurance are the product's underwriting,
pricing, distribution and optionality as well as the ceding company's retention
and financial strength.
REINSURANCE ACTIVITY
MetLife cedes premiums to other insurers under various agreements that
cover individual risks, group risks or defined blocks of business, on a
coinsurance, yearly renewable term, excess or catastrophe excess basis. These
reinsurance agreements spread the risk and minimize the effect on it of losses.
The amount of each risk retained by MetLife depends on its evaluation of the
specific risk, subject, in certain circumstances, to maximum limits based on
characteristics of coverages. The Company also retrocedes reinsurance contracts,
which represent low mortality risk reinsurance treaties. It also reinsures when
capital requirements and the economic terms of the reinsurance make it
appropriate to do so.
Under the terms of the reinsurance agreements, the reinsurer agrees to
reimburse MetLife for the ceded amount in the event the claim is paid. However,
MetLife remains liable to its policyholders with respect to ceded insurance if
any reinsurer fails to meet the obligations assumed by it. Since it bears the
risk of nonpayment by one or more of its reinsurers, MetLife cedes reinsurance
to well-capitalized, highly rated reinsurers.
Individual Business
In recent periods, in response to the reduced cost of reinsurance coverage,
MetLife has increased the amount of individual mortality risk coverage purchased
from third-party reinsurers. Since 1996, it has entered into reinsurance
agreements that cede substantially all of the mortality risk on term insurance
policies issued during 1996 and subsequent years, and on survivorship whole life
insurance policies issued in 1997 and subsequent years. In 1998, MetLife
reinsured substantially all of the mortality risk on its universal life policies
issued since 1983. It is continuing to reinsure substantially all of the
mortality risk on the universal life policies. As a result of these
transactions, MetLife now reinsures up to 90% of the mortality risk for all new
individual insurance policies that it writes. In addition to these reinsurance
policies, MetLife reinsures risk on specific coverages.
MetLife Financial Services' retention limit on any one life is $25 million
($30 million for joint life cases), New England Financial's retention limit on
any one life is $5 million and GenAmerica Financial's retention limit on any one
life is $2 million. However, the Company may cede amounts below those limits on
a case-by-case basis depending on the characteristics of a particular risk. In
addition, the Company routinely reinsures certain classes of risks in order to
limit its exposure to particular travel, avocation and lifestyle hazards. It has
several individual life reinsurance agreements with a diversified group of
third-party reinsurers. These automatic pools have permitted MetLife to enhance
product performance while decreasing business risk.
Auto & Home
Auto & Home purchases reinsurance to control the Company's exposure to
large losses (primarily catastrophe losses), to stabilize earnings and to
protect surplus. Auto & Home cedes to reinsurers a portion of risks and pays
premiums based upon the risk and exposure of the policies subject to
reinsurance.
To control the Company's exposure to large property and casualty losses,
Auto & Home utilizes property catastrophe, casualty, and property per risk
excess loss agreements.
16
18
REGULATION
Insurance regulation
Metropolitan Life is licensed to transact insurance business in, and is
subject to regulation and supervision by, all 50 states, the District of
Columbia, Puerto Rico, the U.S. Virgin Islands and Canada. Each of MetLife's
other insurance subsidiaries is licensed and regulated in all U.S. and
international jurisdictions where it conducts insurance business. The extent of
such regulation varies, but most jurisdictions have laws and regulations
governing the financial aspects of insurers, including standards of solvency,
reserves, reinsurance, capital adequacy and the business conduct of insurers. In
addition, statutes and regulations usually require the licensing of insurers and
their agents, the approval of policy forms and related materials and, for
certain lines of insurance, the approval of rates. Such statutes and regulations
also prescribe the permitted types and concentration of investments.
The New York Insurance Law limits the sales commissions and certain other
marketing expenses that may be incurred in connection with the sale of life
insurance policies and annuity contracts. MetLife's insurance subsidiaries are
each required to file reports, generally including detailed annual financial
statements, with insurance regulatory authorities in each of the jurisdictions
in which they do business, and their operations and accounts are subject to
periodic examination by such authorities. These subsidiaries must also file, and
in many jurisdictions and in some lines of insurance obtain regulatory approval
for, rules, rates and forms relating to the insurance written in the
jurisdictions in which they operate.
The National Association of Insurance Commissioners ("NAIC") has
established a program of accrediting state insurance departments. NAIC
accreditation permits accredited states to conduct periodic examinations of
insurers domiciled in such states. NAIC-accredited states will not accept
reports of examination of insurers from unaccredited states, except under
limited circumstances. As a direct result, insurers domiciled in unaccredited
states may be subject to financial examination by accredited states in which
they are licensed, in addition to any examinations conducted by their
domiciliary states. The accreditation of the New York Insurance Department (the
"Department"), Metropolitan Life's principal insurance regulator, has been
suspended as a result of the New York legislature's failure to adopt certain
model NAIC laws. The Company believes that the suspension of the NAIC
accreditation of the Department, even if continued, will not have a significant
impact upon its ability to conduct its insurance businesses.
State and federal insurance and securities regulatory authorities and other
state law enforcement agencies and attorneys general from time to time make
inquiries regarding compliance by MetLife's insurance subsidiaries with
insurance, securities and other laws and regulations regarding the conduct of
MetLife's insurance and securities businesses. MetLife cooperates with such
inquiries and takes corrective action when warranted.
Holding Company regulation. The Holding Company and its insurance
subsidiaries are subject to regulation under the insurance holding company laws
of various jurisdictions. The insurance holding company laws and regulations
vary from jurisdiction to jurisdiction, but generally require a controlled
insurance company (insurers that are subsidiaries of insurance holding
companies) to register with state regulatory authorities and to file with those
authorities certain reports, including information concerning their capital
structure, ownership, financial condition, certain intercompany transactions and
general business operations.
State insurance statutes also typically place restrictions and limitations
on the amount of dividends or other distributions payable by insurance company
subsidiaries to their parent companies, as well as on transactions between an
insurer and its affiliates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- The Holding Company" The New York Insurance Law and the regulations
thereunder also restrict the aggregate amount of investments Metropolitan Life
may make in non-life insurance subsidiaries, and provide for detailed periodic
reporting on subsidiaries.
Guaranty associations and similar arrangements. Most of the jurisdictions
in which the Company is admitted to transact business require life and property
and casualty insurers doing business within the jurisdiction to participate in
guaranty associations, which are organized to pay contractual benefits owed
17
19
pursuant to insurance policies issued by impaired, insolvent or failed insurers.
These associations levy assessments, up to prescribed limits, on all member
insurers in a particular state on the basis of the proportionate share of the
premiums written by member insurers in the lines of business in which the
impaired, insolvent or failed insurer is engaged. Some states permit member
insurers to recover assessments paid through full or partial premium tax
offsets.
In the past five years, none of the aggregate assessments levied against
Metropolitan Life and its insurance subsidiaries have been material. While the
amount and timing of future assessments are not predictable, the Company has
established liabilities for guaranty fund assessments that it considers adequate
for assessments with respect to insurers that are currently subject to
insolvency proceedings.
Statutory examination. As part of their regulatory oversight process,
state insurance departments conduct periodic detailed examinations of the books,
records, accounts, and business practices of insurers domiciled in their states.
These examinations are generally conducted in cooperation with the departments
of two or three other states, representing each of the NAIC zones, under
guidelines promulgated by the NAIC. The Department recently completed an
examination of Metropolitan Life for each of the five years in the period ended
December 31, 1998 which contained recommendations for certain changes in
recordkeeping processes, but did not result in a fine.
Regulatory authorities in a small number of states have held investigations
or inquiries relating to Metropolitan Life's, New England Life Insurance
Company's ("New England") 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.
NAIC ratios. On the basis of statutory financial statements filed with
state insurance regulators, the NAIC calculates annually 12 financial ratios to
assist state regulators in monitoring the financial condition of insurers. A
"usual range" of results for each ratio is used as a benchmark. Departure from
the "usual range" on four or more of the ratios can lead to inquiries from
individual state insurance departments. In each of the years 1996 through 2000,
at most one ratio for Metropolitan Life fell outside the usual range.
Policy and contract reserve sufficiency analysis. Under the New York
Insurance Law, Metropolitan Life is required to conduct annually an analysis of
the sufficiency of all life and health insurance and annuity statutory reserves.
A qualified actuary must submit an opinion which states that the statutory
reserves, when considered in light of the assets held with respect to such
reserves, make good and sufficient provision for the associated contractual
obligations and related expenses of the insurer. If such an opinion cannot be
provided, the insurer must set up additional reserves by moving funds from
surplus. Since the inception of this requirement, Metropolitan Life has provided
this opinion without any qualifications. Metropolitan Life is required by other
jurisdictions to provide similar opinions and has provided them without
qualifications.
Surplus and capital. The New York Insurance Law requires New York domestic
stock life insurers to maintain minimum capital. At December 31, 2000,
Metropolitan Life's capital was in excess of such required minimum. Since the
demutualization, Metropolitan Life has continued to offer participating
policies. Metropolitan Life is subject to statutory restrictions that limit to
10% the amount of statutory profits on participating policies written after the
demutualization (measured before dividends to policyholders) that can inure to
the benefit of stockholders. Metropolitan Life believes that the impact of these
restrictions on its earnings will not be significant.
MetLife's U.S. insurance subsidiaries are subject to the supervision of the
regulators in each jurisdiction in which they are licensed to transact business.
Regulators have discretionary authority, in connection with the continued
licensing of these insurance subsidiaries, to limit or prohibit sales to
policyholders if, in their judgment, the regulators determine that such insurer
has not maintained the minimum surplus or capital or that the further
transaction of business will be hazardous to policyholders. See "-- Risk-based
capital."
Risk-based capital. Section 1322 of the New York Insurance Law requires
that New York domestic life insurers report their risk-based capital ("RBC")
based on a formula calculated by applying factors to
18
20
various asset, premium and reserve items. The formula takes into account the
risk characteristics of the insurer, including asset risk, insurance risk,
interest rate risk and business risk. The Department uses the formula only as an
early warning regulatory tool to identify possible inadequately capitalized
insurers for purposes of initiating regulatory action, and not as a means to
rank insurers generally. Section 1322 imposes broad confidentiality requirements
on those engaged in the insurance business (including insurers, agents, brokers
and others) and on the Department as to the use and publication of RBC data.
Section 1322 gives the New York Superintendent of Insurance explicit
regulatory authority to require various actions by, or take various actions
against, insurers whose total adjusted capital does not exceed certain RBC
levels. At December 31, 2000, Metropolitan Life's total adjusted capital was in
excess of each of those RBC levels.
The U.S. insurance subsidiaries of Metropolitan Life are also subject, each
individually, to these same RBC requirements. At December 31, 2000, the total
adjusted capital of each of these insurance subsidiaries also was in excess of
each of those RBC levels. See "Managements Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources -- The
Company -- Support Agreements."
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles (the "Codification"). The Codification, which is intended to
standardize regulatory accounting and reporting to state insurance departments,
became effective January 1, 2001. However, statutory accounting principles will
continue to be established by individual state laws and permitted practices. The
Department requires adoption of the Codification, with certain modifications,
for the preparation of statutory financial statements effective January 1, 2001.
The Company believes that the adoption, effective January 1, 2001, of the
Codification by the NAIC and the Codification as modified by the Department, as
currently interpreted, will not adversely affect statutory capital and surplus.
Regulation of investments. Metropolitan Life and each of its insurance
subsidiaries are subject to state laws and regulations that require
diversification of their investment portfolios and limit the amount of
investments in certain asset categories, such as below investment grade fixed
income securities, equity real estate, other equity investments, and
derivatives. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as non-admitted
assets for purposes of measuring surplus, and, in some instances, would require
divestiture of such non-qualifying investments. The Company believes that the
investments made by Metropolitan Life and each of its insurance subsidiaries
complied with such regulations at December 31, 2000.
Federal initiatives. Although the federal government generally does not
directly regulate the insurance business, federal initiatives often have an
impact on the business in a variety of ways. From time to time, federal measures
are proposed which may significantly affect the insurance business, including
limitations on antitrust immunity and the amendment or repeal of the federal
estate tax.
During the summer of 2000, the U.S. Senate and House approved legislation
that, if enacted, would have repealed the federal estate tax over a ten year
period. President Clinton vetoed this legislation and Congress did not override
his veto. President Bush has supported repealing the federal estate tax,
although no legislation has yet been introduced in Congress. The repeal or
modification of the federal estate tax could reduce the attractiveness of some
of the Company's estate planning products, including survivorship/second to die
life insurance products. Given the preliminary stage of discussions in Congress
about the repeal or modification of the federal estate tax, management cannot
predict what legislation, if any, may be introduced or enacted or what the
effect of any such legislation might be on the Company's business. In addition,
management cannot predict what other proposals may be made, what legislation may
be introduced or enacted or the impact of any such legislation on its business,
results of operations and financial condition.
For a discussion of the Gramm-Leach-Bliley Act of 1999, permitting
affiliations between banks and insurers, see "-- Competition."
19
21
In addition, management cannot predict what other proposals may be made,
what legislation may be introduced or enacted or the impact of any such
legislation on the Company's business, results of operations and financial
condition.
Valuation of life insurance policies model regulation. The NAIC has
adopted a revision to the Valuation of Life Insurance Policies Model Regulation
(known as XXX Regulation). This model regulation establishes new minimum
statutory reserve requirements for certain individual life insurance policies
written after January 1, 2001. Before the new reserve standards can become
effective, individual states must adopt the model regulation. As these reserve
standards are adopted, insurers selling certain individual life insurance
products, such as term life insurance with guaranteed premium periods and
universal life insurance products with no-lapse guarantees, will be required to
redesign their products or hold increased reserves to be consistent with the new
minimum standards with respect to policies issued after the effective date of
the regulation. The Department promulgated a regulation similar to the model
regulation in 1994, and has revised its regulation to be consistent with XXX
Regulation.
Broker/Dealer and Securities Regulation
Metropolitan Life, some of its subsidiaries and certain policies and
contracts offered by them are subject to various levels of regulation under the
federal securities laws administered by the Securities and Exchange Commission.
Metropolitan Life and some of its subsidiaries are investment advisers
registered under the Investment Advisers Act of 1940, as amended. In addition,
some separate accounts and a variety of mutual funds are registered under the
Investment Company Act of 1940, as amended. Some annuity contracts and insurance
policies issued by Metropolitan Life and some of its subsidiaries are funded by
separate accounts, the interests in which are registered under the Securities
Act of 1933, as amended. Metropolitan Life and some of its subsidiaries are
registered as broker/dealers under the Securities Exchange Act of 1934, as
amended, and are members of the National Association of Securities Dealers, Inc.
In the case of some of its subsidiaries, these broker/dealers may also be
registered under various state securities laws.
Metropolitan Life and certain of its subsidiaries also have certain pooled
investment vehicles that are exempt from registration under the Securities Act
and the Investment Company Act, but may be subject to certain other provisions
of such acts.
Federal and state securities regulatory authorities from time to time make
inquiries regarding compliance by Metropolitan Life and its subsidiaries with
securities and other laws and regulations regarding the conduct of their
securities businesses. MetLife cooperates with such inquiries and takes
corrective action when warranted.
These laws and regulations are primarily intended to protect investors in
the securities markets and generally grant supervisory agencies broad
administrative powers, including the power to limit or restrict the conduct of
business for failure to comply with such laws and regulations. The Company may
also be subject to similar laws and regulations in the states and foreign
countries in which it provides investment advisory services, offers the products
described above or conducts other securities-related activities.
Environmental Considerations
As owners and operators of real property, the Company is subject to
extensive federal, state and local environmental laws and regulations. Inherent
in such ownership and operation is also the risk that there may be potential
environmental liabilities and costs in connection with any required remediation
of such properties. In addition, the Company holds equity interests in companies
that could potentially be subject to environmental liabilities, although it
routinely has environmental assessments performed with respect to real estate
being acquired for investment and real property to be acquired through
foreclosure. The Company cannot provide assurance that unexpected environmental
liabilities will not arise. However, based on information currently available to
management, management believes that any costs associated with compliance with
environmental laws and regulations or any remediation of such properties will
not have a material adverse effect on the Company's business, results of
operations and financial condition.
20
22
ERISA Considerations
The Company provides certain products and services to certain employee
benefit plans that are subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Internal Revenue Code of 1986, as amended
("Code"). As such, its activities are subject to the restrictions imposed by
ERISA and the Code, including the requirement under ERISA that fiduciaries must
perform their duties solely in the interests of ERISA plan participants and
beneficiaries and the requirement under ERISA and the Code that fiduciaries may
not cause a covered plan to engage in certain prohibited transactions with
persons who have certain relationships with respect to such plans. The
applicable provisions of ERISA and the Code are subject to enforcement by the
Department of Labor, the Internal Revenue Service and the Pension Benefit
Guaranty Corporation.
On December 13, 1993, the U.S. Supreme Court issued its opinion in John
Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank. The
Court held that certain assets in excess of amounts necessary to satisfy
guaranteed obligations held by John Hancock in its general account under a
participating group annuity contract are "plan assets" and therefore subject to
certain fiduciary obligations under ERISA, which specifies that fiduciaries must
perform their duties solely in the interest of ERISA plan participants and
beneficiaries. The Court limited the imposition of ERISA fiduciary obligations
in these instances to certain assets in an insurer's general account that were
not reserved to pay benefits of guaranteed benefit policies. On January 5, 2000,
the Secretary of Labor issued final regulations providing guidance for the
purpose of determining, in cases where an insurer issues one or more policies
backed by the insurer's general account to or for the benefit of an employee
benefit plan, the extent to which assets of the insurer constitute plan assets
for purposes of ERISA and the Code. The regulations apply only with respect to a
policy issued by an insurer on or before December 31, 1998 ("Transition
Policy"). In the case of such a policy, the regulations generally become
applicable on July 5, 2001. Generally, no person will be liable under ERISA or
the Code for conduct occurring prior to the applicability dates, where the basis
of a claim is that insurance company general account assets constitute plan
assets. Insurers issuing new policies after December 31, 1998 that are not
guaranteed benefit policies will generally be subject to fiduciary obligations
under ERISA.
The regulations indicate the requirements that must be met so that assets
supporting a Transition Policy will not be considered plan assets for purposes
of ERISA and the Code. These requirements include detailed disclosures to be
made to the employee benefits plan and the requirement that the insurer must
permit the policyholder to terminate the policy on 90 days' notice and receive
without penalty, at the policyholder's option, either (1) the unallocated
accumulated fund balance (which may be subject to market value adjustment) or
(2) a book value payment of such amount in annual installments with interest.
The Company has taken and continues to take steps designed to ensure compliance
with these regulations, as appropriate.
Financial Holding Company Regulation
Regulatory agencies. In connection with its acquisition of a
federally-chartered commercial bank, the Holding Company became a bank holding
company and financial holding company on February 28, 2001. As such, the Holding
Company is now subject to regulation under the Bank Holding Company Act of 1956,
as amended (the "BHC Act"), and to inspection, examination, and supervision by
the Board of Governors of the Federal Reserve System (the "FRB"). In addition,
the Holding Company's banking subsidiaries are subject to regulation and
examination primarily by the Office of the Comptroller of the Currency ("OCC")
and secondarily by the FRB and the Federal Deposit Insurance Corporation
("FDIC").
Financial Holding Company Activities. As a financial holding company,
MetLife Inc.'s activities and investments are restricted by the BHC Act, as
amended by the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), to those that are
"financial" in nature or "incidental" or "complementary" to such financial
activities. Activities that are financial in nature include securities
underwriting, dealing and market making, sponsoring mutual funds and investment
companies, insurance underwriting and agency, merchant banking and activities
that the FRB has determined to be closely related to banking. In addition, under
the insurance company investment portfolio provision added to the GLB Act,
financial holding companies are authorized
21
23
to make investments in other financial and non-financial companies, through
their insurance subsidiaries, that are in the ordinary course of business and in
accordance with state insurance law, provided the financial holding company does
not routinely manage or operate such companies except as may be necessary to
obtain a reasonable return on investment.
Other Restrictions and Limitations on Bank Holding Companies and Financial
Holding Companies -- Capital. MetLife, Inc. and its insured depository
institution subsidiaries are subject to risk-based capital and leverage
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.
Other Restrictions and Limitations on Bank Holding Companies and Financial
Holding Companies -- Consumer Protection Laws. Numerous other federal and state
laws also affect the Holding Company and its subsidiary banks' earnings and
activities, including federal and state consumer protection laws. The GLB Act
included consumer privacy provisions that, among other things, require
disclosure of a financial institution's privacy policy to customers and offering
the consumer the ability to "opt out" of having non-public information disclosed
to unaffiliated third parties in certain situations. In addition, these
provisions permit states to adopt more extensive privacy protections through
legislation or regulation.
COMPETITION
The Company believes that competition with its business segments is based
on a number of factors, including service, product features, price, commission
structure, financial strength, claims-paying ratings and name recognition. It
competes with a large number of other insurers, as well as non-insurance
financial services companies, such as banks, broker/dealers and asset managers,
for individual consumers, employer and other group customers and agents and
other distributors of insurance and investment products. Some of these companies
offer a broader array of products, have more competitive pricing or, with
respect to other insurers, have higher claims paying ability ratings. Some may
also have greater financial resources with which to compete. National banks,
with their pre-existing customer bases for financial services products, may
increasingly compete with insurers who sell annuities, as a result of the U.S.
Supreme Court's 1994 decision in NationsBank of North Carolina v. Variable
Annuity Life Insurance Company. That decision permits national banks to sell
annuity products of life insurers in some circumstances.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), implementing fundamental changes
in the regulation of the financial services industry in the U.S. The GLB Act
permits mergers that combine commercial banks, insurers and securities firms
under one holding company. Under the GLB Act, national banks retain their
existing ability to sell insurance products in some circumstances. In addition,
bank holding companies that qualify and elect to be treated as "financial
holding companies" may engage in activities, and acquire companies engaged in
activities, that are "financial" in nature or "incidental" or "complementary" to
such financial activities, including acting as principal, agent or broker in
selling life, property and casualty and other forms of insurance and annuities.
A financial holding company can own any kind of insurer or insurance broker or
agent, but its bank subsidiary cannot own the insurer. Under state law, the
financial holding company would need to apply to the insurance commissioner in
the insurer's state of domicile for prior approval of the acquisition of the
insurer, and the GLB Act provides that the commissioner, in considering the
application, may not discriminate against the financial holding company because
it is affiliated with a bank. Under the GLB Act, no state may prevent or
interfere with affiliations between banks and insurers, insurance agents or
brokers, or the licensing of a bank or affiliate as an insurer or agent or
broker. Until passage of the Act, the Glass-Steagall Act of 1933, as amended,
had limited the ability of banks to engage in securities-related businesses, and
the Bank Holding Company Act of 1956, as amended, had restricted banks from
being affiliated with insurers. With the passage of the GLB Act, among other
things, bank holding companies may acquire insurers, and insurance holding
companies may acquire banks. The ability of banks to affiliate with insurers may
materially adversely affect all of our product lines by substantially increasing
the number, size and financial strength of potential competitors.
22
24
The Company must attract and retain productive sales representatives to
sell its insurance, annuities and investment products. Strong competition exists
among insurers for sales representatives with demonstrated ability. The Company
competes with other insurers for sales representatives primarily on the basis of
its financial position, support services and compensation and product features.
See "-- Individual Business -- Marketing and Distribution." MetLife continues to
undertake several initiatives to grow the MetLife Financial Services career
agency force in the future. The Company cannot provide assurance that these
initiatives will succeed in attracting and retaining new agents. Sales of
individual insurance, annuities and investment products and its results of
operations and financial position could be materially adversely affected if it
is unsuccessful in attracting and retaining agents.
Many of the Company's insurance products, particularly those offered by its
Institutional Business segment, are underwritten annually, and, accordingly,
there is a risk that group purchasers may be able to obtain more favorable terms
from competitors rather than renewing coverage with the Company. The effect of
competition may, as a result, adversely affect the persistency of these and
other products, as well as the Company's ability to sell products in the future.
The investment management and securities brokerage businesses have
relatively few barriers to entry and continually attract new entrants. Many of
the Company's competitors in these businesses offer a broader array of
investment products and services and are better known than it as sellers of
annuities and other investment products.
Congress has proposed reforms to the nation's health care system. While the
Company offers non-medical health insurance products (such as group dental
insurance, long-term care and disability insurance), it generally does not offer
medical indemnity products or managed care products, and, accordingly, it does
not expect to be directly affected by such proposals to any significant degree.
However, the uncertain environment resulting from health care reform could cause
group health insurance providers to enter some of the markets in which the
Company does business, thereby increasing competition.
FINANCIAL STRENGTH RATINGS
Financial strength ratings are a factor in establishing the competitive
position of insurers. A ratings downgrade (or the potential for such a
downgrade) of Metropolitan Life or any of the Company's other insurance
subsidiaries could, among other things, increase the number of policies
surrendered and withdrawals by policyholders of cash values from their policies,
adversely affect relationships with broker/dealers, banks, agents, wholesalers
and other distributors of the Company's products and services, negatively impact
new sales, and adversely affect its ability to compete and thereby have a
material adverse effect on its business, results of operations and financial
condition. The Company's current financial strength ratings are listed in the
table below:
RATING AGENCY COMPANIES RELATED RATING RATING STRUCTURE
------------- ----------------- ------ ----------------
Standard & Metropolitan Life Insurance Company, AA Second highest of nine
Poor's New England Life Insurance Company, ("Very Strong") ratings categories and
Ratings Security First Life Insurance Company, mid-range within the category
Services Metropolitan Insurance and Annuity Company, based on modifiers (e.g., AA+
Metropolitan Property and Casualty Insurance Company AA and AA- are "Very Strong")
and RGA Reinsurance Company
General American Life Insurance Company, AA- Second highest of nine
Cova Financial Services Life Insurance Company, ("Very Strong") ratings categories and lowest
Cova Financial Life Insurance Company, within the category based on
First Cova Life Insurance Company, modifiers
General Life Insurance Company (TX),
Paragon Life Insurance Company and
Security Equity Life Insurance Company
Moody's Metropolitan Life Insurance Company, Aa2 Second highest of nine
Investors New England Life Insurance Company, ("Excellent") ratings categories and
Service, Inc. General American Life Insurance Company and mid-range within the category
Cova Financial Services Life Insurance Company based on modifiers (e.g.,
Aa1, Aa2 and Aa3 are
"Excellent")
Security First Life Insurance Company, Aa3 Second highest of nine
Metropolitan Insurance and Annuity Company and ("Excellent") ratings categories and
Metropolitan Property and Casualty Insurance Company lower-range within the
category based on modifiers
23
25
RATING AGENCY COMPANIES RELATED RATING RATING STRUCTURE
------------- ----------------- ------ ----------------
RGA Reinsurance Company A1 Third highest of nine ratings
("Good") categories and highest within
the category based on
modifiers
A.M. Best Metropolitan Life Insurance Company, A+ Highest of nine ratings
Company, Inc. Metropolitan Tower Life Insurance Company, ("Superior") categories and second highest
New England Life Insurance Company, within the category based on
Security First Life Insurance Company, modifiers (e.g., A++ and A+
General American Life Insurance Company, are "Superior' while A and A-
RGA Reinsurance Company, are "Excellent")
Cova Financial Services Life Insurance Company,
Cova Financial Life Insurance Company,
First Cova Life Insurance Company,
General Life Insurance Company of America,
Paragon Life Insurance Company and
Security Equity Life Insurance Company
Metropolitan Insurance and Annuity Company, A Second highest of nine
Texas Life Insurance Company and ("Excellent") ratings categories and
Metropolitan Property and Casualty Insurance Company highest within the category
based on modifiers
Fitch IBCA, Metropolitan Life Insurance Company, AA+ Second highest of eight
Duff & Phelps New England Life Insurance Company, ("Very High") ratings categories and
Security First Life Insurance Company, highest within the category
General American Life Insurance Company, based on modifiers (e.g.,
Cova Financial Services Life Insurance Company, AA+, AA and AA- are "Very
Paragon Life Insurance Company and High")
Security Equity Life Insurance Company
The foregoing ratings reflect each rating agency's opinion of Metropolitan
Life and the Company's other subsidiaries' financial strength, operating
performance and ability to meet their obligations to policyholders, and are not
evaluations directed toward the protection of MetLife, Inc.'s securityholders.
EMPLOYEES
At December 31, 2000, the Company employed approximately 46,700 employees.
The Company believes that its relations with its employees are satisfactory.
TRADEMARKS
MetLife has a worldwide trademark portfolio that it considers important in
the marketing of its products and services, including, among others, the
trademark "MetLife" and the license to use the Peanuts(TM) characters. MetLife
has the exclusive right to use the Peanuts(TM) characters in the area of
financial services and health care services in the U.S. and some foreign
countries under an advertising and premium agreement with United Feature
Syndicate. The agreement with United Feature Syndicate expires on December 31,
2002. The Company believes that its rights in its trademarks are well protected.
ITEM 2. PROPERTIES.
One Madison Avenue in New York, New York, serves as the Company's
headquarters, and it, along with the adjacent MetLife Tower, contains
approximately 1.1 million rentable square feet, most of which it occupies. The
Company has announced plans to lease its headquarters and the MetLife Tower to
Credit Suisse First Boston (USA), Inc. ("CSFB"), under a long-term lease. CSFB
will occupy these premises in stages through late 2003. The Company will
continue to occupy approximately 270,000 rentable square feet under a sublease
from CSFB. In addition to this property, the Company owns 22 other buildings in
the U.S. that it uses in the operation of its business. These buildings contain
approximately 5.4 million rentable square feet and are located in the following
states: Florida, Illinois, Massachusetts, Minnesota, Missouri, New York, New
Jersey, Ohio, Oklahoma, Pennsylvania, Rhode Island and Texas. The Company's
computer center in Rensselaer, New York is not owned in fee but rather is
occupied pursuant to a long-term ground lease. The Company leases space in
approximately 900 other locations throughout the U.S., and these leased
facilities consist of approximately 6.3 million rentable square feet.
Approximately 51% of these leases are occupied as sales offices for Individual
Business, and the Company uses the balance for its other business activities. It
also owns several buildings outside the U.S., comprising more than 48,000
rentable square feet. The Company leases approximately 380,000 rentable square
feet in various locations outside the U.S. Management believes that its
properties are suitable and adequate for the Company's current and anticipated
business operations.
24
26
ITEM 3. LEGAL PROCEEDINGS.
Metropolitan Life is currently a defendant in approximately 500 lawsuits
raising allegations of improper marketing and sales of individual life insurance
policies or annuities. These lawsuits are generally referred to as "sales
practices claims."
On December 28, 1999, after a fairness hearing, the United States District
Court for the Western District of Pennsylvania approved a class action
settlement resolving a multidistrict litigation proceeding involving alleged
sales practices claims. No appeal was taken, and the settlement is final. The
settlement class includes most of the 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.
In addition to dismissing the consolidated class actions, the District
Court's order also bars sales practices claims by class members with respect to
policies or annuities issued by the defendant insurers during the class period,
effectively resolving all pending sales practices class actions against these
insurers in the United States.
Under the terms of the order, only those class members who excluded
themselves from the settlement may continue an existing, or start a new, sales
practices lawsuit against Metropolitan Life, Metropolitan Insurance and Annuity
Company or Metropolitan Tower Life Insurance Company for policies or annuities
issued during the class period. Approximately 20,000 class members elected to
exclude themselves from the settlement. At December 31, 2000, approximately 300
of these "opt-outs" have filed new individual lawsuits.
The settlement provides three forms of relief. General relief, in the form
of free death benefits, is provided automatically to class members who did not
exclude themselves from the settlement or who did not elect the claim evaluation
procedures set forth in the settlement. The claim evaluation procedures permit a
class member to have a claim evaluated by a third party under procedures set
forth in the settlement. Claim awards made under the claim evaluation procedures
will be in the form of policy adjustments, free death benefits or, in some
instances, cash payments. In addition, class members who have or had an
ownership interest in specified policies will also automatically receive
deferred acquisition cost tax relief in the form of free death benefits. The
settlement fixes the aggregate amounts that are available under each form of
relief. Implementation of the class action settlement is proceeding.
Metropolitan Life expects that the total cost of the settlement will be
approximately $957 million. This amount is equal to the amount of the increase
in liabilities for the death benefits and policy adjustments and the present
value of expected cash payments to be provided to included class members, as
well as attorneys' fees and expenses and estimated other administrative costs,
but does not include the cost of litigation with policyholders who are excluded
from the settlement. The Company believes that the cost of the settlement will
be substantially covered by available reinsurance and the provisions made in the
consolidated financial statements, and thus will not have a material adverse
effect on its business, results of operations or financial position.
Metropolitan Life made some recoveries in 2000 under those reinsurance
agreements and, although there is no assurance that other reinsurance claim
submissions will be paid, Metropolitan Life believes payment is likely to occur.
The Company believes it has made adequate provision in the consolidated
financial statements for all probable losses for sales practices claims,
including litigation costs involving policyholders who are excluded from the
settlement as well as for the two class action settlements described in the two
paragraphs immediately following the next paragraph.
The Metropolitan Life class action settlement did not resolve two putative
class actions involving sales practices claims filed against Metropolitan Life
in Canada. A certified class action with conditionally certified subclasses is
pending in the United States District Court for the Southern District of New
York against Metropolitan Life, Metropolitan Insurance and Annuity Company,
Metropolitan Tower Life Insurance Company and various individual defendants
alleging improper sales abroad; settlement discussions are continuing.
25
27
Separate from the Metropolitan Life class action settlement, similar sales
practices class action litigation against New England Mutual Life Insurance
Company ("New England Mutual"), with which Metropolitan Life merged in 1996, and
General American, which was acquired in 2000, has been settled. The New England
Mutual case, a consolidated multidistrict litigation in the United States
District Court for the District of Massachusetts, involves approximately 600,000
life insurance policies sold during the period January 1, 1983 through August
31, 1996. The settlement of this case was approved by the District Court in
October 2000 and is not being appealed. Implementation of the class action
settlement is proceeding. The Company expects that the total cost of this
settlement will be approximately $150 million. Approximately 2,400 class members
opted-out of the settlement. As of December 31, 2000, New England Mutual was a
defendant in approximately 30 opt-out lawsuits involving sales practices claims.
The settlement of the consolidated multidistrict sales practices class
action case against General American was approved by the United States District
Court for the Eastern District of Missouri. The General American case involves
approximately 250,000 life insurance policies sold during the period January 1,
1982 through December 31, 1996. One appeal has been filed. The Company expects
that the approximate cost of the settlement will be $55 million, not including
legal fees and costs for plaintiffs' counsel. The District Court has scheduled a
hearing in March 2001 with respect to plaintiffs' class counsels' request for
such fees and costs. Approximately 700 class members have elected to exclude
themselves from the General American settlement. As of December 31, 2000,
General American was a defendant in approximately ten opt-out lawsuits involving
sales practices claims.
In the past, some individual sales practices claims have been resolved
through settlement, have been 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.
Metropolitan Life paid approximately $92 million, $13.7 million and $15.3
million for sales practices claims for the years ended December 31, 2000, 1999
and 1998, respectively. The settlement payments in 2000 were primarily
attributable to the settlement of opt-out lawsuits and claims.
Regulatory authorities in a small number of states have had investigations
or inquiries relating to Metropolitan Life's, New England Mutual's or General
American's sales of individual life insurance policies or annuities. Over the
past several years, these and a number of investigations by other regulatory
authorities were resolved for monetary payments and certain other relief. The
Company may continue to resolve investigations in a similar manner.
Metropolitan Life is also a defendant in numerous lawsuits seeking
compensatory and punitive damages for personal injuries allegedly caused by
exposure to asbestos or asbestos-containing products. Metropolitan Life has
never engaged in the business of manufacturing, producing, distributing or
selling asbestos or asbestos-containing products. Rather, these lawsuits,
currently numbering in the thousands, have principally been based upon
allegations relating to certain research, publication and other activities of
one or more of Metropolitan Life's employees during the period from the 1920's
through approximately the 1950's and alleging that Metropolitan Life learned or
should have learned of certain health risks posed by asbestos and, among other
things, improperly publicized or failed to disclose those health risks. Legal
theories asserted against Metropolitan Life have included negligence,
intentional tort claims and conspiracy claims concerning the health risks
associated with asbestos. While Metropolitan Life believes it has meritorious
defenses to these claims, and has not suffered any adverse judgments in respect
of these claims, most of the cases have been resolved by settlements.
Metropolitan Life intends to continue to exercise its best judgment regarding
settlement or defense of such cases, including when trials of these cases are
appropriate. The number of such cases that may be brought or the aggregate
amount of any liability that Metropolitan Life may ultimately incur is
uncertain.
Significant portions of amounts paid in settlement of such cases have been
funded with proceeds from a previously-resolved dispute with Metropolitan Life's
primary, umbrella and first level excess liability insurance carriers.
Metropolitan Life was involved in litigation with several of its excess
liability insurers regarding amounts payable under its policies with respect to
coverage for these claims. The trial court
26
28
granted summary judgment to these insurers and Metropolitan Life appealed. The
Connecticut Supreme Court in 2001 affirmed the decision of the trial court. The
Company believes that Metropolitan Life's asbestos-related litigation with these
insurers should have no effect on its recoveries under excess insurance policies
that were obtained in 1998 for asbestos-related claims.
The following table sets forth the total number of asbestos personal injury
claims pending against Metropolitan Life as of the dates indicated, the number
of new claims during the periods ending on those dates and the total settlement
payments made to resolve asbestos personal injury claims during those periods:
AT OR FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Asbestos personal injury claims at period end
(approximate)........................................ 73,000 60,000 72,000
Number of new claims during period (approximate)....... 54,500 35,500 31,000
Settlement payments during period (dollars in
millions)(1)......................................... $71.1 $113.3 $47.0
(1) Settlement payments represent payments made during the period in connection
with settlements made in that period and in prior periods. Amounts do not
include Metropolitan Life's attorneys' fees and expenses and do not reflect
amounts received from insurance carriers.
The Company has recorded, in other expenses, charges of $15 million ($10
million after-tax), $499 million ($317 million after-tax), and $1,895 million
($1,203 million after-tax) for the years ended December 31, 2000, 1999, and
1998, respectively, for sales practices claims and claims for personal injuries
caused by exposure to asbestos or asbestos-containing products. The 2000 charge
was principally related to sales practices claims. The 1999 charge was
principally related to the settlement of the multidistrict litigation proceeding
involving alleged improper sales practices, accruals for sales practices claims
not covered by the settlement and other legal costs. The 1998 charge was
comprised of $925 million and $970 million for sales practices claims and
asbestos-related claims, respectively. The Company recorded the charges for
sales practices claims in 1998 based on preliminary settlement discussions and
the settlement history of other insurers.
Prior to the fourth quarter of 1998, Metropolitan Life established a
liability for asbestos-related claims based on settlement costs for claims that
Metropolitan Life had settled, estimates of settlement costs for claims pending
against Metropolitan Life and an estimate of settlement costs for unasserted
claims. The amount for unasserted claims was based on management's estimate of
unasserted claims that would be probable of assertion. A liability is not
established for claims which management believes are only reasonably possible of
assertion. Based on this process, the accrual for asbestos-related claims at
December 31, 1997 was $386 million. Potential liabilities for asbestos-related
claims are not easily quantified, due to the nature of the allegations against
Metropolitan Life, which are not related to the business of manufacturing,
producing, distributing or selling asbestos or asbestos-containing products,
adding to the uncertainty as to the number of claims that may be brought against
Metropolitan Life.
During 1998, Metropolitan Life decided to pursue the purchase of excess
insurance to limit its exposure to asbestos-related claims. In connection with
the negotiations with the casualty insurers to obtain this insurance,
Metropolitan Life obtained information that caused management to reassess the
accruals for asbestos-related claims. This information included:
- Information from the insurers regarding the asbestos-related claims
experience of other insureds, which indicated that the number of claims
that were probable of assertion against Metropolitan Life in the future
was significantly greater than it had assumed in its accruals. The number
of claims brought against Metropolitan Life is generally a reflection of
the number of asbestos-related claims brought against asbestos defendants
generally and the percentage of those claims in which Metropolitan Life
is included as a defendant. The information provided to Metropolitan Life
relating to other insureds indicated that Metropolitan Life had been
included as a defendant for a significant percentage of total
asbestos-related claims and that it may be included in a larger
percentage of claims in the future, because of greater awareness of
asbestos litigation generally by potential plaintiffs and plaintiffs'
lawyers and because of the bankruptcy and reorganization or the
exhaustion of insurance
27
29
coverage of other asbestos defendants; and that, although volatile, there
was an upward trend in the number of total claims brought against
asbestos defendants.
- Information derived from actuarial calculations Metropolitan Life made in
the fourth quarter of 1998 in connection with these negotiations, which
helped to frame, define and quantify this liability. These calculations
were made using, among other things, current information regarding
Metropolitan Life's claims and settlement experience (which reflected
Metropolitan Life's decision to resolve an increased number of these
claims by settlement), recent and historic claims and settlement
experience of selected other companies and information obtained from the
insurers.
Based on this information, Metropolitan Life concluded that certain claims
that previously were considered as only reasonably possible of assertion were
probable of assertion, increasing the number of assumed claims to approximately
three times the number assumed in prior periods. As a result of this
reassessment, Metropolitan Life increased its liability for asbestos-related
claims to $1,278 million at December 31, 1998.
During 1998, Metropolitan Life paid $1,407 million of premiums for excess
of loss reinsurance agreements and excess insurance policies, consisting of $529
million for the excess of loss reinsurance agreements for sales practices claims
and excess mortality losses and $878 million for the excess insurance policies
for asbestos-related claims.
Metropolitan Life obtained the excess of loss reinsurance agreements to
provide reinsurance with respect to sales practices claims made on or prior to
December 31, 1999 and for certain mortality losses in 1999. These reinsurance
agreements have a maximum aggregate limit of $650 million, with a maximum
sublimit of $550 million for losses for sales practices claims. This coverage is
in excess of an aggregate self-insured retention of $385 million with respect to
sales practices claims and $506 million, plus the Metropolitan Life's statutory
policy reserves released upon the death of insureds, with respect to life
mortality losses. At December 31, 1999, the subject losses under the reinsurance
agreements due to sales practices claims and related counsel fees from the time
Metropolitan Life entered into the reinsurance agreements did not exceed that
self-insured retention. No recoveries were made with respect to the coverage for
excess mortality losses for 1999. As noted above, recoveries have been made in
2000 under the reinsurance agreements for the sales practices claims. The
maximum sublimit of $550 million for sales practices claims was within a range
of losses that management believed were reasonably possible at December 31,
1998. Each excess of loss reinsurance agreement for sales practices claims and
mortality losses contains an experience fund, which provides for payments to
Metropolitan Life at the commutation date if experience is favorable at such
date. The Company accounts for the aggregate excess of loss reinsurance
agreements as reinsurance; however, if deposit accounting were applied, the
effect on the Company's consolidated financial statements in 1998, 1999 and 2000
would not be significant.
Under reinsurance accounting, the excess of the liability recorded for
sales practices losses recoverable under the agreements of $550 million over the
premium paid of $529 million resulted in a deferred gain of $21 million which
was amortized into income over the settlement period from January 1999 through
April 2000. Under deposit accounting, the premium would be recorded as an other
asset rather than as an expense, and the reinsurance loss recoverable and the
deferred gain would not have been recorded. Because the agreements also contain
an experience fund which increases with the passage of time, the increase in the
experience fund in 1999 and 2000 under deposit accounting would be recognized as
interest income in an amount approximately equal to the deferred gain that was
amortized into income under reinsurance accounting.
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 ($878 million of which was recorded as a recoverable at
December 31, 2000, 1999 and 1998). 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 in any given year that are recoverable under the policies
will be reflected as a reduction in the Company's operating cash flows for that
year, management believes that the payments will not have a material adverse
effect on the Company's liquidity. Each asbestos-related policy contains an
experience fund and a reference fund that provides for payments to the
28
30
Company at the commutation date if experience under the policy to such date has
been favorable, or pro rata reductions from time to time in the loss
reimbursements to the Company if the cumulative return on the reference fund is
less than the return specified in the experience fund.
The Company believes that the excess of loss reinsurance agreements should
provide coverage for a portion of the Metropolitan Life multidistrict sales
practices settlement described above. The increase in liabilities for death
benefits and policy adjustments and the cash payments to be made under the
settlement should be substantially offset by amounts recoverable under those
agreements, as well as amounts provided in the Company's consolidated financial
statements, and accordingly it does not believe that they will have a material
adverse effect on its business, results of operations, financial position or
cash flows in future periods.
The Company believes adequate provision has been made in its consolidated
financial statements for all reasonably probable and estimable losses for sales
practices and asbestos-related claims. With respect to Metropolitan Life's
asbestos litigation, estimates can be uncertain due to the limitations of
available data and the difficulty of predicting with any certainty numerous
variables that can affect liability estimates, including the number of future
claims, the cost to settle claims and the impact of any possible future adverse
verdicts and their amounts. Recent bankruptcies of other companies involved in
asbestos litigation 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 verdicts
Metropolitan Life may experience. Plaintiffs are seeking additional funds from
defendants, including Metropolitan Life, in light of recent bankruptcy filings
by certain other defendants. 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 consolidated financial statements. Metropolitan
Life will continue to study the variables in light of additional information,
including legislative and judicial developments, gained over time in order to
identify trends that may become evident and to assess their impact on the
previously established liability; 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.
A purported class action suit involving policyholders in four states has
been filed in a Rhode Island state court against a Metropolitan Life subsidiary,
Metropolitan Property and Casualty Insurance Company, with respect to claims by
policyholders for the alleged diminished value of automobiles after accident-
related repairs. The trial court recently denied a motion by Metropolitan
Property and Casualty Insurance Company for summary judgment, and discovery has
commenced. A class certification motion has been denied. Similar "diminished
value" purported class action suits have been filed in Texas and Tennessee
against Metropolitan Property and Casualty Insurance Company. A purported class
action has been filed against Metropolitan Property and Casualty Insurance
Company's subsidiary, Metropolitan Casualty Insurance Company, in Florida by a
policyholder 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. A motion for class certification is pending. In addition, a
plaintiff in Louisiana state court recently amended an individual lawsuit to
state a putative class action on behalf of Louisiana insureds challenging the
method that Metropolitan Property and Casualty Insurance Company uses to
determine the value of a motor vehicle that has sustained a total loss. A class
certification motion is pending. These suits are in the early stages of
litigation and Metropolitan Property and Casualty Insurance Company and
Metropolitan Casualty Insurance Company intend to defend themselves vigorously
against these suits. Similar suits have been filed against many other personal
lines property and casualty insurers.
The United States, the Commonwealth of Puerto Rico and various hotels and
individuals have sued MetLife Capital Corporation, a former subsidiary of the
Company, seeking damages for clean up costs, natural resource damages, personal
injuries and lost profits and taxes based upon, among other things, a release of
oil from a barge which was being towed by the M/V Emily S. In connection with
the sale of MetLife Capital, the Company acquired MetLife Capital's potential
liability with respect to the M/V Emily S lawsuits. MetLife Capital had entered
into a sale and leaseback financing arrangement with respect to the M/V Emily S.
The plaintiffs have taken the position that MetLife Capital, as the owner of
record of the
29
31
M/V Emily S, is responsible for all damages caused by the barge, including the
oil spill. The claims of the governments of the United States and Puerto Rico
were settled in 2000 within amounts previously accrued by the Company.
Metropolitan Life has completed a tender offer to purchase the shares of
Conning Corporation that it had not already owned. After Metropolitan Life had
announced its intention to make a tender offer, three putative class actions
were filed by Conning shareholders alleging that the prospective offer was
inadequate and constituted a breach of fiduciary duty. The parties to the
litigation have reached an agreement providing for a settlement of the actions;
a motion seeking court approval for the settlement will be filed with the New
York State Supreme Court in New York County after a final agreement is signed.
Several lawsuits were brought in 2000 challenging the fairness of
Metropolitan Life's plan of reorganization and the adequacy and accuracy of
Metropolitan Life's disclosure to policyholders regarding the plan. These
actions name as defendants some or all of Metropolitan Life, the Holding
Company, the individual directors, the New York Superintendent of Insurance and
the underwriters for MetLife Inc.'s initial public offering, Goldman Sachs &
Company and Credit Suisse First Boston. Five purported class actions pending in
the Supreme Court of the State of New York for New York County have been
consolidated within the commercial part. In addition, there remains a separate
purported class action in New York state court in New York County and another in
Kings County. The plaintiffs in the state court class actions seek injunctive,
declaratory and compensatory relief, as well as an accounting. Some of the
plaintiffs in the above described actions have also brought a proceeding under
Article 78 of New York's Civil Practice Law and Rules challenging the Opinion
and Decision of the New York Superintendent of Insurance that 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. Another
purported class action is pending in the Supreme Court of the State of New York
for New York County and has been brought on behalf of a purported class of
beneficiaries of Metropolitan Life annuities purchased to fund structured
settlements claiming that the class members should have received common stock or
cash in connection with the demutualization. Three purported class actions were
filed in the United States District Court for the Eastern District of New York
claiming violation of the Securities Act of 1933. The plaintiffs in these
actions, which have been consolidated, claim that the Policyholder Information
Booklets relating to the plan failed to disclose certain material facts and seek
rescission and compensatory damages. A purported class action was filed in the
United States District Court for the Southern District of New York seeking
damages from Metropolitan Life and the Holding Company for alleged violations of
various provisions of the Constitution of the United States in connection with
the plan of reorganization. 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. The defendants have moved to dismiss most of these actions; the Kings
County action and the Article 78 proceeding are being voluntarily held in
abeyance.
Three lawsuits were also filed against Metropolitan Life in 2000 in the
United States District Courts for the Southern District of New York, for the
Eastern District of Louisiana, and for the District of Kansas, alleging racial
discrimination in the marketing, sale, and administration of life insurance
policies, including "industrial" life insurance policies, sold by Metropolitan
Life decades ago. The plaintiffs in these three purported class actions seek
unspecified compensatory damages, punitive damages, reformation, imposition of a
constructive trust, a declaration that the alleged practices are discriminatory
and illegal, injunctive relief requiring Metropolitan Life to discontinue the
alleged discriminatory practices and adjust policy values, and other relief.
Metropolitan Life believes it has meritorious defenses to the plaintiffs' claims
and is contesting vigorously plaintiffs' claims in these actions. Metropolitan
Life successfully transferred the Louisiana action to the United States District
Court for the Southern District of New York and has also filed a motion to
transfer the Kansas action to the same court. Metropolitan Life has moved for
summary judgment in the two actions pending in New York, citing the applicable
statute of limitations. The New York cases are scheduled for trial in November
2001.
Insurance departments in a number of states have initiated inquiries in
2000 about possible race-based underwriting of life insurance. These inquiries
generally have been directed to all life insurers licensed
30
32
in the respective states, including Metropolitan Life and certain of its
subsidiaries. The New York Insurance Department has commenced examinations of
certain domestic life insurance companies, including Metropolitan Life and
certain of its subsidiaries, concerning possible past race-based underwriting
practices.
On March 13, 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 Business segment. The plaintiffs seek unspecified
compensatory damages, punitive damages, a declaration that the alleged practices
are discriminatory and illegal, injunctive relief requiring Metropolitan Life to
discontinue the alleged discriminatory practices, an order restoring class
members to their rightful positions (or appropriate compensation in lieu
thereof), and other relief. The Company intends to vigorously defend itself
against these allegations.
Various litigation, claims and assessments against the Company, in addition
to those discussed above and those otherwise provided for in the Company's
consolidated financial statements, have arisen in the course of the Company's
business, including, but not limited to, in connection with its activities as an
insurer, employer, investor, investment advisor and taxpayer. Further, state
insurance regulatory authorities and other Federal and state authorities
regularly make inquiries and conduct investigations concerning the Company's
compliance with applicable insurance and other laws and regulations.
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses. In some of the matters referred to above, very large and/or
indeterminate amounts, including punitive and treble damages, are sought. 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 a material adverse effect on the Company's consolidated financial position.
However, given the large and/or indeterminate amounts sought in certain of these
matters and the inherent unpredictability of litigation, it is possible that an
adverse outcome in certain matters could, from time to time, have a material
adverse effect on the Company's operating results or cash flows in particular
quarterly or annual periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MetLife, Inc.'s common stock, par value $0.01 per share (the "Common
Stock"), began trading on the New York Stock Exchange ("NYSE") under the symbol
"MET" on April 5, 2000.
The following table presents high and low closing prices for the Common
Stock on the NYSE for the periods indicated, and the dividends declared per
share:
2000
--------------------------------------------------------
1ST QUARTER 2ND QUARTER(1) 3RD QUARTER 4TH QUARTER
----------- -------------- ----------- -----------
Common Stock Price
High............................ N/A $21.31 $27.19 $36.50
Low............................. N/A $15.13 $19.81 $23.75
Dividends Declared................ N/A $ -- $ -- $ 0.20
---------------
N/A - Not applicable
(1) Commencing April 5, 2000.
As of March 2, 2001, the closing price of the Common Stock was $31.83. On
March 2, 2001, there were 1,073 shareholders of record of Common Stock.
On October 24, 2000, the Holding Company's Board of Directors approved an
annual dividend of $0.20 per share. The dividend was paid on December 15, 2000
to shareholders of record on November 7, 2000. Future dividend decisions will be
based on and affected by a number of factors, including the
31
33
operating results and financial requirements of the Holding Company and the
impact of regulatory restrictions. See "Business -- Regulation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial information
for the Company. The consolidated financial information for the years ended
December 31, 2000, 1999 and 1998 and at December 31, 2000 and 1999 has been
derived from the Company's audited consolidated financial statements included
elsewhere herein. The consolidated financial information for the years ended
December 31, 1997 and 1996 and at December 31, 1998, 1997 and 1996 has been
derived from the Company's audited consolidated financial statements not
included elsewhere herein. The following consolidated statements of income and
consolidated balance sheet data, other than the statutory data, have been
prepared in conformity with GAAP. The statutory data have been derived from
Metropolitan Life's Annual Statements filed with insurance regulatory
authorities and have been prepared in accordance with statutory accounting
practices. The following information should be read in conjunction with and is
qualified in its entirety by the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the consolidated financial statements appearing elsewhere herein.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
STATEMENTS OF INCOME DATA
Revenues
Premiums............................ $16,317 $12,088 $11,503 $11,278 $11,345
Universal life and investment-type
product policy fees.............. 1,820 1,433 1,360 1,418 1,243
Net investment income(3)(4)......... 11,768 9,816 10,228 9,491 8,978
Other revenues...................... 2,432 2,154 1,994 1,491 1,246
Net investment (losses) gains(5).... (390) (70) 2,021 787 231
------- ------- ------- ------- -------
Total revenues(1)(2) 31,947 25,421 27,106 24,465 23,043
------- ------- ------- ------- -------
Expenses:
Policyholder benefits and
claims(6)........................ 16,893 13,100 12,638 12,403 12,432
Interest credited to policyholder
account balances................. 2,935 2,441 2,711 2,878 2,868
Policyholder dividends.............. 1,919 1,690 1,651 1,742 1,728
Payments to former Canadian
policyholders(1)................. 327 -- -- -- --
Demutualization costs............... 230 260 6 -- --
Other expenses(4)(7)................ 8,227 6,755 8,019 5,771 4,609
------- ------- ------- ------- -------
Total expenses(1)(2) 30,531 24,246 25,025 22,794 21,637
------- ------- ------- ------- -------
Income before provision for income
taxes............................... 1,416 1,175 2,081 1,671 1,406
Provision for income taxes(8)......... 463 558 738 468 482
------- ------- ------- ------- -------
Income before discontinued
operations.......................... 953 617 1,343 1,203 924
Loss from discontinued
operations(9)....................... -- -- -- -- (71)
------- ------- ------- ------- -------
Net income............................ $ 953 $ 617 $ 1,343 $ 1,203 $ 853
======= ======= ======= ======= =======
Net income after April 7, 2000 (date
of demutualization)................. $ 1,173
=======
32
34
AT DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA
General account assets(4)............. $184,768 $160,291 $157,278 $154,444 $145,877
Separate account assets............... 70,250 64,941 58,068 48,338 43,399
-------- -------- -------- -------- --------
Total assets.......................... $255,018 $225,232 $215,346 $202,782 $189,276
======== ======== ======== ======== ========
Liabilities:
Life and health policyholder
liabilities(10).................. $140,896 $122,637 $122,726 $125,849 $121,333
Property and casualty policyholder
liabilities(10).................. 2,559 2,318 1,477 1,509 1,562
Short-term debt.................... 1,094 4,208 3,585 4,587 3,311
Long-term debt..................... 2,426 2,514 2,903 2,884 1,946
Separate account liabilities....... 70,250 64,941 58,068 48,338 43,399
Other liabilities(4)............... 20,314 14,924 11,720 5,608 5,742
-------- -------- -------- -------- --------
Total liabilities..................... 237,539 211,542 200,479 188,775 177,293
-------- -------- -------- -------- --------
Company-obligated mandatorily
redeemable securities of subsidiary
trusts............................. 1,090 -- -- -- --
-------- -------- -------- -------- --------
Stockholders' Equity:
Common Stock, at par value......... 8 -- -- -- --
Additional paid-in capital(11)..... 14,926 -- -- -- --
Retained earnings(11).............. 1,021 14,100 13,483 12,140 10,937
Treasury stock, at cost............ (613) -- -- -- --
Accumulated other comprehensive
income (loss).................... 1,047 (410) 1,384 1,867 1,046
-------- -------- -------- -------- --------
Total stockholders' equity............ 16,389 13,690 14,867 14,007 11,983
-------- -------- -------- -------- --------
Total liabilities and stockholders'
equity............................. $255,018 $225,232 $215,346 $202,782 $189,276
======== ======== ======== ======== ========
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
OTHER DATA
Operating income(5)(12)....... $ 1,541 $ 990 $ 23 $ 617 $ 818
Adjusted operating
income(5)(13).............. $ 1,541 $ 1,307 $ 1,226 $ 807 $ 921
Operating return on
equity(14)................. 10.5% 7.2% 0.2% 5.3% 7.8%
Adjusted operating return on
equity(15)................. 10.5% 9.5% 9.6% 7.0% 8.8%
Return on equity(16).......... 6.5% 4.5% 10.5% 10.4% 8.1%
Operating cash flows.......... $ 1,326 $ 3,865 $ 842 $ 2,872 $ 3,688
Total assets under
management(17)............. $302,181 $373,646 $360,703 $338,731 $297,570
STATUTORY DATA(18)
Premiums and deposits......... $ 23,536 $ 24,643 $ 22,722 $ 20,569 $ 20,611
Net income.................... $ 1,027 $ 790 $ 875 $ 589 $ 460
Policyholder surplus.......... $ 7,213 $ 7,630 $ 7,388 $ 7,378 $ 7,151
Asset valuation reserve....... $ 3,205 $ 3,109 $ 3,323 $ 3,814 $ 2,635
33
35
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
EARNINGS PER SHARE DATA(19)
Basic earnings per share...... $ 1.52 N/A N/A N/A N/A
Diluted earnings per share.... $ 1.49 N/A N/A N/A N/A
ADJUSTED OPERATING EARNINGS PER
SHARE DATA(20)
Basic earnings per share...... $ 1.99 N/A N/A N/A N/A
Diluted earnings per share.... $ 1.96 N/A N/A N/A N/A
DIVIDENDS DECLARED PER SHARE.... $ 0.20 N/A N/A N/A N/A
(1) Includes the following combined financial statement data of the Company's
controlling interest in Nvest Companies L.P. and its affiliates, which were
sold in 2000, MetLife Capital Holdings, Inc., which was sold in 1998, and
the Company's Canadian operations and U.K. insurance operations,
substantially all of which were sold in 1998 and 1997:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998 1997 1996
---- ---- ------ ------ ------
(DOLLARS IN MILLIONS)
Total revenues....... $524 $655 $1,405 $2,149 $1,890
==== ==== ====== ====== ======
Total expenses....... $492 $603 $1,275 $1,870 $1,412
==== ==== ====== ====== ======
As a result of these sales, investment gains of $663 million, $520 million
and $139 million were recorded for the years ended December 31, 2000, 1998
and 1997, respectively.
In July 1998, Metropolitan Life sold a substantial portion of its Canadian
operations to Clarica Life. As part of that sale, a large block of policies
in effect with Metropolitan Life in Canada were transferred to Clarica
Life, and the holders of the transferred Canadian policies became
policyholders of Clarica Life. Those transferred policyholders are no
longer policyholders of Metropolitan Life and, therefore, were not entitled
to compensation under the plan of reorganization. However, as a result of a
commitment made in connection with obtaining Canadian regulatory approval
of that sale and in connection with the demutualization, Metropolitan
Life's Canadian branch made cash payments to those who were, or were deemed
to be, holders of these transferred Canadian policies. The payments were
determined in a manner that is consistent with the treatment of, and fair
and equitable to, eligible policyholders of Metropolitan Life.
(2) Included in 2000 total revenues and total expenses are $3,754 million and
$3,576 million, respectively, related to GenAmerica, which was acquired on
January 6, 2000.
(3) During 1997, the Company changed to the retrospective interest method of
accounting for investment income on structured notes in accordance with
Emerging Issues Task Force Consensus 96-12, Recognition of Interest Income
and Balance Sheet Classification of Structured Notes. As a result, net
investment income increased by $175 million. The cumulative effect of this
accounting change on prior years' income was immaterial.
(4) In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, with respect to the
Company's securities lending program. Adoption of the provisions had the
effect of increasing assets and liabilities by $3,769 million at December
31, 1998 and increasing revenues and expenses by $266 million for the year
ended December 31, 1998.
34
36
(5) Investment gains and losses are presented net of related policyholder
amounts. The amounts netted against investment gains and losses are the
following:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998 1997 1996
----- ----- ------- ------- -----
(DOLLARS IN MILLIONS)
Gross investment (losses)
gains....................... $(444) $(137) $ 2,629 $ 1,018 $ 458
----- ----- ------- ------- -----
Less amounts allocable to:
Future policy benefit loss
recognition.............. -- -- (272) (126) (203)
Deferred policy acquisition
costs.................... 95 46 (240) (70) (4)
Participating contracts..... (126) 21 (96) (35) (20)
Policyholder dividend
obligation............... 85 -- -- -- --
----- ----- ------- ------- -----
Total....................... 54 67 (608) (231) (227)
----- ----- ------- ------- -----
Net investment (losses)
gains....................... $(390) $ (70) $ 2,021 $ 787 $ 231
===== ===== ======= ======= =====
Investment gains (losses) have been reduced by (1) deferred policy
acquisition amortization to the extent that such amortization results from
investment gains and losses, (2) additions to future policy benefits
resulting from the need to establish additional liabilities due to the
recognition of investment gains (3) additions to participating
contractholder accounts when amounts equal to such investment gains and
losses are credited to the contractholders' accounts, and (4) adjustments
to the policyholder dividend obligation resulting from investment gains and
losses. This presentation may not be comparable to presentations made by
other insurers. This presentation affected operating income and adjusted
operating income. See notes 12 and 13 below.
(6) Policyholder benefits and claims exclude $41 million, $(21) million, $368
million, $161 million and $223 million for the years ended December 31,
2000, 1999, 1998, 1997 and 1996, respectively, of future policy benefit
loss recognition, credits to participating contractholder accounts and
changes in the policyholder dividend obligation that have been charged
against net investment gains and losses as such amounts are directly
related to such gains and losses. This presentation may not be comparable
to presentations made by other insurers.
(7) Other expenses exclude $(95) million, $(46) million, $240 million, $70
million and $4 million for the years ended December 31, 2000, 1999, 1998,
1997 and 1996, respectively, of amortization of deferred policy acquisition
costs that have been charged against net investment gains and losses as
such amounts are directly related to such gains and losses. This
presentation may not be comparable to presentations made by other insurers.
(8) Includes $(145) million, $125 million, $18 million, $(40) million and $38
million for surplus tax accrued (credited) by Metropolitan Life for the
years ended December 31, 2000, 1999, 1998, 1997 and 1996, respectively.
Prior to its demutualization, Metropolitan Life was subject to surplus tax
imposed on mutual life insurance companies under Section 809 of the
Internal Revenue Code. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(9) The loss from discontinued operations was primarily attributable to the
disposition of the Company's group medical insurance business.
(10) Policyholder liabilities include future policy benefits, policyholder
account balances, other policyholder funds, policyholder dividends and the
policyholder dividend obligation.
(11) For additional information regarding these items, see Note 1 of Notes to
Consolidated Financial Statements.
35
37
(12) The following provides a reconciliation of net income to operating income:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998 1997 1996
------ ---- ------- ------- -----
(DOLLARS IN MILLIONS)
Net income......................... $ 953 $617 $ 1,343 $ 1,203 $ 853
------ ---- ------- ------- -----
Adjustments to reconcile net income
to operating income:
Gross investment losses
(gains)....................... 444 137 (2,629) (1,018) (458)
Income tax on gross investment
gains and losses.............. (175) (92) 883 312 173
------ ---- ------- ------- -----
Investment losses (gains), net
of income tax............... 269 45 (1,746) (706) (285)
------ ---- ------- ------- -----
Amount allocated to investment
gains and losses (see note
5)............................ (54) (67) 608 231 227
Income tax on amount allocated to
investment gains and losses... 21 45 (204) (71) (86)
------ ---- ------- ------- -----
Amount allocated to investment
gains and losses, net of
income tax.................. (33) (22) 404 160 141
------ ---- ------- ------- -----
Demutualization costs............ 230 260 6 -- --
Income tax on demutualization
costs......................... (60) (35) (2) -- --
------ ---- ------- ------- -----
Demutualization costs, net of
income tax.................. 170 225 4 -- --
------ ---- ------- ------- -----
Payments to former Canadian
policyholders................. 327 -- -- -- --
------ ---- ------- ------- -----
Loss from discontinued
operations, net of income
tax........................... -- -- -- -- 71
------ ---- ------- ------- -----
Surplus tax...................... (145) 125 18 (40) 38
------ ---- ------- ------- -----
Operating income................... $1,541 $990 $ 23 $ 617 $ 818
====== ==== ======= ======= =====
The Company believes the supplemental operating information presented above
allows for a more complete analysis of results of operations. Investment
gains and losses have been excluded due to their volatility between periods
and because such data are often excluded when evaluating the overall
financial performance of insurers. Operating income should not be
considered as a substitute for any GAAP measure of performance. The
Company's method of calculating operating income may be different from the
method used by other companies and therefore comparability may be limited.
(13) The following provides a reconciliation of operating income to adjusted
operating income:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ----- -----
(DOLLARS IN MILLIONS)
Operating income............ $1,541 $ 990 $ 23 $ 617 $ 818
Adjustments for charges for
sales practices claims and
for personal injury claims
caused by exposure to
asbestos or asbestos-
containing products, net
of income tax............. -- 317 1,203 190 103
------ ------ ------ ----- -----
Adjusted operating income... $1,541 $1,307 $1,226 $ 807 $ 921
====== ====== ====== ===== =====
36
38
The charge for the year ended December 31, 1999 was principally related to
the settlement of a multidistrict litigation proceeding involving alleged
improper sales practices, accruals for sales practices claims not covered
by the settlement and other legal costs. The amounts reported for the years
ended December 31, 1998, 1997 and 1996 include charges for sales practices
claims and claims for personal injuries caused by exposure to asbestos or
asbestos-containing products. See Note 10 of Notes to Consolidated
Financial Statements. The Company believes that supplemental adjusted
operating income data provides information useful in measuring operating
trends by excluding the unusual amounts of expenses associated with sales
practices and asbestos-related claims. Adjusted operating income should not
be considered as a substitute for any GAAP measure of performance.
(14) Operating return on equity is defined as operating income divided by
average total equity excluding accumulated other comprehensive income
(loss). The Company believes the operating return on equity information
presented supplementally allows for a more complete analysis of results of
operations. Accumulated other comprehensive income (loss) has been excluded
due to its volatility between periods and because such data is often
excluded when evaluating the overall financial performance of insurers.
Operating return on equity should not be considered as a substitute for any
GAAP measure of performance. The Company's method of calculating operating
return on equity may be different from the method used by other companies
and, therefore, comparability may be limited.
(15) Adjusted operating return on equity is defined as adjusted operating income
divided by average total equity, excluding accumulated other comprehensive
income (loss). The Company believes that supplemental adjusted operating
return on equity data provides information useful in measuring operating
trends by excluding the unusual amounts of expenses associated with sales
practices and asbestos-related claims. Adjusted operating return on equity
should not be considered as a substitute for net income in accordance with
GAAP.
(16) Return on equity is defined as net income divided by average total equity,
excluding accumulated other comprehensive income (loss).
(17) Includes MetLife's general account and separate account assets and assets
managed on behalf of third parties. On October 30, 2000, the Company
completed its sale of Nvest. Includes $133 billion, $135 billion, $125
billion and $100 billion of assets under management managed by Nvest at
December 31, 1999, 1998, 1997 and 1996, respectively.
(18) Metropolitan Life statutory data only.
(19) Based on earnings subsequent to date of demutualization. For additional
information regarding these items, see Note 17 of Notes to Consolidated
Financial Statements.
(20) Earnings per share amounts are presented as if the initial public offering
had occurred on January 1, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For purposes of this discussion, the term "Company" refers, at all times
prior to the date of demutualization (as hereinafter defined), to Metropolitan
Life Insurance Company, a mutual life insurance company organized under the laws
of the State of New York ("Metropolitan Life"), and its subsidiaries, and at all
times on and after the date of demutualization, to MetLife, Inc. (the "Holding
Company"), a Delaware corporation, and its subsidiaries, including Metropolitan
Life ("MetLife"). 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 consolidated financial statements included elsewhere herein.
37
39
THE DEMUTUALIZATION
On April 7, 2000 (the "date of demutualization"), pursuant to an order by
the New York Superintendent of Insurance ("Superintendent") approving its plan
of reorganization, as amended (the "plan"), Metropolitan Life converted from a
mutual life insurance company to a stock life insurance company and became a
wholly-owned subsidiary of the Holding Company. In conjunction therewith, each
policyholder's membership interest was extinguished and each eligible
policyholder received, in exchange for that interest, trust interests
representing shares of Common Stock held in the Metropolitan Life Policyholder
Trust, cash or an adjustment to their policy values in the form of policy
credits, as provided in the plan. In addition, Metropolitan Life's Canadian
branch made cash payments to holders of certain policies transferred to Clarica
Life Insurance Company in connection with the sale of a substantial portion of
Metropolitan Life's Canadian operations in 1998, as a result of a commitment
made in connection with obtaining Canadian regulatory approval of that sale. The
payments, which were recorded in the second quarter of 2000, were determined in
a manner that was consistent with the treatment of, and fair and equitable to,
eligible policyholders of Metropolitan Life.
On the date of demutualization, the Holding Company conducted an initial
public offering of 202,000,000 shares of its Common Stock and concurrent private
placements of an aggregate of 60,000,000 shares of its Common Stock at an
offering price of $14.25 per share. The shares of Common Stock issued in the
offerings are in addition to 494,466,664 shares of Common Stock of the Holding
Company distributed to the Metropolitan Life Policyholder Trust for the benefit
of policyholders of Metropolitan Life in connection with the demutualization. On
April 10, 2000, the Holding Company issued 30,300,000 additional shares of its
Common Stock as a result of the exercise of over-allotment options granted to
underwriters in the initial public offering.
Concurrently with these offerings, MetLife, Inc. and MetLife Capital Trust
I, a Delaware statutory business trust wholly-owned by MetLife, Inc., issued
20,125,000 8.00% equity security units for an aggregate offering price of $1,006
million. Each unit consists of (i) a contract to purchase shares of Common Stock
and (ii) a capital security of MetLife Capital Trust I.
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. See Note 6 of Notes to Consolidated Financial Statements.
On June 27, 2000, the Holding Company's Board of Directors authorized the
repurchase of up to $1 billion of the Holding Company's outstanding Common
Stock. The buyback may take place over an unspecified period of time. the
Holding Company may purchase Common Stock from the Metropolitan Life
Policyholder Trust, in the open market, and in private transactions. Through
December 31, 2000, 26,084,751 shares have been acquired for $613 million.
ACQUISITIONS AND DISPOSITIONS
On February 28, 2001, the Holding Company consummated the purchase of Grand
Bank, N.A. ("Grand Bank"). Grand Bank, with reported assets at September 30,
2000 of approximately $84 million, provides banking services to individuals and
small businesses in the Princeton, New Jersey area. On February 12, 2001, the
Federal Reserve Board approved the Holding Company's application for bank
holding company status and to become a financial holding company upon its
acquisition of Grand Bank.
On January 6, 2000, Metropolitan Life completed its acquisition of
GenAmerica for $1.2 billion. As part of the GenAmerica acquisition, General
American Life Insurance Company paid Metropolitan Life a fee of $120 million in
connection with the assumption of certain funding agreements. The fee has been
considered as part of the purchase price of GenAmerica. GenAmerica is a holding
company which includes General American Life Insurance Company, 49% of the
outstanding shares of Reinsurance Group of America, Incorporated ("RGA") common
stock, a provider of reinsurance, and 61.0% of the outstanding shares of Conning
Corporation ("Conning") common stock, an asset manager. Metropolitan Life owned
10% of the outstanding shares of RGA common stock prior to the completion of the
GenAmerica
38
40
acquisition. At December 31, 2000 Metropolitan Life's ownership percentage of
the outstanding shares of RGA common stock was approximately 59%.
In April 2000, Metropolitan Life acquired the outstanding shares of Conning
common stock not already owned by Metropolitan Life for $73 million.
In July 2000, the Company acquired the workplace benefits division of
Business Men's Assurance Company, a Kansas City, Missouri based insurer.
In October 2000, the Company completed the sale of its 48% ownership
interest in its affiliates, Nvest, L.P. and Nvest Companies L.P. This
transaction resulted in an investment gain of $663 million.
In September 1999, the Auto & Home segment acquired the standard personal
lines property and casualty insurance operations of The St. Paul Companies.
In November 1999, the Company acquired the individual disability income
business of Lincoln National Life Insurance Company.
During 1998, the Company sold MetLife Capital Holdings, Inc., a commercial
financing company and a substantial portion of its Canadian insurance
operations, which resulted in an investment gain of $531 million.
RESULTS OF OPERATIONS
THE COMPANY
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Premiums increased by $4,229 million, or 35%, to $16,317 million in 2000
from $12,088 million in 1999, in part, due to the acquisition of GenAmerica on
January 6, 2000. Excluding the impact of this acquisition, premiums increased by
$2,273 million, or 19%. This increase is attributable to Institutional Business,
Auto & Home and International. These increases are partially offset by a $72
million, or 2%, decrease in Individual Business. The increase of $1,297 million,
or 23%, in Institutional Business is predominantly the result of strong sales
and continued favorable policyholder retention in this segment's group life,
dental and disability businesses. The acquisitions of the workplace benefits
division from the Business Men's Assurance Company in July 2000 and Lincoln
National's disability business in November 1999 ("the BMA and Lincoln National
acquisitions") account for $103 million of the variance. In addition,
significant premiums received from existing group life and retirement and
savings customers in 2000 contribute $465 million to the variance. The increase
of $885 million, or 51%, in Auto & Home is primarily due to the St. Paul
acquisition, which represents $755 million of the increase, as well as growth in
this segment's standard auto business. The increase of $137 million, or 26%, in
International is primarily due to overall growth in Mexico, Taiwan, South Korea,
Spain and Brazil. The decrease in the Individual Business segment is primarily
due to a decline in sales of traditional life insurance policies, which reflects
a continued shift in policyholders' preferences from those policies to variable
life products.
Universal life and investment-type product policy fees increased by $387
million, or 27%, to $1,820 million in 2000 from $1,433 million in 1999.
Excluding the impact of the GenAmerica acquisition, universal life and
investment-type product policy fees increased by $145 million, or 10%. This
increase is almost entirely attributable to a $130 million, or 15%, increase in
Individual Business, which is primarily due to increased sales, including
exchanges, of variable life products, increases in separate account assets and
the acceleration of the recognition of unearned fees in connection with a
universal life product replacement program.
Net investment income increased by $1,952 million, or 20%, to $11,768
million in 2000 from $9,816 million in 1999. Excluding the impact of the
GenAmerica acquisition, net investment income increased by $832 million, or 8%.
This increase is primarily due to higher income from (i) fixed maturities of
$653 million, or 9%, (ii) mortgage loans on real estate of $76 million, or 5%,
(iii) interest on policy loans of $17 million, or 5%, (iv) cash and short term
investments of $79 million, or 46%, (v) real estate and real estate joint
ventures, net of investment expenses and depreciation, of $45 million, or 8%,
and (vi) lower investment expenses of $27 million, or 10%. These increases are
partially offset by reduced income from equity
39
41
securities and other limited partnership interests of $54 million, or 23%, and
other invested assets of $11 million, or 12%.
The increase in income from fixed maturities to $7,824 million in 2000 from
$7,171 million in 1999 is primarily due to higher volume in the securities
lending program and income from fixed maturities which were part of the St. Paul
acquisition in the fourth quarter of 1999. These increases are partially offset
by decreases in income from equity-linked notes. The increase in income from
mortgage loans on real estate to $1,560 million in 2000 from $1,484 million in
1999 is largely due to higher mortgage production volume. The reduction in
income from equity securities and other limited partnership interests to $185
million in 2000 from $239 million in 1999 is predominantly the result of a
decrease in sales by corporate partnerships.
Other revenues increased by $278 million, or 13%, to $2,432 million in 2000
from $2,154 million in 1999. The impact of the GenAmerica acquisition is an
increase to other revenues of $378 million. The variance year over year,
excluding the impact of GenAmerica, is partially attributable to increases in
the Individual and Institutional Business segments. The increase of $89 million
in Individual Business is largely a result of higher commission and fee income
related to increased sales in the broker/dealer and other subsidiaries. The
primary driver of Institutional Business' $36 million increase is strong sales
growth in its dental and disability administrative services businesses.
Offsetting these increases is a $131 million decline in the Asset Management
segment due to the sale of Nvest, on October 30, 2000. The remaining variance is
primarily due to the Corporate (including consolidation related adjustments)
segment.
The Company's investment gains and losses are net of related policyholder
amounts. The amounts netted against investment gains and losses are (i)
amortization of deferred policy acquisition costs attributable to the increase
or decrease in product gross margins or profits resulting from investment gains
and losses, (ii) additional policyholder liabilities, which are required when
investment gains are recognized and the Company reinvests the proceeds in lower
yielding assets ("loss recognition"), (iii) liabilities for those participating
contracts in which the policyholders' accounts are increased or decreased by the
related investment gains or losses, and (iv) adjustments to the policyholder
dividend obligation resulting from investment gains and losses.
Net investment losses increased by $320 million, or 457%, to $390 million
in 2000 from $70 million in 1999. This increase reflects total gross investment
losses of $444 million, an increase of $307 million, or 224%, from $137 million
in 1999, before the offsets for: the amortization of deferred policy acquisition
costs of $95 million and $46 million in 2000 and 1999, respectively; changes in
the policyholder dividend obligation of $85 million in 2000; and (additions to)
or reductions in participating contracts of $(126) million and $21 million in
2000 and 1999, respectively, related to assets sold. Excluding the impact of the
GenAmerica acquisition, net investment losses increased by $378 million, or
540%. This increase reflects the continuation of the Company's strategy to
reposition its investment portfolio in order to provide a higher operating
return on its invested assets and the recognition of losses through the
proactive sale of certain assets. These losses are partially offset by a $663
million gain, which was recognized as a result of the sale of Nvest on October
30, 2000.
The Company believes its policy of netting related policyholder amounts
against investment gains and losses provides important information in evaluating
its operating performance. Investment gains and losses are often excluded by
investors when evaluating the overall financial performance of insurers. The
Company believes its presentation enables readers of its consolidated statements
of income to easily exclude investment gains and losses and the related effects
on the consolidated statements of income when evaluating its operating
performance. The Company's presentation of investment gains and losses, net of
policyholder amounts, may be different from the presentation used by other
insurance companies and, therefore, amounts in its consolidated statements of
income may not be comparable with amounts reported by other insurers.
Policyholder benefits and claims increased by $3,793 million, or 29%, to
$16,893 million in 2000 from $13,100 million in 1999. This increase reflects
total gross policyholder benefits and claims of $16,934 million, an increase of
$3,855 million from $13,079 million in 1999, before the offsets for additions to
or (reductions in) participating contractholder accounts of $126 million in 2000
and $(21) million in 1999 and changes in the policyholder dividend obligation of
$(85) million in 2000 directly related to net investment
40
42
losses. Excluding the impact of the GenAmerica acquisition, policyholder
benefits and claims increased $2,044 million, or 16%. This rise is primarily due
to increases of $1,366 million, or 20%, in Institutional Business, $704 million,
or 54%, in Auto & Home, and $104 million, or 23%, in International. These
increases are partially offset by a decrease of $103 million, or 2%, in
Individual Business. The Institutional Business increase is largely due to
overall growth within the segment's group dental and disability businesses, as
well as the BMA and Lincoln National acquisitions. In addition, policyholder
benefits and claims related to the group life and retirement and savings
businesses increased commensurate with the premium variance noted above. The
increase in Auto & Home is due, in most part, to the St. Paul acquisition, which
represents $580 million of the increase. The remainder of the increase is
largely attributable to a 9% increase in the number of auto policies in force
and increased costs resulting from an increase in the use of original equipment
manufacturer parts and higher labor rates. The increase in International is
primarily due to overall growth in Mexico, Taiwan, South Korea, Spain and
Brazil, commensurate with the increase in International's premiums. The decrease
in Individual Business is predominately the result of improved mortality and
morbidity experience.
Interest credited increased by $494 million, or 20%, to $2,935 million in
2000 from $2,441 million in 1999. Excluding the impact of the GenAmerica
acquisition, interest credited increased by $95 million, or 4%. This is
primarily attributable to increases of $54 million, or 5%, in Institutional
Business and $36 million, or 3%, in Individual Business. The higher expense in
Institutional Business is largely due to an increase in group insurance of $84
million, which resulted from asset growth in customer account balances, growth
in the bank-owned life insurance business and increases in the cash values of
executive and corporate-owned universal life plans. These increases are
partially offset by a decrease in retirement and savings products of $30
million, due to a continued shift in customers' investment preferences from
guaranteed interest products to separate account alternatives. The increase in
Individual Business is predominately due to higher policyholder account balances
and increases in crediting rates on annuity and investment products.
Policyholder dividends increased by $229 million, or 14%, to $1,919 million
in 2000 from $1,690 million in 1999. Excluding the acquisition of GenAmerica,
policyholder dividends increased by $20 million, or 1%. Policyholder dividends
vary from period to period based on participating group and traditional
individual life insurance contract experience.
Payments of $327 million were made during the second quarter of 2000, as
part of Metropolitan Life's demutualization, to holders of certain policies
transferred to Clarica Life Insurance Company in connection with the sale of a
substantial portion of the Canadian operations in 1998.
Demutualization costs decreased by $30 million, or 12%, to $230 million in
2000 from $260 million in 1999. These costs are related to Metropolitan Life's
demutualization on April 7, 2000.
Other expenses increased by $1,472 million, or 22%, to $8,227 million in
2000 from $6,755 million in 1999. Excluding the capitalization and amortization
of deferred policy acquisition costs, which are discussed below, other expenses
increased by $1,627 million, or 23%, to $8,612 million in 2000 from $6,985
million in 1999. Excluding the impact of the GenAmerica acquisition, other
expenses increased by $300 million, or 4%. This increase is primarily
attributable to increases in Auto & Home, Individual Business, Institutional
Business and International. These increases are partially offset by a $396
million, or 38%, decrease in Corporate and a $101 million, or 13%, decrease in
Asset Management. The increase in Auto & Home of $311 million, or 59%, is
largely due to the St. Paul acquisition. The increase in Individual Business of
$291 million, or 10%, is partially attributable to a $111 million increase from
the broker/dealer and other subsidiaries commensurate with the increase in other
revenues and increased securities lending volume. The increase in Institutional
Business of $144 million, or 9%, is primarily due to costs incurred in
connection with initiatives focused on improving service delivery capabilities
through investments in technology and an increase in volume-related expenses
associated with premium growth. Volume-related expenses include premium taxes,
separate account investment management expenses and commissions. The increase in
International of $45 million, or 14%, is primarily attributable to expenses
incurred in connection with business expansion efforts in several countries. The
decrease in Corporate is primarily due to a $499 million
41
43
charge in 1999 principally related to the settlement of a multidistrict
litigation proceeding involving alleged improper sales practices, accruals for
sales practices claims not covered by the settlement and other legal costs. The
most significant factor contributing to the decline in Asset Management is the
sale of Nvest, which occurred on October 30, 2000.
Deferred policy acquisition costs are principally amortized in proportion
to gross margins or profits, including investment gains or losses. The
amortization is allocated to investment gains and losses to provide consolidated
statement of income information regarding the impact of investment gains and
losses on the amount of the amortization, and other expenses to provide amounts
related to gross margins or profits originating from transactions other than
investment gains and losses.
Capitalization of deferred policy acquisition costs increased to $1,863
million in 2000 from $1,160 million in 1999 while total amortization of deferred
policy acquisition costs, charged to operations, increased to $1,383 million in
2000 from $884 million in 1999. Excluding the impact of the GenAmerica
acquisition, capitalization of deferred policy acquisition costs increased to
$1,413 million in 2000 from $1,160 in 1999 while total amortization of deferred
policy acquisition costs increased to $1,012 million in 2000 from $884 million
in 1999. Amortization of deferred policy acquisition costs of $1,478 million and
$930 million are allocated to other expenses in 2000 and 1999, respectively,
while the remainder of the amortization in each year is allocated to investment
losses. Excluding the impact of the GenAmerica acquisition, amortization of
deferred policy acquisition costs of $1,136 million and $930 million are
allocated to other expenses in 2000 and 1999, respectively, while the remainder
of the amortization in each year is allocated to investment losses. The increase
in amortization of deferred policy acquisition costs allocated to other expenses
was predominately attributable to Auto & Home's acquisition of St. Paul.
Income tax expense for the year ended December 31, 2000 was $463 million,
or 33% of income before provision for income taxes, compared with $558 million,
or 47%, in 1999. The 2000 effective tax rate differs from the corporate tax rate
of 35% due to non-deductible payments made in the second quarter of 2000 to
former Canadian policyholders in connection with the demutualization, a surplus
tax benefit of $145 million and a reduction in prior year taxes on capital gains
associated with the sale of businesses recorded in the third quarter of 2000.
The 1999 effective rate differs from the corporate tax rate of 35% primarily due
to the impact of surplus tax. Prior to its demutualization, Metropolitan Life
was subject to surplus tax imposed on mutual life insurance companies under
Section 809 of the Internal Revenue Code. The surplus tax results from the
disallowance of a portion of a mutual life insurance company's policyholder
dividends as a deduction from taxable income.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Premiums increased by 5% to $12,088 million in 1999 from $11,503 million in
1998. This increase is attributable to strong growth in Institutional Business
of $366 million, or 7%, and Auto & Home of $348 million, or 25%. These increases
are partially offset by decreases in International of $95 million, or 15%, and
in Individual Business of $34 million, or 1%. Institutional Business' growth is
primarily driven by an increase in non-medical health premiums due to increased
sales and improved policyholder retention in its dental and disability
businesses. Auto & Home's premium increase is primarily due to the St. Paul
acquisition, of which represents $262 million of the increase, as well as growth
in both standard and non-standard auto insurance businesses. International's
premium decrease is primarily due to the disposition of a substantial portion of
the Company's Canadian operations in July 1998. The Individual Business decrease
is primarily attributable to the decline in sales of traditional life insurance
policies, which reflects a continued shift in customers' investment preferences
from those policies to variable life products, as well as decreased sales of
supplementary contracts with life contingencies.
Universal life and investment-type product policy fees increased by 5% to
$1,433 million in 1999 from $1,360 million in 1998. This increase is
attributable to increases of $71 million, or 9%, in Individual Business and $27
million, or 6%, in Institutional Business. These increases are partially offset
by a decrease in International of $25 million, or 37%. The Individual Business
policy fee increase is, in large part, due to the continued growth in deposits
for investment products as well as stock market appreciation. The $27 million
42
44
increase in Institutional Business' policy fees is primarily due to continued
growth in sales of products used in executive and corporate-owned benefit plans.
The majority of International's policy fee decrease is a result of the sale of a
substantial portion of the Company's Canadian operations.
Net investment income decreased by 4% to $9,816 million in 1999 from
$10,228 million in 1998. This decrease is primarily due to reductions in (i)
investment income related to mortgage loans on real estate of $93 million, or
6%, (ii) investment income on other invested assets of $340 million, or 40%,
(iii) equity securities income of $38 million, or 49%, (iv) policy loan income
of $47 million, or 12%, and (v) real estate and real estate joint ventures
income, after investment expenses and depreciation, of $106 million, or 15%.
These reductions in net investment income are partially offset by higher income
from fixed maturities of $203 million, or 3%. The reduction in investment income
from mortgage loans on real estate to $1,479 million in 1999 from $1,572 million
in 1998 is due to a reduction in principal balances in MetLife Capital Holdings,
Inc. and a substantial portion of the Company's Canadian operations, which were
sold in 1998, the proceeds of which were reinvested in fixed maturities.
Likewise, the increase in fixed maturity investment income to $6,766 million in
1999 from $6,563 million in 1998 is primarily attributable to increased average
principal balances due, in part, to the reinvestment of proceeds from the sale
of MetLife Capital Holdings, as well as from sales of equity securities, the
dispositions of which were part of the Company's 1998 year-end asset
repositioning program. The reduction in investment income from other invested
assets to $501 million in 1999 from $841 million in 1998 is due to a reduction
in leveraged lease balances, resulting from the sale of MetLife Capital
Holdings, and lower fees received from bond prepayments, calls and tenders. The
reduction in real estate and real estate joint ventures income is primarily
attributable to the timing of sales of investments held by the Company's real
estate joint ventures.
Other revenues, which are primarily comprised of expense reimbursements
from reinsurers and fees related to investment management and administrative
services and securities lending activities, increased by 8% to $2,154 million in
1999 from $1,994 million in 1998. This increase is primarily attributable to
growth of $84 million, or 18%, in Individual Business and $54 million, or 9%, in
Institutional Business. The Individual Business increase is primarily due to a
full year of activity from Nathan & Lewis, which was acquired in April 1998. The
increase in Institutional Business is due to increases in its non-medical health
and retirement and savings businesses, partially offset by a decrease in its
group life business. The Company's non-medical health business increased $61
million primarily due to growth in its dental administrative service business.
The increase in its retirement and savings business of $44 million reflects
higher administrative fees derived from separate accounts and its defined
contribution record-keeping services. The decrease in the group life business of
$51 million is primarily due to lower income in 1999 related to funds used to
seed separate accounts.
The Company's investment gains and losses are net of related policyholder
amounts. The amounts netted against investment gains and losses are (i)
amortization of deferred policy acquisition costs attributable to the increase
or decrease in product gross margins or profits resulting from investment gains
and losses, (ii) future policy benefit loss recognition, and (iii) liabilities
for those participating contracts in which the policyholders' accounts are
increased or decreased by the related investment gains or losses.
Net investment gains (losses) decreased by 103% to $(70) million in 1999
from $2,021 million in 1998. This decrease reflects total gross investment
losses of $(137) million, a decrease of 105%, from total gross investment gains
of $2,629 million in 1998, before the offsets for the amortization of deferred
policy acquisition costs of $46 million and $(240) million, loss recognition of
$0 million and $(272) million and reductions in and (additions to) participating
contracts of $21 million and $(96) million related to assets sold in 1999 and
1998, respectively. A significant portion of the Company's net investment gains
in 1998 is attributable to a sales program initiated in the fourth quarter of
1998, which it conducted as part of its strategy to reposition its investment
portfolio in order to provide a higher operating rate of return on its invested
assets. In connection with this repositioning, the Company reduced its
investments in treasury securities and corporate equities and increased its
investments in fixed maturities with a higher current yield. Net investment
losses in 1999 reflect the continuation of the Company's strategy to reposition
its investment portfolio in order to provide a higher operating rate of return
on its invested assets.
43
45
The Company believes its policy of netting related policyholder amounts
against investment gains and losses provides important information in evaluating
its operating performance. Investment gains and losses are often excluded by
investors when evaluating the overall financial performance of insurers. The
Company believes its presentation enables readers of its consolidated statements
of income to easily exclude investment gains and losses and the related effects
on the consolidated statements of income when evaluating its operating
performance. The Company's presentation of investment gains and losses net of
policyholder amounts may be different from the presentation used by other
insurance companies and, therefore, amounts in its consolidated statements of
income may not be comparable with amounts reported by other insurers.
Policyholder benefits and claims increased by 4% to $13,100 million in 1999
from $12,638 million in 1998. This increase reflected total gross policyholder
benefits and claims of $13,079 million, an increase of $73 million from $13,006
million in 1998, before the offsets for loss recognition of $272 million in 1998
(there were no offsets for loss recognition in 1999) and (reductions in) or
additions to participating contractholder accounts of $(21) million and $96
million directly related to net investment gains and losses for the years ended
December 31, 1999 and 1998, respectively. This increase was primarily
attributable to increases of $296 million, or 5%, in Institutional Business and
$272 million, or 26%, in Auto & Home, partially offset by a decrease of $139
million, or 23%, in International. The Institutional Business increase is
primarily due to overall premium growth within its group dental and disability
businesses. The increase in Auto & Home is primarily due to the St. Paul
acquisition of $195 million, a 6% increase in the number of policies in force
and $23 million of unfavorable claims development due to lower than expected
savings resulting from the implementation of a new technology platform. The
decrease in International is attributable to the sale of a substantial portion
of the Company's Canadian operations.
Interest credited to policyholder account balances decreased by 10% to
$2,441 million in 1999 from $2,711 million in 1998. This decrease is
attributable to reductions of $169 million, or 14%, in Institutional Business,
$64 million, or 4%, in Individual Business, and $37 million, or 42%, in
International. Group insurance in Institutional Business decreased by $63
million, or 14%, primarily due to cancellations in the leveraged corporate-owned
life insurance business attributable to a change in the federal income tax
treatment for those products. In addition, retirement and savings products
declined by $106 million, or 14%, reflecting a shift in policyholders'
investment preferences from guaranteed interest products to separate account
alternatives. The decrease in Individual Business is the result of a 1998
annuity reinsurance transaction, as well as a shift in policyholders'
preferences to separate account alternatives. The International decrease is due
to the sale of a substantial portion of the Company's Canadian operations.
Policyholder dividends increased by 2% to $1,690 million in 1999 from
$1,651 million in 1998. This increase is attributable to increases of $64
million, or 4%, in Individual Business and $17 million, or 12%, in Institutional
Business, which are somewhat offset by a $42 million, or 66%, decrease in
International. The increase in Individual Business is primarily due to growth in
cash values of policies associated with the Company's large block of traditional
life insurance business combined with a dividend scale increase on certain
mature policies in 1999. Policyholder dividends within Institutional Business
vary from period to period based on participating group insurance contract
experience. The International decrease is due to the sale of a substantial
portion of the Company's Canadian operations.
Demutualization costs are $260 million and $6 million for the years ended
December 31, 1999 and 1998, respectively. These costs related to Metropolitan
Life's demutualization efforts.
Other expenses decreased by 16% to $6,755 million in 1999 from $8,019
million in 1998. This decrease reflects total gross other expenses of $6,709
million, a decrease of 19%, from $8,259 million in 1998, before the offset for
amortization of deferred policy acquisition costs directly attributable to net
investment gains and losses of $(46) million and $240 million for the years
ended December 31, 1999 and 1998, respectively. Excluding the effect of the pay
down of debt with proceeds from the sale of MetLife Capital Holdings, Inc. in
1998, other expenses decreased by $1,372 million. This decrease is attributable
to a $1,570 million, or 60%, decrease in Corporate. The decrease in Corporate is
primarily due to a $1,895 million charge in 1998 for sales practices claims and
claims for personal injuries caused by exposure to
44
46
asbestos or asbestos-containing products, compared with a $499 million charge in
1999. The 1999 charge is principally related to the settlement of a
multidistrict litigation proceeding involving alleged improper sale practices,
accruals for sales practices claims not covered by the settlement and other
legal costs. The 1998 charge of $1,895 million is comprised of $925 million and
$970 million for sales practices claims and asbestos-related claims,
respectively. The Company recorded the accrual for sales practices claims based
on preliminary settlement discussions and the settlement history of other
insurers.
Prior to the fourth quarter of 1998, the Company established a liability
for asbestos-related claims based on settlement costs for claims that it had
settled, estimates of settlement costs for claims pending against it and an
estimate of settlement costs for unasserted claims. The amount for unasserted
claims is based on management's estimate of unasserted claims that would be
probable of assertion. A liability is not established for claims which the
Company believes are only reasonably possible of assertion. Based on this
process, the Company's accrual for asbestos-related claims at December 31, 1997
was $386 million. The Company's potential liabilities for asbestos-related
claims are not easily quantified, due to the nature of the allegations against
it, which are not related to the business of manufacturing, producing,
distributing or selling asbestos or asbestos-containing products, adding to the
uncertainty in the number of claims brought against it.
During 1998, the Company decided to pursue the purchase of insurance to
limit its exposure to asbestos-related claims. In connection with its
negotiations with the casualty insurers to obtain this insurance, the Company
obtained information that caused it to reassess its accruals for
asbestos-related claims. This information included:
- Information from the insurers regarding the asbestos-related claims
experience of other insureds, which indicated that the number of claims
that were probable of assertion against the Company in the future was
significantly greater than it had assumed in its accruals. The number of
claims brought against it is generally a reflection of the number of
asbestos-related claims brought against asbestos defendants generally and
the percentage of those claims in which the Company is included as a
defendant. The information provided to the Company relating to other
insureds indicated that it had been included as defendants for a
significant percentage of total asbestos-related claims and that it may
be included in a larger percentage of claims in the future, because of
greater awareness of asbestos litigation generally by potential
plaintiffs and plaintiffs' lawyers and because of the bankruptcy and
reorganization or the exhaustion of insurance coverage of other asbestos
defendants; and that, although volatile, there was an upward trend in the
number of total claims brought against asbestos defendants.
- Information derived from actuarial calculations the Company made in the
fourth quarter of 1998 in connection with these negotiations, which
helped it to frame, define and quantify this liability. These
calculations were made using, among other things, current information
regarding its claims and settlement experience (which reflected the
Company's decision to resolve an increased number of these claims by
settlement), recent and historic claims and settlement experience of
selected other companies and information obtained from the insurers.
Based on this information, the Company concluded that certain claims that
previously were considered as only reasonably possible of assertion are probable
of assertion, increasing the number of assumed claims to approximately three
times the number assumed in prior periods. As a result of this reassessment, the
Company increased its liability for asbestos-related claims to $1,278 million at
December 31, 1998.
During 1998, the Company paid $1,407 million of premiums for excess of loss
reinsurance and insurance policies and agreements, consisting of $529 million
for the excess of loss reinsurance agreements for sales practices claims and
excess mortality losses and $878 million for the excess insurance policies for
asbestos-related claims. The excess insurance policies for asbestos-related
claims provide for recovery of losses of up to $1,500 million, while the excess
of loss reinsurance policies provide for recovery of sales practices losses of
up to $550 million and for certain mortality losses with a maximum aggregate
limit of $650 million. The Company may recover amounts under the policies
annually, with respect to claims paid during the prior calendar year. The
policies contain self-insured retentions and, with respect to
45
47
asbestos-related claims, annual and per-claim sublimits, for which the Company
believes adequate provision has been made in its consolidated financial
statements. For additional information regarding the nature of these claims, see
"Legal Proceedings" and Note 10 of Notes to Consolidated Financial Statements.
In addition to the decrease in Corporate in 1999, other expenses reflected
a $104 million, or 30%, decrease in International, and increases of $128
million, or 33%, in Auto & Home and $142 million, or 6%, in Individual Business.
The International decrease is primarily due to the sale of a substantial portion
of the Company's Canadian operations. The increase in Auto & Home is primarily
due to the St. Paul acquisition. The increase in Individual Business is
attributable to the net capitalization of deferred acquisition costs, as
discussed below. Excluding the net capitalization of deferred acquisition costs,
other expenses in Individual Business decreased by $71 million, or 2%. This
decrease is primarily attributable to cost reduction initiatives implemented in
1998.
Deferred policy acquisition costs are principally amortized in proportion
to gross margins or gross profits, including investment gains or losses. The
amortization is allocated to investment gains and losses to provide consolidated
statement of income information regarding the impact of investment gains and
losses on the amount of the amortization, and other expenses to provide amounts
related to gross margins or profits originating from transactions other than
investment gains and losses.
Capitalization of deferred policy acquisition costs increased by 13% to
$1,160 million in 1999 from $1,025 million in 1998, while total amortization of
such costs, charged to operations, increased to $884 million in 1999 from $881
million in 1998. Amortization of deferred policy acquisition costs of $930
million and $641 million are allocated to other expenses in 1999 and 1998,
respectively, while the remainder of the amortization in each year is allocated
to investment gains (losses). The increase in amortization of deferred policy
acquisition costs allocated to other expenses is primarily attributable to the
Individual Business segment, which increased to $625 million in 1999 from $386
million in 1998. This increase is the result of its reinsurance of mortality
risk at a cost that is expected to be less than its previously estimated
mortality losses in 1998, as well as refinements in its calculation of estimated
gross margins.
Income tax expense in 1999 is $558 million, or 47% of income before
provision for income taxes compared with $738 million, or 35%, in 1998. The 1999
effective tax rate differs from the corporate tax rate of 35% primarily due to
the impact of surplus tax. Prior to its demutualization, the Company was subject
to surplus tax imposed on mutual life insurance companies under Section 809 of
the Internal Revenue Code. The surplus tax results from the disallowance of a
portion of a mutual life insurance company's policyholder dividends as a
deduction from taxable income.
INDIVIDUAL BUSINESS
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Premiums increased by $384 million, or 9%, to $4,673 million in 2000 from
$4,289 million in 1999. Excluding the impact of the GenAmerica acquisition,
premiums decreased by $72 million, or 2%. Premiums from insurance products
decreased by $82 million, or 2%, to $4,133 million in 2000 from $4,215 million
in 1999. This decrease is primarily due to a decline in sales of traditional
life insurance policies, which reflects a continued shift in policyholders'
preferences from those policies to variable life products. Premiums from annuity
and investment products increased by $10 million, or 14%, to $84 million in 2000
from $74 million in 1999. This increase is largely attributable to increased
sales of supplementary contracts with life contingencies and immediate annuity
products.
Universal life and investment-type product policy fees increased by $333
million, or 38%, to $1,221 million in 2000 from $888 million in 1999. Excluding
the impact of the GenAmerica acquisition, universal life and investment-type
fees increased by $130 million, or 15%. Policy fees from insurance products
increased by $48 million, or 8%, to $619 million in 2000 from $571 million in
1999, primarily due to increased sales of variable life products and continued
growth in separate accounts, reflecting a continued shift in customer
preferences from traditional life products. This increase also reflects the
acceleration of the
46
48
recognition of unearned fees in connection with a product replacement program
related to universal life policies. Policy fees from annuity and investment
products increased by $82 million, or 26%, to $399 million in 2000 from $317
million in 1999, primarily due to continued growth in separate account assets.
Other revenues increased by $280 million, or 50%, to $838 million in 2000
from $558 million in 1999. Excluding the impact of the GenAmerica acquisition,
other revenues increased by $89 million, or 16%. Other revenues for insurance
products increased by $91 million, or 17%, to $612 million in 2000 from $521
million in 1999. This increase is principally attributable to higher commission
and fee income associated with increased sales in the broker/dealer and other
subsidiaries. Other revenues for annuity products remained essentially unchanged
at $35 million in 2000 compared with $37 million in 1999.
Policyholder benefits and claims increased by $429 million, or 9%, to
$5,054 million in 2000 from $4,625 million in 1999. Excluding the impact of the
GenAmerica acquisition, policyholder benefits and claims decreased by $103
million, or 2%. Policyholder benefits and claims for insurance products
decreased by $111 million, or 2%, to $4,339 million in 2000 from $4,450 million
in 1999. This decrease is predominately a result of improved mortality and
morbidity experience. Policyholder benefits and claims for annuity and
investment products increased by $8 million, or 5%, to $183 million in 2000 from
$175 million in 1999, commensurate with the increase in premiums discussed
above.
Interest credited to policyholder account balances increased by $321
million, or 24%, to $1,680 million in 2000 from $1,359 million in 1999.
Excluding the impact of the GenAmerica acquisition, interest credited increased
by $36 million, or 3%. Interest on insurance products increased by $26 million,
or 6%, to $445 million in 2000 from $419 million in 1999, largely due to higher
policyholder account balances. Higher crediting rates caused interest on annuity
and investment products to increase by $10 million, or 1%, to $950 million in
2000 from $940 million in 1999.
Policyholder dividends increased by $233 million, or 15%, to $1,742 million
in 2000 from $1,509 million in 1999. Excluding the impact of the GenAmerica
acquisition, policyholder dividends increased by $33 million, or 2%. This
increase is due to growth in cash values of policies associated with this
segment's large block of traditional life insurance business.
Other expenses increased by $792 million, or 29%, to $3,511 million in 2000
from $2,719 million in 1999. Excluding the capitalization and amortization of
deferred policy acquisition costs, which are discussed below, other expenses
increased by $784 million, or 27%, to $3,660 million in 2000 from $2,876 million
in 1999. Excluding the impact of the GenAmerica acquisition, other expenses
increased by $291 million, or 10%. Other expenses related to insurance products
increased by $182 million, or 8%, to $2,419 million in 2000 from $2,237 million
in 1999. This increase is attributable to a $111 million increase from the
broker/dealer and other subsidiaries commensurate with the increase in other
revenues discussed above. In addition, increased volume in the securities
lending program resulted in a $122 million increase in related rebate expense.
These increases were partially offset by a $51 million reduction in general and
administrative expenses. Other expenses related to annuity and investment
products increased by $109 million, or 17%, to $748 million in 2000 from $639
million in 1999. This increase resulted from a $54 million increase in rebate
expense associated with the Company's securities lending program. The remaining
increase is largely attributable to a $54 million increase in general and
administrative expenses incurred in connection with initiatives focused on
improving service delivery capabilities through investments in technology and
the consolidation of operations.
Deferred policy acquisition costs are principally amortized in proportion
to gross margins or gross profits, including investment gains or losses. The
amortization is allocated to investment gains and losses to provide consolidated
statement of income information regarding the impact of investment gains and
losses on the amount of the amortization, and other expenses to provide amounts
related to gross margins or profits originating from transactions other than
investment gains and losses.
Capitalization of deferred policy acquisition costs increased by $90
million to $872 million in 2000 from $782 million in 1999, while total
amortization of deferred policy acquisition costs, charged to operations,
increased by $49 million to $628 million in 2000 from $579 million in 1999.
Excluding the impact of the
47
49
GenAmerica acquisition, capitalization of deferred policy acquisition costs
decreased by $6 million, or 1%, while total amortization of deferred policy
acquisition costs decreased by $117 million, or 20%. Amortization of deferred
policy acquisition costs of $723 million and $625 million are allocated to other
expenses in 2000 and 1999, respectively, while the remainder of the amortization
in each year is allocated to investment gains and losses. Excluding the impact
of the GenAmerica acquisition, amortization of deferred policy acquisition costs
of $585 million and $625 million are allocated to other expenses in 2000 and
1999, respectively, while the remainder of the amortization in each year is
allocated to investment gains and losses. Amortization of deferred policy
acquisition costs allocated to other expenses related to insurance products
decreased by $128 million to $389 million in 2000 from $517 in 1999. This
decrease is due to refinements in the calculation of estimated gross margins and
profits, as well as the acceleration of the recognition of unearned fees in
connection with the product replacement program discussed above. Amortization of
deferred policy acquisition costs allocated to other expenses related to annuity
and investment products increased by $88 million to $196 million in 2000 from
$108 million in 1999. This increase is primarily due to refinements in the
calculation of estimated gross profits.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Premiums decreased by $34 million, or 1%, to $4,289 million in 1999 from
$4,323 million in 1998. Premiums from insurance products decreased by $16
million to $4,215 million in 1999 from $4,231 million in 1998. This decrease is
primarily due to a decline in sales of traditional life insurance policies,
which reflects a continued shift in policyholders' preferences from those
policies to variable life products. Premiums from annuity and investment
products decreased by $18 million, or 20%, to $74 million in 1999 from $92
million in 1998, primarily due to lower sales of supplementary contracts with
life contingencies. The relatively high level of supplemental contract premiums
in 1998 reflected the initial offering of a payout annuity feature in that year.
Universal life and investment-type product policy fees increased by $71
million, or 9%, to $888 million in 1999 from $817 million in 1998. Policy fees
from insurance products increased by $3 million, or 1%, to $571 million in 1999
from $568 million in 1998. This increase is attributable to a $77 million
increase in separate account contract fees arising from increased sales of
variable life products. This increase is almost entirely offset by reinsurance
treaties entered into during 1998 related to $86 billion of universal life
insurance in-force, which constitutes the majority of the mortality risk on
universal life business written subsequent to January 1, 1983. Policy fees from
annuity and investment products increased by $68 million, or 27%, to $317
million in 1999 from $249 million in 1998, primarily due to the continued growth
in deposits for investment products and stock market appreciation.
Other revenues increased by $84 million, or 18%, to $558 million in 1999
from $474 million in 1998. Other revenues for insurance products increased by
$85 million, or 19%, to $521 million in 1999 from $436 million in 1998. This
increase is primarily attributable to the inclusion of a full year's activity of
Nathan & Lewis, as well as increased commission and fee income associated with
increased sales of non-proprietary products. Other revenues for annuity and
investment products are essentially flat at $37 million in 1999 compared with
$38 million in 1998.
Policyholder benefits and claims increased by $19 million to $4,625 million
in 1999 from $4,606 million in 1998. Policyholder benefits and claims for
insurance products increased by $85 million, or 2%, to $4,450 million in 1999
from $4,365 million in 1998. This increase is primarily due to growth in the
existing block of traditional life policyholder liabilities. Policyholder
benefits and claims for annuity and investment products decreased by $66
million, or 27%, to $175 million in 1999 from $241 million in 1998 consistent
with the decreased premiums discussed above.
Interest credited to policyholder account balances decreased by $64
million, or 4%, to $1,359 million in 1999 from $1,423 million in 1998. Interest
on insurance products decreased by $18 million, or 4%, to $419 million in 1999
from $437 million in 1998. This decrease is primarily due to reduced crediting
rates on universal life products. Interest on annuity and investment products
decreased by $46 million, or 5%, to $940 million in 1999 from $986 million in
1998. This decrease is due to a 1998 reinsurance transaction, a shift in
policyholders' preferences to separate account alternatives and reduced
crediting rates.
48
50
Policyholder dividends increased by $64 million, or 4%, to $1,509 million
in 1999 from $1,445 million in 1998. This increase is due to dividend increases
from growth in cash values of policies associated with this segment's large
block of traditional individual life insurance business, combined with a
dividend scale increase in 1999.
Other expenses increased by $142 million, or 6%, to $2,719 million in 1999
from $2,577 million in 1998. Excluding the net capitalization of deferred policy
acquisition costs, other expenses decreased by $71 million, or 2%, to $2,876
million in 1999 from $2,947 million in 1998. Other expenses related to insurance
products decreased by $152 million, or 6%, to $2,237 million in 1999 from $2,389
million in 1998. This decrease was attributable to expense management
initiatives instituted in 1999 and an adjustment to the allocation of expenses
in 1999 between insurance and annuity products to better match expenses to the
mix of its business. These decreases are partially offset by a $44 million
increase due to the inclusion of a full year's activity of Nathan & Lewis. Other
expenses related to annuity and investment products increased by $81 million, or
15%, to $639 million in 1999 from $558 million in 1998, primarily due to the
adjustment of expenses noted above.
Deferred policy acquisition costs are principally amortized in proportion
to gross margins or gross profits, including investment gains or losses. The
amortization is allocated to investment gains (losses) to provide consolidated
statement of income information regarding the impact of investment gains and
losses on the amount of the amortization, and other expenses to provide amounts
related to gross margins or profits originating from transactions other than
investment gains and losses.
Capitalization of deferred policy acquisition costs increased to $782
million in 1999 from $756 million in 1998 while total amortization of such
costs, charged to operations, decreased to $579 million in 1999 from $626
million in 1998. Amortization of deferred policy acquisition costs of $625
million and $386 million are allocated to other expenses in 1999 and 1998,
respectively, while the remainder of the amortization in each year is allocated
to investment gains and losses. Amortization of deferred policy acquisition
costs allocated to other expenses related to insurance products increased to
$517 million in 1999 from $277 million in 1998 attributable to the reinsurance
transaction discussed above and refinements in the calculation of estimated
gross margins. Amortization of deferred policy acquisition costs allocated to
other expenses related to annuity products remained essentially unchanged at
$108 million in 1999 compared with $109 million in 1998.
INSTITUTIONAL BUSINESS
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Premiums increased by $1,375 million, or 25%, to $6,900 million in 2000
from $5,525 million in 1999. Excluding the impact of the GenAmerica acquisition,
premiums increased by $1,297 million, or 23%, to $6,822 million in 2000 from
$5,525 million in 1999. Group insurance premiums increased by $953 million, or
19%, to $6,048 million in 2000 from $5,095 million in 1999. This increase is
predominately the result of strong sales and continued favorable policyholder
retention in this segment's group life, dental and disability businesses, as
well as $121 million of additional insurance coverages purchased by existing
customers with funds received in the demutualization. In addition, the BMA and
Lincoln National acquisitions contributed $103 million to the variance.
Retirement and savings premiums increased by $344 million, or 80%, to $774
million in 2000 from $430 million in 1999, primarily due to significant premiums
received from existing customers in 2000.
Universal life and investment-type product policy fees increased by $45
million, or 9%, to $547 million in 2000 from $502 million in 1999. Excluding the
impact of the GenAmerica acquisition, universal life and investment-type product
policy fees increased by $6 million, or 1%, to $508 million in 2000 from $502
million in 1999. This increase reflects growth in group universal life products.
Other revenues increased by $44 million, or 7%, to $673 million in 2000
from $629 million in 1999. Excluding the impact of the GenAmerica acquisition,
other revenues increased by $36 million, or 6%, to $665 million in 2000 from
$629 million in 1999. Group insurance other revenues increased by $53 million,
or 18%, to $355 million in 2000 from $302 million in 1999. The primary driver of
this increase was strong sales growth in this segment's dental and disability
administrative services businesses. Retirement and
49
51
savings other revenues decreased by $17 million, or 5%, to $310 million in 2000
from $327 million in 1999, primarily due to a special performance fee received
in 1999.
Policyholder benefits and claims increased by $1,466 million, or 22%, to
$8,178 million in 2000 from $6,712 million in 1999. Excluding the impact of the
GenAmerica acquisition, policyholder benefits and claims increased by $1,366
million, or 20%, to $8,078 million in 2000 from $6,712 million in 1999. Group
life increased by $411 million, or 12%, to $3,941 million in 2000 from $3,530
million in 1999, primarily due to overall growth in the business, commensurate
with the premium variance discussed above. Non-medical health increased by $614
million, or 46%, to $1,941 million in 2000 from $1,327 million in 1999. This
increase is largely attributable to significant growth in this segment's dental
and disability businesses. In addition, the BMA and Lincoln National
acquisitions contributed to the variance. Retirement and savings increased by
$341 million, or 18%, to $2,196 million in 2000 from $1,855 million in 1999
commensurate with the premium variance above.
Interest credited to policyholders increased by $60 million, or 6%, to
$1,090 million in 2000 from $1,030 million in 1999. Excluding the impact of the
GenAmerica acquisition, interest credited to policyholder account balances
increased by $54 million, or 5%, to $1,084 million in 2000 from $1,030 million
in 1999. Group insurance increased by $84 million, or 21%, to $482 million in
2000 from $398 million in 1999. This increase is primarily due to asset growth
in customer account balances and the bank-owned life insurance business, as well
as an increase in the cash values of executive and corporate-owned universal
life plans. Retirement and savings decreased by $30 million, or 5%, to $602
million in 2000 from $632 million in 1999, due to a continued shift in
customers' investment preferences from guaranteed interest products to separate
account alternatives.
Policyholder dividends decreased by $35 million, or 22%, to $124 million in
2000 from $159 million in 1999. Policyholder dividends vary from period to
period based on participating group insurance contract experience.
Other expenses increased by $164 million, or 10%, to $1,753 million in 2000
from $1,589 million in 1999. Excluding the impact of the GenAmerica acquisition,
expenses increased by $126 million, or 8%, to $1,715 million in 2000 from $1,589
million in 1999. Other expenses related to group life increased by $56 million,
or 15%, to $438 million in 2000 from $382 million in 1999. Other expenses
related to group non-medical health increased by $12 million, or 2%, to $685
million in 2000 from $673 million in 1999. Other expenses related to retirement
and savings increased by $58 million, or 11%, to $592 million in 2000 from $534
million in 1999. These increases are primarily due to costs incurred in
connection with initiatives that focused on improving service delivery
capabilities through investments in technology and higher expenses associated
with the Company's securities lending program. In addition, an increase in
volume-related expenses associated with premium growth contributed to the
variance. Volume-related expenses include premium taxes, separate account
investment management expenses and commissions.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Premiums increased by 7% to $5,525 million in 1999 from $5,159 million in
1998. Group insurance premiums increased by $478 million, or 10%, to $5,095
million in 1999 from $4,617 million in 1998. This increase is largely
attributable to strong sales and improved policyholder retention in non-medical
health, primarily the dental and disability businesses. Retirement and savings
premiums decreased by $112 million, or 21%, to $430 million in 1999 from $542
million in 1998, primarily due to premiums received from several large existing
customers in 1998.
Universal life and investment-type product policy fees increased by 6% to
$502 million in 1999 from $475 million in 1998. This increase reflects the
continued growth in the sale of products used in executive-and corporate-owned
benefit plans due to the continued favorable tax status associated with these
products.
Other revenues increased by 9% to $629 million in 1999 from $575 million in
1998. Group life decreased by $51 million, or 77%, to $15 million in 1999 from
$66 million in 1998. This decrease is primarily due to lower income in 1999
relating to funds used to seed separate accounts. Non-medical health increased
by $61 million, or 27%, to $287 million in 1999 from $226 million in 1998. This
increase is
50
52
primarily due to growth in the dental administrative service business.
Retirement and savings increased by $44 million, or 16%, to $327 million in 1999
from $283 million in 1998. This increase reflects higher administrative fees
derived from separate accounts and defined contribution record-keeping services.
In addition, the 1999 results reflect interest on funds held on deposit relating
to a reinsurance transaction entered into during December 1998.
Policyholder benefits and claims increased by 5% to $6,712 million in 1999
from $6,416 million in 1998. Group insurance increased by $362 million, or 8%,
to $4,857 million in 1999 from $4,495 million in 1998. This increase is
primarily due to overall growth and is comparable to the growth in premiums
discussed above. Retirement and savings decreased by $66 million, or 3%, to
$1,855 million in 1999 from $1,921 million in 1998. The decrease is commensurate
with the premium variance discussed above, partially offset by an increase in
liabilities associated with the continued accumulation of interest on
liabilities relating to this segment's large block of non-participating annuity
business.
Interest credited to policyholder account balances decreased by 14% to
$1,030 million in 1999 from $1,199 million in 1998. Group insurance decreased by
$63 million, or 14%, to $398 million in 1999 from $461 million in 1998. This
decrease is primarily due to cancellations in the leveraged corporate-owned life
insurance business attributable to a change in the federal income tax treatment
for these products. Retirement and savings decreased by $106 million, or 14%, to
$632 million in 1999 from $738 million in 1998 due to a shift in customers'
investment preferences from guaranteed interest products to separate account
alternatives and the continuation of the low interest rate environment.
Policyholder dividends increased by 12% to $159 million in 1999 from $142
million in 1998. Non-medical health increased by $26 million to $27 million in
1999. Group life and retirement and savings decreased $9 million, or 6%, to $132
million in 1999 from $141 million in 1998. Policyholder dividends vary from
period to period based on participating group insurance contract experience.
Other expenses decreased by 1% to $1,589 million in 1999 from $1,613
million in 1998. Other expenses related to group life decreased by $14 million,
or 4%, to $382 million in 1999 from $396 million in 1998. Other expenses related
to non-medical health decreased by $18 million, or 3%, to $673 million in 1999
from $691 million in 1998. These decreases are primarily attributable to
reductions in non-sales positions and the achievement of operational
efficiencies. Other expenses related to retirement and savings products
increased by $8 million, or 2%, to $534 million in 1999 from $526 million in
1998. This increase is due to higher interest expense of $47 million primarily
due to commercial paper issued in connection with amounts placed on deposit
related to a 1998 reinsurance transaction and a $15 million increase in volume-
related expenses, including premium taxes, separate account investment
management expenses and commissions. These increases are partially offset by a
$54 million decrease due to reductions in non-sales positions and other
administrative expenses.
REINSURANCE
YEAR ENDED DECEMBER 31, 2000
As a result of the acquisition of GenAmerica, MetLife beneficially owns
approximately 59% of RGA. MetLife's Reinsurance segment is comprised of the life
reinsurance business of RGA, and MetLife's ancillary life reinsurance business.
The ancillary life reinsurance business was an immaterial component of MetLife's
Individual Business segment for periods prior to January 1, 2000.
Revenues were $1,856 million for the year ended December 31, 2000.
Reinsurance revenues are primarily derived from renewal premiums from existing
reinsurance treaties, new business premiums from existing or new reinsurance
treaties and income earned on invested assets. Premium levels are significantly
influenced by large transactions and reporting practices of ceding companies
and, as a result, can fluctuate from period to period.
Expenses were $1,672 million for the year ended December 31, 2000. Policy
benefits and claims were 75.6% of premiums for the year ended December 31, 2000,
which is consistent with management's expectations. Underwriting, acquisition
and insurance expenses, which are included in other expenses, were 22.3% of
premiums for the year ended December 31, 2000. This percentage fluctuates
depending on
51
53
the mix of the underlying insurance products being reinsured. Interest credited
to policyholder account balances are related to amounts credited on RGA's
deposit-type contracts and cash value products, which have a significant
mortality component. This amount fluctuates with the changes in cash values and
changes in interest crediting rates.
Minority interest, which represents third-party ownership interests in RGA,
was $67 million for the year ended December 31, 2000.
AUTO & HOME
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Premiums increased by $885 million, or 51%, to $2,636 million in 2000 from
$1,751 million in 1999, primarily due to the St. Paul acquisition in 1999.
Excluding the impact of the St. Paul acquisition, premiums increased by $130
million, or 9%. Auto premiums increased by $95 million, or 8%, to $1,313 million
in 2000 from $1,218 million in 1999. This increase is primarily due to growth in
the standard auto insurance book of business, which was attributable to
increased new business production resulting from an increase in independent
agents in this segment's sales force and improved retention in the existing
business. Policyholder retention in the standard auto business increased by 1%
to 89%. Homeowner premiums increased by $27 million, or 11%, to $282 million in
2000 from $255 million in 1999 due to higher new business production as a result
of a larger sales force and an increase in policyholder retention of 2% to 91%
in 2000 from 89% in 1999. Premiums from other personal lines increased by 44% to
$26 million in 2000 from $18 million in 1999.
Other revenues increased by $19 million, or 90%, to $40 million in 2000
from $21 million in 1999, primarily due to a revision of an estimate of amounts
recoverable from reinsurers related to the disposition of this segment's
reinsurance business in 1990.
Expenses increased by $1,017 million, or 56%, to $2,832 million in 2000
from $1,815 million in 1999. Excluding the impact of the St. Paul acquisition,
expenses increased by $152 million, or 10%, which resulted in an increase in the
combined ratio to 103.9% in 2000 from 102.8% in 1999. As discussed below, higher
overall loss costs, predominately in the homeowners line, is the primary cause
of this increase.
Policyholder benefits and claims increased by $704 million, or 54%, to
$2,005 million in 2000 from $1,301 million in 1999. Automobile policyholder
benefits and claims increased by $438 million, or 42%, to $1,490 million in 2000
from $1,052 million in 1999. Homeowner policyholder benefits and claims
increased by $260 million, or 112%, to $493 million in 2000 from $233 million in
1999. Other policyholder benefits and claims increased by $6 million, or 38%, to
$22 million in 2000 from $16 million in 1999. Correspondingly, the auto loss
ratio increased to 76.6% in 2000 from 76.1% in 1999 and the homeowners loss
ratio increased to 76.4% from 67.2% in 1999. The increase in the homeowners loss
ratio is primarily due to higher catastrophe losses and expenses, predominantly
in the St. Paul book of business. Catastrophes, including multiple storms and
the Los Alamos fire, resulted in an increase in the catastrophe loss ratio to
17.3% in 2000 from 6.3% in 1999.
Excluding the impact of the St. Paul acquisition, policyholder benefits and
claims increased by $124 million, or 11%. Auto policyholder benefits and claims
increased by $102 million, or 11%, to $1,041 million in 2000 from $939 million
in 1999. This is largely attributable to a 9% increase in the number of policies
in force and increased costs resulting from an increase in the use of original
equipment manufacturer parts and higher labor rates. The auto loss ratio
increased to 79.3% in 2000 from 77.1% in 1999. Homeowners benefits and claims
increased by $23 million, or 14%, to $186 million in 2000 from $163 million in
1999, primarily due to the increased volume of this book of business and
increased catastrophe experience as discussed above. The homeowners loss ratio
increased by 1.6% to 66.0% in 2000 from 64.4% in 1999. Other personal lines
benefits and claims decreased by $1 million to $11 million in 2000 from $12
million in 1999.
Other expenses increased by $313 million, or 61%, to $827 million in 2000
from $514 million in 1999, which resulted in an increase in the expense ratio to
31.4% in 2000 from 29.3% in 1999. A portion of the
52
54
increase in expenses from 1999 to 2000 is associated with the costs incurred in
connection with the integration of the St. Paul business acquired.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Premiums increased by 25% to $1,751 million in 1999 from $1,403 million in
1998 primarily due to the St. Paul acquisition in 1999. Excluding the impact of
the St. Paul acquisition, premiums increased by $88 million, or 6%. Auto
premiums increased by $54 million, or 5%, to $1,218 million in 1999 from $1,164
million in 1998. This increase is due to growth in both the standard and
non-standard auto insurance books of business. "Non-standard" auto insurance is
insurance for risks bearing higher loss experience or loss potential than risks
covered by standard auto insurance policies. In addition, the standard auto
policyholder retention increased 1% to 88%. Homeowner premiums increased by $30
million, or 13%, to $255 million in 1999 from $225 million in 1998 due to higher
new business production, an average premium increase of 1%, and increased
policyholder retention to 90% in 1999 from 89% in 1998. Premiums from other
personal lines increased to $18 million in 1999 from $14 million in 1998.
Other revenues decreased by 42% to $21 million in 1999 from $36 million in
1998. This decrease is primarily attributable to a decrease in payments
resulting from experience-related adjustments under a reinsurance agreement
related to the disposition of this segment's reinsurance business in 1990.
Expenses increased by 28% to $1,815 million in 1999 from $1,415 million in
1998. This resulted in an increase in the combined ratio to 103.7% in 1999 from
100.8% in 1998. Excluding the impact of the St. Paul acquisition, expenses
increased by $116 million, or 8%, which resulted in an increase in the combined
ratio to 102.8% in 1999 from 100.8% in 1998. This increase is primarily due to
higher overall loss costs in the auto and homeowners lines as discussed below.
In addition, both lines experienced modestly elevated acquisition expenses due
to increased levels of new business premiums.
Policyholder benefits and claims increased by 26% to $1,301 million in 1999
from $1,029 million in 1998. Correspondingly, the auto and homeowners loss
ratios increased to 76.1% from 74.9% and to 67.2% from 65.0% in 1999 and 1998,
respectively. Excluding the impact of the St. Paul acquisition, policyholder
benefits and claims increased by $85 million, or 8%. Auto policyholder benefits
and claims increased by $67 million, or 8%, to $939 million in 1999 from $872
million in 1998, due to a 6% increase in the number of policies in-force and $23
million of unfavorable claims development due to lower than expected savings
resulting from the implementation of a new technology platform. Correspondingly,
the auto loss ratio increased to 77.1% in 1999 from 74.9% in 1998. Homeowners
benefits and claims increased by $17 million, or 12%, to $163 million in 1999
from $146 million in 1998 due to increased volume of this book of business. The
homeowners loss ratio decreased by 0.6% to 64.4% in 1999 from 65.0% in 1998.
Other personal lines benefits and claims increased by $1 million to $12 million
in 1999 from $11 million in 1998.
Other expenses increased by 33% to $514 million in 1999 from $386 million
in 1998, which resulted in an increase in the expense ratio to 29.3% in 1999
from 27.4% in 1998. Excluding the impact of the St. Paul acquisition, operating
expenses increased by $31 million, or 8%, resulting in an increase in the
expense ratio to 27.9% in 1999 from 27.4% in 1998. This increase is primarily
due to $10 million in additional administration expenses and $23 million in new
business acquisition expenses, which are partially offset by a reduction in
employee-related expenses.
ASSET MANAGEMENT
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Other revenues, which are primarily comprised of management and advisory
fees, decreased by $43 million, or 5%, to $760 million in 2000 from $803 million
in 1999. The most significant factor contributing to this decline is a $131
million decrease resulting primarily from the sale of Nvest, which occurred on
October 30, 2000. This reduction is partially offset by a $79 million increase
related to the acquisition of Conning, a component of the GenAmerica
acquisition. Excluding the impact of these transactions, other
53
55
revenues increased by $9 million, or 6%, to $159 million in 2000 from $150
million in 1999. This is attributable to an increase in average assets under
management during the year and a change in asset mix. Despite a $1 billion, or
2%, decrease in assets under management from $57 billion as of December 31, 1999
to $56 billion at December 31, 2000, average assets under management exceed
those for the same period in 1999. The decline occurred during the fourth
quarter as a result of a market downturn. Management and advisory fees are
typically calculated based on a percentage of assets under management, and are
not necessarily proportionate to average assets managed due to changes in
account mix.
Other expenses increased by $8 million, or 1%, to $749 million in 2000 from
$741 million in 1999. The sale of Nvest reduced other expenses by $92 million
and the acquisition of Conning increased other expenses by $90 million.
Excluding the impact of these transactions, other expenses increased by $10
million, or 5%, to $202 million in 2000 from $192 million in 1999. Approximately
half of the variance is attributable to an increase in total compensation and
benefits. This expense totaled $103 million for the year 2000 and is comprised
of approximately 59% base compensation and 41% variable compensation. Base
compensation increased by $2 million, or 3%, to $61 million in 2000 from $59
million in 1999, primarily due to annual salary increases and higher staffing
levels. Variable compensation increased by $3 million, or 8%, to $42 million in
2000 from $39 million in 1999. Variable incentive payments are based upon
profitability, investment portfolio performance, new business sales and growth
in revenues and profits. The variable compensation plans reward the employees
for growth in their businesses, but also require them to share in the impact of
any declines. General administrative expenses increased by $5 million, or 5%, to
$99 million in 2000 from $94 million in 1999. This increase is primarily due to
increased mutual fund expense subsidies, distribution costs and system
enhancements.
Minority interest, reflecting third-party ownership interest in Nvest,
decreased by $19 million, or 35%, to $35 million in 2000 from $54 million in
1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Other revenues, which are primarily comprised of management and advisory
fees, decreased by $14 million, or 2%, to $803 million in 1999 from $817 million
in 1998, reflecting an overall decrease in assets under management of $1
billion, or 1%, to $190 billion at December 31, 1999 from $191 billion at
December 31, 1998. This decrease in assets is primarily attributable to a
reduction in assets under management in value-style products. Management and
advisory fees are typically calculated based on a percentage of assets under
management, and are not necessarily proportionate to average assets managed due
to changes in account mix.
Other expenses are essentially unchanged in 1999 from 1998. Total
compensation and benefits of $424 million consisted of approximately 53% base
compensation and 47% variable compensation. Base compensation increased by $10
million, or 5%, to $225 million in 1999 from $215 million in 1998, primarily due
to annual salary increases and higher staffing levels. Variable compensation
decreased by $15 million, or 7%, to $199 million in 1999 from $214 million in
1998. Variable incentive payments are based upon profitability, investment
portfolio performance, new business sales and growth in revenues and profits.
The variable compensation plans reward the employees for growth in their
businesses, but also require them to share in the impact of any declines. In
addition, general and administrative expenses increased by $6 million, or 2%, to
$317 million in 1999 from $311 million in 1998, primarily due to increased
discretionary spending.
Minority interest, reflecting third-party ownership interests in Nvest,
decreased by $5 million, or 9%, to $54 million in 1999 from $59 million in 1998.
INTERNATIONAL
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Premiums increased by $137 million, or 26%, to $660 million in 2000 from
$523 million in 1999. Mexico's premiums increased by $45 million, primarily due
to new business growth in the group life and
54
56
major medical products. South Korea's increase in premiums of $29 million is
mainly attributable to the establishment of a new professional agency force
resulting in higher productivity levels and an improvement in the individual
life business' persistency. The majority of Taiwan's premium increase of $28
million is due to overall growth in the individual life business. Increased
sales from the direct auto business is the principal driver behind Spain's
premium increase of $18 million. Brazil's premiums increased by $14 million
resulting predominately from business expansion. Brazil began selling business
late in the second quarter of 1999 and acquired two large blocks of business in
the beginning of 2000. The remainder of the increase is due to minor increases
in several other countries.
Universal life and investment-type product policy fees increased by $10
million, or 22%, to $53 million in 2000 from $43 million in 1999, primarily due
to expanded business operations in both Argentina and Spain.
Other revenues decreased by $3 million to $9 million in 2000 from $12
million in 1999. This decrease is attributable to variances in several
countries.
Policyholder benefits and claims increased by $104 million, or 23%, to $562
million in 2000 from $458 million in 1999. Mexico, Taiwan, South Korea and
Brazil's policyholder benefits and claims increased by $35 million, $32 million,
$14 million and $8 million, respectively, commensurate with the overall premium
growth discussed above. Spain's policyholder benefits and claims increased by
$11 million, primarily due to increases in auto claims. This is consistent with
the premium growth discussed above. The remainder of the increase is primarily
due to expanded business operations in several other countries.
Interest credited to policyholder account balances increased by $4 million,
or 8%, to $56 million in 2000 from $52 million in 1999 as a result of growth in
policyholder account balances in Argentina and Mexico.
Policyholder dividends increased by $10 million, or 47%, to $32 million in
2000 from $22 million in 1999. This increase is largely attributable to growth
in Mexico's participating group business and is in line with the increase in
premiums discussed above.
Payments of $327 million related to Metropolitan Life's demutualization
were made during the second quarter of 2000 to holders of certain policies
transferred to Clarica Life Insurance Company in connection with the sale of a
substantial portion of the Company's Canadian operations in 1998.
Other expenses increased by $44 million, or 18%, to $292 million in 2000
from $248 million in 1999. This increase is partially attributable to business
expansion initiatives in Brazil and Uruguay and the establishment of operations
in Poland, the Philippines, and India in 2000. The remaining increase in other
expenses is commensurate with the overall growth discussed above.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Premiums decreased by 15% to $523 million in 1999 from $618 million in
1998, primarily due to the disposition of a substantial portion of the Company's
Canadian operations. Excluding the impact of this sale, premiums increased by
$109 million, or 26%, to $523 million in 1999 from $414 million in 1998.
Argentina's premiums increased by $11 million, primarily due to expanded
business operations. South Korea's and Taiwan's premiums increased by $24
million and $39 million, respectively, due to improved economic environments.
Spain's premiums increased by $24 million primarily due to increased sales
through the Company's joint venture partnership.
Universal life and investment-type product policy fees decreased by 37% to
$43 million in 1999 from $68 million in 1998. Excluding the impact of the
Canadian divestiture, universal life and investment-type product policy fees
were essentially unchanged at $43 million in 1999 compared with $46 million in
1998.
Other revenues decreased by 64% to $12 million in 1999 from $33 million in
1998. Excluding the impact of the Canadian divestiture, other revenues increased
slightly to $12 million in 1999 from $10 million in 1998.
55
57
Policyholder benefits and claims decreased by 23% to $458 million in 1999
from $597 million in 1998. Excluding the impact of the Canadian divestiture,
policyholder benefits and claims increased by $101 million, or 28%, to $458
million in 1999 from $357 million in 1998. This increase is commensurate with
the aforementioned increase in premiums.
Interest credited to policyholder account balances decreased by 42% to $52
million in 1999 from $89 million in 1998. Excluding the impact of the Canadian
divestiture, interest credited to policyholder account balances increased by $1
million, or 2%, to $52 million in 1999 from $51 million in 1998 in line with
increased account balances.
Policyholder dividends decreased by 66% to $22 million in 1999 from $64
million in 1998. Excluding the impact of the Canadian divestiture, policyholder
dividends decreased $1 million, or 5%, to $22 million in 1999 from $21 million
in 1998, primarily due to less favorable experience on participating policies in
Spain.
Other expenses decreased by 30% to $248 million in 1999 from $352 million
in 1998. Excluding the impact of the Canadian divestiture, other expenses
decreased by $7 million, or 3%, to $248 million in 1999 from $255 million in
1998. This decrease is primarily attributable to ongoing cost reduction
initiatives.
CORPORATE
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Total revenues for the Corporate segment, which consist of net investment
income, other revenues, and net investment losses that are not allocated to
other business segments, decreased by $40 million, or 6%, to $583 million in
2000 from $623 million in 1999. Excluding the impact of the GenAmerica
acquisition, total revenues decreased by $169 million, or 27%. This decrease is
primarily due to a $179 million increase in net investment losses. These losses
reflect the continuation of the Company's strategy to reposition its investment
portfolio to provide a higher operating return on its invested assets. Total
Corporate expenses decreased by $290 million, or 22%, to $1,001 million in 2000
from $1,291 million in 1999. Excluding the impact of the GenAmerica acquisition,
total expenses decreased by $426 million, or 33%. During 1999, the Company
reported a $499 million charge principally related to the settlement of a
multidistrict litigation proceeding involving alleged improper sales practices,
accruals for sales practices claims not covered by the settlement and other
legal costs.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Total revenues for the Corporate segment, which consist of net investment
income and realized investment gains and losses that are not allocated to other
business segments, were $623 million in 1999, a decrease of $849 million, or
58%, from $1,472 million in 1998, primarily due to a reduction in investment
gains and investment income of $722 million due to the sale of MetLife Capital
Holdings in 1998. Total Corporate expenses were $1,291 million in 1999, a
decrease of $1,306 million, or 50%, from $2,597 million in 1998. This decrease
is primarily due to a $1,895 million charge in 1998 for sales practices claims
and claims for personal injuries caused by exposure to asbestos or
asbestos-containing products, as well as the elimination of $270 million of
expenses due to the sale of MetLife Capital Holdings. These decreases are
partially offset by a $499 million charge in 1999 principally related to the
settlement of a multidistrict litigation proceeding involving alleged improper
sales practices, accruals for sales practices claims not covered by the
settlement and other legal costs, as well as a $254 million increase in
demutualization costs.
LIQUIDITY AND CAPITAL RESOURCES
THE HOLDING COMPANY
The primary uses of liquidity of the Holding Company include the payment of
Common Stock dividends, interest payments on debentures issued to MetLife
Capital Trust I and other debt servicing, contributions to subsidiaries, and
payment of general operating expenses. The primary source of the Holding
Company's liquidity is dividends it receives from Metropolitan Life and the
interest received from
56
58
Metropolitan Life under the capital note described in Note 9 of Notes to
Consolidated Financial Statements. The Holding Company's ability, on a
continuing basis, to meet its cash needs depends primarily on the receipt of
dividends and the interest on the capital note from Metropolitan Life.
Under the New York Insurance Law, Metropolitan Life is permitted without
prior insurance regulatory clearance to pay a stockholder dividend to the
Holding Company as long as the aggregate amount of all such dividends in any
calendar year does not exceed the lesser of (i) 10% of its surplus to
policyholders as of the immediately preceding calendar year and (ii) its net
gain from operations for the immediately preceding calendar year (excluding
realized capital gains). Metropolitan Life will be permitted to pay a
stockholder dividend to the Holding Company in excess of the lesser of such two
amounts only if it files notice of its intention to declare such a dividend and
the amount thereof with the New York Superintendent of Insurance (the
"Superintendent") and the Superintendent does not disapprove the distribution.
Under the New York Insurance Law, the Superintendent has broad discretion in
determining whether the financial condition of a stock life insurance company
would support the payment of such dividends to its stockholders. The New York
Insurance Department has established informal guidelines for such
determinations. The guidelines, among other things, focus on the insurer's
overall financial condition and profitability under statutory accounting
practices. Management of the Company cannot provide assurance that Metropolitan
Life will have statutory earnings to support payment of dividends to the Holding
Company in an amount sufficient to fund its cash requirements and pay cash
dividends or that the Superintendent will not disapprove any dividends that
Metropolitan Life must submit for the Superintendent's consideration. MetLife's
other insurance subsidiaries are also subject to restrictions on the payment of
dividends to their respective parent companies.
The dividend limitation is based on statutory financial results. Statutory
accounting practices differ in certain respects from accounting principles used
in financial statements prepared in conformity with GAAP. The significant
differences relate to deferred policy acquisition costs, deferred income taxes,
required investment reserves, reserve calculation assumptions, capital notes and
surplus notes.
In connection with the contribution of the net proceeds from the initial
public offering, the private placements and the offering of equity security
units, Metropolitan Life issued to the Holding Company a $1,006 8.00%
mandatorily convertible capital note due 2005.
The Superintendent approved the issuance of the capital note on April 4,
2000. If the payment of interest is prevented by application of the payment
restrictions described in Note 9 in Notes to Consolidated Financial Statements,
the interest on the capital note will not be available as a source of liquidity
for the Holding Company.
Based on the historic cash flows and the current financial results of
Metropolitan Life, subject to any dividend limitations which may be imposed upon
Metropolitan Life or its subsidiaries by regulatory authorities, management
believes that cash flows from operating activities, together with the dividends
it is permitted to pay without prior insurance regulatory clearance and the
interest received on the capital note from Metropolitan Life, will be sufficient
to enable the Holding Company to make dividend payments on its Common Stock, to
pay all operating expenses, make payments on the debentures issued to MetLife
Capital Trust I and meet its other obligations.
THE COMPANY
LIQUIDITY SOURCES. The Company's principal cash inflows from its insurance
activities come from life insurance premiums, annuity considerations and deposit
funds. A primary liquidity concern with respect to these cash inflows is the
risk of early contract holder and policyholder withdrawal. The Company seeks to
include provisions limiting withdrawal rights from general account institutional
pension products (generally group annuities, including guaranteed interest
contracts and certain deposit fund liabilities) sold to employee benefit plan
sponsors.
The Company's principal cash inflows from its investment activities result
from repayments of principal and proceeds from maturities and sales of invested
assets, investment income, as well as dividends and
57
59
distributions from subsidiaries. The primary liquidity concerns with respect to
these cash inflows are the risks of default by debtors, interest rate and other
market volatilities and potential illiquidity of subsidiaries. The Company
closely monitors and manages these risks.
Additional sources of liquidity to meet unexpected cash outflows are
available from the Company's portfolio of liquid assets. These liquid assets
include substantial holdings of U.S. treasury securities, short-term
investments, common stocks and marketable fixed maturity securities. The
Company's available portfolio of liquid assets was approximately $101 billion
and $88 billion at December 31, 2000 and December 31, 1999, respectively.
Sources of liquidity also include facilities for short- and long-term
borrowing as needed, primarily arranged through MetLife Funding, Inc., a
subsidiary of Metropolitan Life. See "-- Financing" below.
LIQUIDITY USES. The Company's principal cash outflows primarily relate to
the liabilities associated with its various life insurance, annuity and group
pension products, operating expenses, income taxes, contributions to
subsidiaries, as well as principal and interest on its outstanding debt
obligations. Liabilities arising from its insurance activities primarily relate
to benefit payments under the above-named products, as well as payments for
policy surrenders, withdrawals and loans.
The Company's management believes that its sources of liquidity are more
than adequate to meet its current cash requirements.
LITIGATION. Various litigation claims and assessments against the Company
have arisen in the course of the Company's business, including, but not limited
to, in connection with its activities as an insurer, employer, investor,
investment advisor and taxpayer. Further, state insurance regulatory authorities
and other Federal and state authorities regularly make inquiries and conduct
investigations concerning the Company's compliance with applicable insurance and
other laws and regulations.
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses. In some of the matters referred to above, very large and/or
indeterminate amounts, including punitive and treble damages, are sought. 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 a material adverse effect on the Company's consolidated financial position.
However, given the large and/or indeterminate amounts sought in certain of these
matters and the inherent unpredictability of litigation, it is possible that an
adverse outcome in certain matters could, from time to time, have a material
adverse effect on the Company's operating results or cash flows in particular
quarterly or annual periods. See Note 10 of Notes to Consolidated Financial
Statements and "Legal Proceedings."
RISK-BASED CAPITAL. Section 1322 of the New York Insurance Law requires
that New York domestic life insurers report their RBC based on a formula
calculated by applying factors to various asset, premium and statutory reserve
items. The formula takes into account the risk characteristics of the insurer,
including asset risk, insurance risk, interest rate risk and business risk.
Section 1322 gives the Superintendent explicit regulatory authority to require
various actions by, or take various actions against, insurers whose total
adjusted capital does not exceed certain RBC levels. At December 31, 2000,
Metropolitan Life's and each of its U.S. insurance subsidiaries' total adjusted
capital was in excess of each of the RBC levels required by each state of
domicile.
In March 1998, the NAIC adopted the Codification. The Codification, which
is intended to standardize regulatory accounting and reporting to state
insurance departments, became effective January 1, 2001. However, statutory
accounting principles will continue to be established by individual state laws
and permitted practices. The New York Insurance Department requires adoption of
the Codification, with certain modifications, for the preparation of statutory
financial statements effective January 1, 2001. The Company believes that the
adoption, effective January 1, 2001, of the Codification by the NAIC and the
Codification as modified by the New York Insurance Department, as currently
interpreted, will not adversely affect statutory capital and surplus.
58
60
FINANCING. MetLife Funding, Inc. serves as a centralized finance unit for
the Company. 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
December 31, 2000 and 1999, MetLife Funding had a tangible net worth of $10.3
million and $10.5 million, respectively. MetLife Funding raises funds from
various funding sources and uses the proceeds to extend loans to the Holding
Company, Metropolitan Life and other affiliates. MetLife Funding manages its
funding sources to enhance the financial flexibility and liquidity of MetLife.
At December 31, 2000 and 1999, MetLife Funding had total outstanding liabilities
of $1.1 billion and $4.2 billion, respectively, consisting primarily of
commercial paper.
In connection with the Company's acquisition of the stock of GenAmerica,
the Company incurred $900 million of short-term debt, consisting primarily of
commercial paper. In April 2000, the debt was repaid with proceeds from the
offerings of Common Stock and equity security units and the private placements
of Common Stock. The Company also incurred approximately $3.2 billion of
short-term debt, consisting primarily of commercial paper, in connection with
its October 1, 1999 exchange offer to holders of General American funding
agreements. This debt was repaid during 2000.
The Company also maintained approximately $2 billion in committed credit
facilities at December 31, 2000, as compared with $7 billion ($5 billion of
which served as back-up for the commercial paper incurred in connection with the
exchange offer to holders of General American funding agreements) at December
31, 1999. These credit facilities were not utilized during 2000 or 1999.
SUPPORT AGREEMENTS. In addition to its support agreement with MetLife
Funding described above, Metropolitan Life has entered into a net worth
maintenance agreement with New England, whereby it is obligated to maintain New
England's statutory capital and surplus at the greater of $10 million or the
amount necessary to prevent certain regulatory action by Massachusetts, the
state of domicile of this subsidiary. The capital and surplus of New England's
at December 31, 2000 was in excess of the amount that would trigger such an
event.
In connection with the Company's acquisition of GenAmerica, Metropolitan
Life entered into a net worth maintenance agreement with General American,
whereby Metropolitan Life is obligated to maintain General American's statutory
capital and surplus at the greater of $10 million or the amount necessary to
maintain the capital and surplus of General American at a level not less than
180% of the NAIC Risk Based Capitalization Model. The capital and surplus of
General American at December 31, 2000 was in excess of the required amount after
giving effect to its receipt of $300 million through a series of affiliated
capital transactions.
Metropolitan Life has also entered into arrangements with some of its other
subsidiaries and affiliates to assist such subsidiaries and affiliates in
meeting various jurisdictions' regulatory requirements regarding capital and
surplus. In addition, Metropolitan Life has entered into a support arrangement
with respect to reinsurance obligations of its wholly-owned subsidiary,
Metropolitan Insurance and Annuity Company. Management does not anticipate that
these arrangements will place any significant demands upon the Company's
liquidity resources.
CONSOLIDATED CASH FLOWS. Net cash provided by operating activities was
$1,326 million, $3,865 million and $842 million for the years ended December 31,
2000, 1999 and 1998, respectively. In 2000, the decrease in cash provided by
operating activities was primarily the result of the timing in the settlement in
receivables and payables. In 1999, the change in cash provided by operating
activities was largely due to strong growth in the Institutional Business and
Auto & Home segments. The growth in the Institutional Business segment is
largely attributable to strong sales and improved policyholder retention in
non-medical health, predominately in the dental and disability businesses. The
growth in Auto & Home is primarily due to the acquisition of the standard
personal lines property and casualty insurance operations of The St. Paul
Companies, as well as growth in both the standard and non-standard auto
insurance businesses. Net cash provided by operating activities in 2000, 1999
and 1998 was more than adequate to meet liquidity requirements.
59
61
Net cash provided by (used in) investing activities was $83 million,
$(2,389) million and $2,683 million for the years ended December 31, 2000, 1999
and 1998, respectively. Purchases of investments exceeded sales, maturities and
repayments by $7,313 million, $461 million and $7,647 million in 2000, 1999 and
1998, respectively. In 2000, the increase in net purchases of investments
resulted from increased volume in the Company's securities lending program as
well as the reinvestment of the proceeds from the sale of Nvest on October 30,
2000. In 1999, the significant decrease in net purchases of investments resulted
from a decrease in the reinvestment of sales proceeds as a result of the funding
agreement exchange offer in connection with the GenAmerica acquisition, as well
as the purchase of the individual disability income business of Lincoln National
Insurance Company. Cash flows from investing activities increased by $5,840
million, $2,692 million and $3,769 million in 2000, 1999, and 1998,
respectively, as a result of increased volume in the securities lending program.
Net cash used in financing activities was $764 million, $1,988 million and
$3,135 million for the years ended December 31, 2000, 1999 and 1998,
respectively. In 2000, the primary sources of cash from financing activities
include cash proceeds from the Company's initial public offering and concurrent
private placements in April 2000, as well as the issuance of mandatorily
convertible securities in connection with the formation of MetLife Capital Trust
I. The primary uses of cash in financing activities include cash payments to
eligible policyholders in connection with the demutualization, the acquisition
of treasury stock, Common Stock dividends, and the pay-down of short-term debt.
Deposits to policyholders' account balances exceeded withdrawals by $599 million
in 2000, as compared with withdrawals from policyholder account balances
exceeding deposits of $2,222 million and $2,345 million in 1999 and 1998,
respectively. Short-term financings decreased by $3,114 million in 2000 compared
with an increase of $623 million in 1999, while net additions to long-term debt
were $88 million in 2000 compared with net reductions of $389 million in 1999.
The operating, investing and financing activities described above resulted
in an increase (decrease) in cash and cash equivalents of $645 million, $(512)
million and $390 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
INSOLVENCY ASSESSMENTS
Most of the jurisdictions in which the Company is admitted to transact
business require life insurers doing business within the jurisdiction to
participate in guaranty associations, which are organized to pay contractual
benefits owed pursuant to insurance policies issued by impaired, insolvent or
failed life insurers. These associations levy assessments, up to prescribed
limits, on all member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers in the lines of
business in which the impaired, insolvent or failed insurer engaged. Some states
permit member insurers to recover assessments paid through full or partial
premium tax offsets. Assessments levied against the Company from January 1, 1998
through December 31, 2000 aggregated $6 million. The Company maintained a
liability of $63 million at December 31, 2000 for future assessments in respect
of currently impaired, insolvent or failed insurers.
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.
INVESTMENTS
The Company had total cash and invested assets at December 31, 2000 of
$160.0 billion. In addition, the Company had $70.3 billion held in its separate
accounts, for which the Company generally does not bear investment risk.
60
62
The Company's primary investment objective is to maximize after-tax
operating income consistent with acceptable risk parameters. The Company is
exposed to three primary sources of investment risk:
- credit risk, relating to the uncertainty associated with the continued
ability of a given obligor to make timely payments of principal and
interest;
- interest rate risk, relating to the market price and cash flow
variability associated with changes in market interest rates; and
- market valuation risk for equity holdings.
The Company manages risk through in-house fundamental analysis of the
underlying obligors, issuers, transaction structures and real estate properties.
The Company also manages credit risk and market valuation risk through industry
and issuer diversification and asset allocation. For real estate and
agricultural assets, the Company manages credit risk and valuation risk through
geographic, property type, and product type diversification and asset
allocation. The Company manages interest rate risk as part of its asset and
liability management strategies, product design, such as the use of market value
adjustment features and surrender charges, and proactive monitoring and
management of certain non-guaranteed elements of its products, such as the
resetting of credited interest and dividend rates for policies that permit such
adjustments.
The following table summarizes the Company's cash and invested assets at
December 31, 2000 and December 31, 1999:
AT DECEMBER 31,
--------------------------------------
2000 1999
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
Fixed maturities available for sale at fair
value............................................ $112,979 70.7% $ 96,981 69.9%
Mortgage loans on real estate...................... 21,951 13.7 19,739 14.3
Policy loans....................................... 8,158 5.1 5,598 4.0
Equity real estate and real estate joint
ventures......................................... 5,504 3.4 5,649 4.1
Cash and cash equivalents.......................... 3,434 2.1 2,789 2.0
Equity securities and other limited partnership
interests........................................ 3,845 2.4 3,337 2.4
Other invested assets.............................. 2,821 1.8 1,501 1.1
Short-term investments............................. 1,269 0.8 3,055 2.2
-------- ----- -------- -----
Total cash and invested assets........... $159,961 100.0% $138,649 100.0%
======== ===== ======== =====
INVESTMENT RESULTS
The annual yields on general account cash and invested assets, excluding
net investment gains and losses, were 7.5%, 7.3% and 7.5% for the years ended
December 31, 2000, 1999 and 1998, respectively.
The following table illustrates the annual yields on average assets for
each of the components of the Company's investment portfolio for the years ended
December 31, 2000, 1999 and 1998:
2000 1999 1998
------------------- ------------------ -------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- -------- -------- ------- -------- --------
(DOLLARS IN MILLIONS)
FIXED MATURITIES:(2)
Investment income.............. 7.8% $ 8,538 7.5% $ 7,171 7.4% $ 6,990
Net investment (losses)
gains........................ (1,437) (538) 573
-------- ------- --------
Total........................ $ 7,101 $ 6,633 $ 7,563
-------- ------- --------
Ending assets.................. $112,979 $96,981 $100,767
-------- ------- --------
61
63
2000 1999 1998
------------------- ------------------ -------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- -------- -------- ------- -------- --------
(DOLLARS IN MILLIONS)
MORTGAGE LOANS:(3)
Investment income.............. 7.9% $ 1,693 8.1% $ 1,484 8.5% $ 1,580
Net investment (losses)
gains........................ (18) 28 23
-------- ------- --------
Total........................ $ 1,675 $ 1,512 $ 1,603
-------- ------- --------
Ending assets.................. $ 21,951 $19,739 $ 16,827
-------- ------- --------
POLICY LOANS:
Investment income.............. 6.5% $ 515 6.1% $ 340 6.6% $ 387
-------- ------- --------
Ending assets.................. $ 8,158 $ 5,598 $ 5,600
-------- ------- --------
EQUITY REAL ESTATE AND REAL
ESTATE JOINT VENTURES:(4)
Investment income, net of
expenses..................... 11.1% $ 629 9.7% $ 581 10.4% $ 687
Net investment gains........... 101 265 424
-------- ------- --------
Total........................ $ 730 $ 846 $ 1,111
-------- ------- --------
Ending assets.................. $ 5,504 $ 5,649 $ 6,287
-------- ------- --------
CASH, CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS:
Investment income.............. 5.7% $ 288 4.2% $ 173 5.3% $ 187
-------- ------- --------
Ending assets.................. $ 4,703 $ 5,844 $ 4,670
-------- ------- --------
EQUITY SECURITIES AND OTHER
LIMITED PARTNERSHIP
INTERESTS:
Investment income.............. 5.0% $ 183 7.1% $ 239 5.6% $ 274
Net investment gains........... 185 132 1,007
-------- ------- --------
Total........................ $ 368 $ 371 $ 1,281
-------- ------- --------
Ending assets.................. $ 3,845 $ 3,337 $ 3,387
-------- ------- --------
OTHER INVESTED ASSETS:
Investment income.............. 6.3% $ 162 6.0% $ 91 12.2% $ 406
Net investment gains
(losses)..................... 65 (24) 71
-------- ------- --------
Total........................ $ 227 $ 67 $ 477
-------- ------- --------
Ending assets.................. $ 2,821 $ 1,501 $ 1,484
-------- ------- --------
TOTAL INVESTMENTS:
Investment income.............. 7.7% $ 12,008 7.5% $10,079 7.7% $ 10,511
Investment expenses and fees... (0.2%) (240) (0.2%) (263) (0.2%) (283)
---- -------- ---- ------- ---- --------
Net investment income.......... 7.5% $ 11,768 7.3% $ 9,816 7.5% $ 10,228
Net investment (losses)
gains........................ (1,104) (137) 2,098
Adjustments to investment
(losses) gains(5)............ 54 67 (608)
Gains from sales of
subsidiaries................. 660 -- 531
-------- ------- --------
$ 11,378 $ 9,746 $ 12,249
======== ======= ========
(1) Yields are based on quarterly average asset carrying values for 2000, 1999
and 1998, excluding recognized and unrealized gains and losses, and for
yield calculation purposes, average assets exclude
62
64
collateral associated with the Company's securities lending program. Fixed
maturity investment income has been reduced by rebates paid under the program.
(2) Included in fixed maturities are equity-linked notes of $1,232 million,
$1,079 million and $916 million at December 31, 2000, 1999 and 1998,
respectively, which include an equity component as part of the notes'
return. Investment income for fixed maturities includes prepayment fees and
income from the securities lending program.
(3) Investment income from mortgage loans includes prepayment fees.
(4) Equity real estate and real estate joint venture income is shown net of
depreciation of $224 million, $247 million and $282 million for the years
ended December 31, 2000, 1999 and 1998, respectively.
(5) Adjustments to investment gains and losses include amortization of deferred
policy acquisition costs, charges and credits to participating contracts,
and adjustments to the policyholder dividend obligation resulting from
investment gains and losses.
FIXED MATURITIES
Fixed maturities consist principally of publicly traded and privately
placed debt securities, and represented 70.7% and 69.9% of total cash and
invested assets at December 31, 2000 and 1999, respectively.
Based on estimated fair value, public fixed maturities and private fixed
maturities comprised 83.6% and 16.4%, respectively, of total fixed maturities at
December 31, 2000 and 82.6% and 17.4%, respectively, at December 31, 1999. The
Company invests in privately placed fixed maturities to enhance the overall
value of its portfolio, increase diversification and obtain higher yields than
can ordinarily be obtained with comparable public market securities. Generally,
private placements provide the Company with protective covenants, call
protection features and, where applicable, a higher level of collateral.
However, the Company may not freely trade its private placements because of
restrictions imposed by federal and state securities laws and illiquid trading
markets.
The Securities Valuation Office of the NAIC evaluates the bond investments
of insurers for regulatory reporting purposes and assigns securities to one of
six investment categories called "NAIC designations." The NAIC designations
parallel the credit ratings of the Nationally Recognized Statistical Rating
Organizations for marketable bonds. NAIC designations 1 and 2 include bonds
considered investment grade (rated "Baa3" or higher by Moody's, or rated "BBB-"
or higher by S&P) by such rating organizations. NAIC designations 3 through 6
include bonds considered below investment grade (rated "Ba1" or lower by
Moody's, or rated "BB+" or lower by S&P).
The following table presents the Company's total fixed maturities by NAIC
designation and the equivalent ratings of the Nationally Recognized Statistical
Rating Organizations at December 31, 2000 and December 31, 1999, as well as the
percentage, based on estimated fair value, that each designation comprises:
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999
----------------------------- ------------------------------
ESTIMATED ESTIMATED
NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF
RATING EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL
------ ---------------------- --------- --------- ----- --------- --------- ------
(DOLLARS IN MILLIONS)
1 AAa/Aa/A........................ $ 72,170 $ 74,389 65.9% $ 62,855 $ 62,207 64.2%
2 Baa............................. 28,470 28,405 25.1 26,883 25,951 26.8
3 Ba.............................. 5,935 5,650 5.0 5,808 5,636 5.8
4 B............................... 3,964 3,758 3.3 3,017 2,969 3.1
5 Caa and lower................... 123 95 0.1 168 141 0.1
6 In or near default.............. 319 361 0.3 68 67 0.0
-------- -------- ----- -------- -------- ------
Subtotal...................... 110,981 112,658 99.7 98,799 96,971 100.0
Redeemable preferred stock...... 321 321 0.3 10 10 0.0
-------- -------- ----- -------- -------- ------
Total fixed maturities.......... $111,302 $112,979 100.0% $ 98,809 $ 96,981 100.0%
======== ======== ===== ======== ======== ======
63
65
Based on estimated fair values, total investment grade public and private
placement fixed maturities comprised 91.0% of total fixed maturities in the
general account at both December 31, 2000 and 1999.
The following table shows the amortized cost and estimated fair value of
fixed maturities, by contractual maturity dates (excluding scheduled sinking
funds) at December 31, 2000 and 1999:
AT DECEMBER 31,
--------------------------------------------------
2000 1999
----------------------- -----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
Due in one year or less.............. $ 3,465 $ 3,460 $ 3,180 $ 3,217
Due after one year through five
years.............................. 21,041 21,275 18,152 18,061
Due after five years through ten
years.............................. 23,872 23,948 23,755 23,114
Due after ten years.................. 29,564 30,402 26,316 25,918
-------- -------- ------- -------
Subtotal........................ 77,942 79,085 71,403 70,310
Mortgage-backed and other asset-
backed securities.................. 33,039 33,573 27,396 26,661
-------- -------- ------- -------
Subtotal........................ 110,981 112,658 98,799 96,971
Redeemable preferred stock........... 321 321 10 10
-------- -------- ------- -------
Total fixed maturities............... $111,302 $112,979 $98,809 $96,981
======== ======== ======= =======
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED FIXED MATURITIES. The Company
monitors fixed maturities to identify investments that management considers to
be problems or potential problems. The Company also monitors investments that
have been restructured.
The Company defines problem securities in the fixed maturities category as
securities as to which principal or interest payments are in default or are to
be restructured pursuant to commenced negotiations, or as securities issued by a
debtor that has entered into bankruptcy.
The Company defines potential problem securities in the fixed maturity
category as securities of an issuer deemed to be experiencing significant
operating problems or difficult industry conditions. The Company uses various
criteria, including the following, to identify potential problem securities:
- debt service coverage or cash flow falling below certain thresholds which
vary according to the issuer's industry and other relevant factors;
- significant declines in revenues or margins;
- violation of financial covenants;
- public securities trading at a substantial discount as a result of
specific credit concerns; and
- other subjective factors.
The Company defines restructured securities in the fixed maturities
category as securities to which the Company has granted a concession that it
would not have otherwise considered but for the financial difficulties of the
obligor. The Company enters into a restructuring when it believes it will
realize a greater economic value under the new terms rather than through
liquidation or disposition. The terms of the restructuring may involve some or
all of the following characteristics: a reduction in the interest rate, an
extension of the maturity date, an exchange of debt for equity or a partial
forgiveness of principal or interest.
64
66
The following table presents the estimated fair value of the Company's
total fixed maturities classified as performing, problem, potential problem and
restructured fixed maturities at December 31, 2000 and 1999:
AT DECEMBER 31,
---------------------------------------
2000 1999
------------------ ------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Performing.................................... $112,371 99.5% $96,464 99.5%
Problem....................................... 163 0.1 20 0.0
Potential Problem............................. 364 0.3 482 0.5
Restructured.................................. 81 0.1 15 0.0
-------- ----- ------- -----
Total............................... $112,979 100.0% $96,981 100.0%
======== ===== ======= =====
The Company classifies all of its fixed maturities as available-for-sale
and marks them to market. The Company writes down to fair value fixed maturities
that it deems to be other than temporarily impaired. The Company records
write-downs as investment losses and includes them in earnings and adjusts the
cost basis of the fixed maturities accordingly. The Company does not change the
revised cost basis for subsequent recoveries in value. Such write-downs were
$339 million and $98 million for the years ended December 31, 2000 and 1999,
respectively.
FIXED MATURITIES BY SECTOR. The Company diversifies its fixed maturities
by security sector. The following table sets forth the estimated fair value of
the Company's fixed maturities by sector, as well as the percentage of the total
fixed maturities holdings that each security sector comprised at December 31,
2000 and 1999:
AT DECEMBER 31,
---------------------------------------
2000 1999
------------------ ------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
U.S. Treasuries/agencies...................... $ 9,634 8.5% $ 6,299 6.5%
Corporate securities.......................... 56,553 50.1 55,543 57.3
Foreign government securities................. 5,341 4.7 4,206 4.3
Mortgage-backed securities.................... 25,726 22.8 20,279 20.9
Asset-backed securities....................... 7,847 6.9 6,382 6.6
Other fixed income assets..................... 7,878 7.0 4,272 4.4
-------- ----- ------- -----
Total............................... $112,979 100.0% $96,981 100.0%
======== ===== ======= =====
CORPORATE FIXED MATURITIES. The table below shows the major industry types
that comprise the corporate bond holdings at the dates indicated:
AT DECEMBER 31,
-------------------------------------------
2000 1999
-------------------- -------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ------ ---------- -----
(DOLLARS IN MILLIONS)
Industrial................................ $27,199 48.1% $26,480 47.6%
Utility................................... 7,011 12.4 6,487 11.7
Finance................................... 12,722 22.5 11,631 21.0
Yankee/Foreign(1)......................... 9,291 16.4 10,423 18.8
Other..................................... 330 0.6 522 0.9
------- ------ ------- -----
Total........................... $56,553 100.0% $55,543 100.0%
======= ====== ======= =====
(1) Includes publicly traded, dollar-denominated debt obligations of foreign
obligors, known as Yankee bonds, and other foreign investments.
65
67
The Company diversifies its corporate bond holdings by industry and issuer.
The portfolio has no significant exposure to any single issuer. At December 31,
2000, the Company's combined holdings in the ten issuers to which it had the
greatest exposure totaled $3,849 million, which was less than 5% of the
Company's total invested assets at such date. The exposure to the largest single
issuer of corporate bonds the Company held at December 31, 2000 was $496
million, which was less than 1% of its total invested assets at such date.
At December 31, 2000, investments of $6,262 million, or 67.4% of the
Yankee/Foreign sector, represented exposure to traditional Yankee bonds. The
balance of this exposure was primarily dollar-denominated, foreign private
placements and project finance loans. The Company diversifies the Yankee/
Foreign portfolio by country and issuer.
The Company does not have material exposure to foreign currency risk in its
invested assets. In the Company's international insurance operations, both its
assets and liabilities are denominated in local currencies. Foreign currency
denominated securities supporting U.S. dollar liabilities are generally swapped
back into U.S. dollars.
MORTGAGE-BACKED SECURITIES. The following table shows the types of
mortgage-backed securities the Company held at December 31, 2000 and 1999:
AT DECEMBER 31,
------------------------------------------
2000 1999
------------------- -------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Pass-through securities..................... $10,610 41.3% $ 8,478 41.8%
Collateralized mortgage obligations......... 9,866 38.3 7,694 37.9
Commercial mortgage-backed securities....... 5,250 20.4 4,107 20.3
------- ----- ------- -----
Total............................. $25,726 100.0% $20,279 100.0%
======= ===== ======= =====
At December 31, 2000, pass-through and collateralized mortgage obligations
totaled $20,476 million, or 79.6% of total mortgage-backed securities, and a
majority of this amount represented agency-issued pass-through and
collateralized mortgage obligations guaranteed or otherwise supported by the
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation or
Government National Mortgage Association. Other types of mortgage-backed
securities comprised the balance of such amounts reflected in the table. At
December 31, 2000, approximately $3,202 million, or 61.0% of the commercial
mortgage-backed securities, and $17,303 million, or 84.5% of the pass-through
securities and collateralized mortgage obligations, were rated Aaa/AAA by
Moody's or S&P.
The principal risks inherent in holding mortgage-backed securities are
prepayment and extension risks, which will affect the timing of when cash flow
will be received. The Company's active monitoring of its mortgage-backed
securities mitigates exposure to losses from cash flow risk associated with
interest rate fluctuations.
ASSET-BACKED SECURITIES. Asset-backed securities, which include credit
card and automobile receivables and home equity loans, are purchased both to
diversify the overall risks of the Company's fixed maturities assets and to
provide attractive returns. The Company's asset-backed securities are
diversified both by type of asset and by issuer. Home equity loans constitute
the largest exposure in the Company's asset-backed securities investments.
Except for asset-backed securities backed by home equity loans, the asset-backed
securities investments generally have little sensitivity to changes in interest
rates. At December 31, 2000, approximately $3,149 million, or 40.1%, of total
asset-backed securities were rated Aaa/AAA by Moody's or S&P.
The principal risks in holding asset-backed securities are structural,
credit and capital market risks. Structural risks include the security's
priority in the issuer's capital structure, the adequacy of and ability to
realize proceeds from the collateral and the potential for prepayments. Credit
risks include consumer or corporate credits such as credit card holders,
equipment lessees, and corporate obligors. Capital market risks include the
general level of interest rates and the liquidity for these securities in the
marketplace.
66
68
MORTGAGE LOANS
The Company's mortgage loans are collateralized by commercial, agricultural
and residential properties. Mortgage loans comprised 13.7% and 14.3% of the
Company's total cash and invested assets at December 31, 2000 and 1999,
respectively. The carrying value of mortgage loans 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 by type at December 31, 2000 and 1999:
AT DECEMBER 31,
--------------------------------------
2000 1999
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
Commercial................................... $16,869 76.8% $14,862 75.3%
Agricultural................................. 4,973 22.7 4,798 24.3
Residential.................................. 109 0.5 79 0.4
------- ----- ------- -----
Total.............................. $21,951 100.0% $19,739 100.0%
======= ===== ======= =====
COMMERCIAL MORTGAGE LOANS. The Company diversifies its commercial mortgage
loans by both geographic region and property type, and manages these investments
through a network of regional offices overseen by its investment department. The
following table presents the distribution across geographic regions and property
types for commercial mortgage loans at December 31, 2000 and 1999:
AT DECEMBER 31,
--------------------------------------
2000 1999
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
REGION
South Atlantic............................... $ 4,542 26.9% $ 4,098 27.6%
Pacific...................................... 3,111 18.4 2,596 17.5
Middle Atlantic.............................. 2,968 17.6 2,703 18.2
East North Central........................... 1,822 10.8 1,865 12.5
West South Central........................... 1,169 6.9 1,012 6.8
New England.................................. 1,157 6.9 1,095 7.4
Mountain..................................... 753 4.5 490 3.3
West North Central........................... 740 4.4 652 4.4
International................................ 433 2.6 202 1.3
East South Central........................... 174 1.0 149 1.0
------- ----- ------- -----
Total.............................. $16,869 100.0% $14,862 100.0%
======= ===== ======= =====
PROPERTY TYPE
Office....................................... $ 7,577 44.9% $ 6,789 45.7%
Retail....................................... 4,148 24.6 3,620 24.4
Apartments................................... 2,585 15.3 2,382 16.0
Industrial................................... 1,414 8.4 1,136 7.6
Hotel........................................ 865 5.1 843 5.7
Other........................................ 280 1.7 92 0.6
------- ----- ------- -----
Total.............................. $16,869 100.0% $14,862 100.0%
======= ===== ======= =====
67
69
The following table presents the scheduled maturities for the Company's
commercial mortgage loans at December 31, 2000 and 1999:
AT DECEMBER 31,
--------------------------------------
2000 1999
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
Due in one year or less...................... $ 644 3.8% $ 806 5.4%
Due after one year through two years......... 934 5.5 482 3.2
Due after two years through three years...... 830 4.9 708 4.8
Due after three years through four years..... 1,551 9.2 787 5.3
Due after four years through five years...... 1,654 9.8 1,608 10.8
Due after five years......................... 11,256 66.8 10,471 70.5
------- ----- ------- -----
Total.............................. $16,869 100.0% $14,862 100.0%
======= ===== ======= =====
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED MORTGAGE LOANS. The Company
monitors its mortgage loan investments on a continual basis. Through this
monitoring process, the Company reviews loans that are restructured, delinquent
or under foreclosure and identifies those that management considers to be
potentially delinquent. These loan classifications are generally consistent with
those used in industry practice.
The Company defines restructured mortgage loans, consistent with industry
practice, as loans in which the Company, for economic or legal reasons related
to the debtor's financial difficulties, grants a concession to the debtor that
it would not otherwise consider. This definition provides for loans to exit the
restructured category under certain conditions. The Company defines delinquent
mortgage loans, consistent with industry practice, as loans in which two or more
interest or principal payments are past due. The Company defines mortgage loans
under foreclosure, consistent with industry practice, as loans in which
foreclosure proceedings have formally commenced. The Company defines potentially
delinquent loans as loans that, in management's opinion, have a high probability
of becoming delinquent.
The Company reviews all mortgage loans on an annual basis. These reviews
may include an analysis of the property financial statements and rent roll,
lease rollover analysis, property inspections, market analysis and tenant
creditworthiness. The Company also reviews loan-to-value ratios and debt
coverage ratios for restructured loans, delinquent loans, loans under
foreclosure, potentially delinquent loans, loans with an existing valuation
allowance, loans maturing within two years and loans with a loan-to-value ratio
greater than 90% as determined in the prior year.
The Company establishes valuation allowances for loans that it deems
impaired, as determined through its annual review process. The Company defines
impaired loans consistent with Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, as loans which it
probably will not collect all amounts due according to applicable contractual
terms of the agreement. The Company bases valuation allowances upon the present
value of expected future cash flows discounted at the loan's original effective
interest rate or the value of the loan's collateral. The Company records
valuation allowances as investment losses and includes them in earnings. The
Company records subsequent adjustments to allowances as investment gains or
losses and includes them in earnings.
68
70
The following table presents the amortized cost and valuation allowances
for commercial mortgage loans distributed by loan classification at December 31,
2000 and 1999:
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999
----------------------------------------- -----------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST
--------- ----- --------- --------- --------- ----- --------- ---------
(DOLLARS IN MILLIONS)
Performing................ $16,169 95.5% $15 0.1% $14,098 94.5% $11 0.1%
Restructured.............. 646 3.8 47 7.3% 810 5.4 52 6.4%
Delinquent or under
foreclosure............. 24 0.1 4 16.7% 17 0.1 4 25.0%
Potentially delinquent.... 106 0.6 10 9.4% 6 0.0 2 33.3%
------- ----- --- ------- ----- ---
Total............ $16,945 100.0% $76 0.4% $14,931 100.0% $69 0.5%
======= ===== === ======= ===== ===
(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 years ended December 31, 2000, 1999 and 1998:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Balance, beginning of year................................. $ 69 $ 142 $ 259
Additions.................................................. 61 36 30
Deductions for writedowns and dispositions................. (54) (109) (147)
----- ----- -----
Balance, end of year....................................... $ 76 $ 69 $ 142
===== ===== =====
The principal risks in holding commercial mortgage loans are property
specific, supply and demand, financial and capital market risks. Property
specific risks include the geographic location of the property, the physical
condition of the property, the diversity of tenants and the rollover of their
leases and the ability of the property manager to attract tenants and manage
expenses. Supply and demand risks include changes in the supply and/or demand
for rental space which cause changes in vacancy rates and/or rental rates.
Financial risks include the overall level of debt on the property and the amount
of principal repaid during the loan term. Capital market risks include the
general level of interest rates, the liquidity for these securities in the
marketplace and the capital available loan for refinancing.
AGRICULTURAL MORTGAGE LOANS. The Company diversifies its agricultural
mortgage loans by both geographic region and product type. The Company manages
these investments through a network of regional offices and field professionals
overseen by its investment department.
Approximately 59.9% of the $4,973 million of agricultural mortgage loans
outstanding at December 31, 2000 was subject to rate resets prior to maturity. A
substantial portion of these loans were 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.
69
71
The following table presents the amortized cost and valuation allowances
for agricultural mortgage loans distributed by loan classification at December
31, 2000 and 1999:
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999
----------------------------------------- -----------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST
--------- ----- --------- --------- --------- ----- --------- ---------
(DOLLARS IN MILLIONS)
Performing........... $4,771 95.7% $1 0.0% $4.616 95.8% $ 1 0.0%
Restructured......... 172 3.5 2 1.2% 165 3.4 11 6.7%
Delinquent or under
foreclosure........ 24 0.5 4 16.7% 27 0.6 2 7.4%
Potentially
delinquent......... 13 0.3 0 2.3% 8 0.2 4 50.0%
------ ----- -- ------ ----- ---
Total...... $4,980 100.0% $7 0.1% $4,816 100.0% $18 0.4%
====== ===== == ====== ===== ===
(1) Amortized cost is equal to carrying value before valuation allowances.
The following table presents the changes in valuation allowances for
agricultural mortgage loans for the years ended December 31, 2000, 1999 and
1998:
YEAR ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Balance, beginning of year.................................. $ 18 $ 28 $ 27
Additions................................................... 8 4 10
Deductions for writedowns and dispositions.................. (19) (14) (9)
---- ---- ----
Balance, end of year........................................ $ 7 $ 18 $ 28
==== ==== ====
The principal risks in holding agricultural mortgage loans are property
specific, supply and demand, financial and capital market risks. Property
specific risks include the geographic location of the property, soil types,
weather conditions and the other factors that may impact the borrower's
guaranty. Supply and demand risks include the supply and demand for the
commodities produced on the specific property and the related price for those
commodities. Financial risks include the overall level of debt on the property
and the amount of principal repaid during the loan term. Capital market risks
include the general level of interest rates, the liquidity for these securities
in the marketplace and the capital available for loan refinancing.
EQUITY REAL ESTATE AND REAL ESTATE JOINT VENTURES
The Company's equity real estate and real estate joint venture investments
consist of commercial and agricultural properties located throughout the U.S.
and Canada. The Company manages these investments through a network of regional
offices overseen by its investment department. At December 31, 2000 and 1999,
the carrying value of the Company's equity real estate and real estate joint
ventures was $5,504 million and $5,649 million, respectively, or 3.4% and 4.1%,
respectively, of total cash and invested assets. The carrying value of equity
real estate was stated at depreciated cost net of impairments and valuation
allowances. The carrying value of real estate joint ventures was stated at the
Company's equity in the real estate joint ventures net of impairments and
valuation allowances. These holdings consist of equity real estate, interests in
real estate joint ventures and real estate acquired upon foreclosure of
commercial and
70
72
agricultural mortgage loans. The following table presents the carrying value of
the Company's equity real estate and real estate joint ventures at December 31,
2000 and 1999:
AT DECEMBER 31,
--------------------------------------
2000 1999
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
TYPE
Equity real estate............................ $5,069 92.1% $5,271 93.3%
Real estate joint ventures.................... 369 6.7 331 5.9
------ ----- ------ -----
Subtotal............................ 5,438 98.8 5,602 99.2
Foreclosed real estate........................ 66 1.2 47 0.8
------ ----- ------ -----
Total............................... $5,504 100.0% $5,649 100.0%
====== ===== ====== =====
Office properties representing 66.1% and 68.1% of the Company's equity real
estate and real estate joint venture holdings at December 31, 2000 and 1999,
respectively, are well diversified geographically, principally within the United
States. The average occupancy level of office properties was 94% and 92% at
December 31, 2000 and 1999, respectively.
The Company classifies equity real estate and real estate joint ventures as
held-for-investment or held-for-sale. The carrying value of equity real estate
and real estate joint ventures held-for-investment was $5,223 million and $5,151
million at December 31, 2000 and 1999, respectively. The carrying value of
equity real estate and real estate joint ventures held-for-sale was $281 million
and $498 million at December 31, 2000 and 1999, respectively.
Ongoing management of these investments includes quarterly appraisals as
well as an annual market update and review of each property's budget, financial
returns, lease rollover status and the Company's exit strategy. In addition to
individual property reviews, the Company employs an overall strategy of
selective dispositions and acquisitions as market opportunities arise.
The Company adjusts the carrying value of equity real estate and real
estate joint ventures held for investment for impairments whenever events or
changes in circumstances indicate that the carrying value of the property may
not be recoverable. The Company writes down impaired real estate to estimated
fair value, which it generally computes using the present value of future cash
flows from the property, discounted at a rate commensurate with the underlying
risks. The Company records write-downs as investment losses through earnings and
reduces the cost basis of the properties accordingly. The Company does not
change the new cost basis for subsequent recoveries in value.
The Company records real estate acquired upon foreclosure of commercial and
agricultural mortgage loans at the lower of estimated fair value or the carrying
value of the mortgage loan at the date of foreclosure.
Once the Company identifies a property to be sold and commences a firm plan
for marketing the property, the Company establishes and periodically revises, if
necessary, a valuation allowance to adjust the carrying value of the property to
its expected sales value, less associated selling costs, if it is lower than the
property's carrying value. The Company records allowances as investment losses
and includes them in earnings. The Company records subsequent adjustments to
allowances as investment gains or losses and includes them in earnings.
The Company's carrying value of equity real estate and real estate joint
ventures held-for-sale, including real estate acquired upon foreclosure of
commercial and agricultural mortgage loans, in the amounts of $281 million and
$498 million at December 31, 2000 and 1999, respectively, are net of impairments
of $97 million and $187 million and net of valuation allowances of $39 million
and $34 million, respectively.
71
73
EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
The Company's carrying value of equity securities, which primarily consists
of investments in common stocks, was $2,193 million and $2,006 million at
December 31, 2000 and 1999, respectively. Substantially all of the common stock
is publicly traded on major securities exchanges. The carrying value of the
other limited partnership interests which primarily represent ownership
interests in pooled investment funds that make private equity investments in
companies in the U.S. and overseas was $1,652 million and $1,331 million at
December 31, 2000 and 1999, respectively. The Company classifies its investments
in common stocks as available-for-sale and marks them to market except for
non-marketable private equities which are generally carried at cost. The Company
accounts for its investments in limited partnership interests in which it does
not have a controlling interest in accordance with the equity method of
accounting. The Company's investments in equity securities represented 1.4% and
1.5% of cash and invested assets at December 31, 2000 and 1999, respectively.
Equity securities include, at December 31, 2000 and 1999, $577 million and
$237 million, respectively, of private equity securities. The Company may not
freely trade its private equity securities because of restrictions imposed by
federal and state securities laws and illiquid trading markets.
At December 31, 2000 and 1999, approximately $313 million and $380 million,
respectively, of the Company's equity securities holdings were effectively fixed
at a minimum value of $257 million and $355 million in these respective periods,
primarily through the use of exchangeable securities and other derivatives. The
exchangeable debt securities issued by the Company mature through 2002 and the
Company may repurchase them earlier at its discretion. In 2000, one exchangeable
debt security was repurchased resulting in a gross investment loss of $9 million
on the note and a gross investment gain of $77 million on the equity exchanged
in satisfaction of the note.
The Company makes commitments to fund partnership investments in the normal
course of business. The amounts of these unfunded commitments were $1,311
million and $1,131 million at December 31, 2000 and 1999, respectively. The
Company anticipates that these amounts will be invested in the partnerships over
the next three to five years.
PROBLEM AND POTENTIAL PROBLEM EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP
INTERESTS
The Company monitors its equity securities and other limited partnership
interests on a continual basis. Through this monitoring process, the Company
identifies investments that management considers to be problems or potential
problems.
Problem equity securities and other limited partnership interests are
defined as securities (1) in which significant declines in revenues and/or
margins threaten the ability of the issuer to continue operating or (2) where
the issuer has subsequently entered bankruptcy.
Potential problem equity securities and other limited partnership interests
are defined as securities issued by a company that is experiencing significant
operating problems or difficult industry conditions. Criteria generally
indicative of these problems or conditions are (1) cash flows falling below
varying thresholds established for the industry and other relevant factors, (2)
significant declines in revenues and/or margins, (3) public securities trading
at a substantial discount as a result of specific credit concerns, and (4) other
information that becomes available.
Equity securities or other limited partnership interests which are deemed
to be other than temporarily impaired are written down to fair value.
Write-downs are recorded as investment losses and are included in earnings and
the cost basis of the equity securities and other limited partnership interests
are adjusted accordingly. The new cost basis is not changed for subsequent
recoveries in value. For the years ended December 31, 2000 and 1999, such
write-downs were $18 million and $30 million, respectively.
OTHER INVESTED ASSETS
The Company's other invested assets consisted principally of leveraged
leases, which were recorded net of non-recourse debt. The Company participates
in lease transactions which are diversified by geographic area. The Company
regularly reviews residual values and writes down residuals to expected values
72
74
as needed. The Company's other invested assets represented 1.8% and 1.1% of cash
and invested assets at December 31, 2000 and 1999, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative instruments to reduce the risk associated with
changing market values or variable cash flows related to the Company's financial
assets and liabilities. This objective is achieved through one of two principal
risk management strategies: hedging the changes in fair value of financial
assets, liabilities or firm commitments or hedging the variable cash flows of
assets, liabilities or forecasted transactions. Hedged forecasted transactions,
other than the receipt or payment of variable interest payments, are not
expected to occur more than 12 months after hedge inception. The Company's
derivative strategy employs a variety of instruments including financial
futures, financial forwards, interest rate and foreign currency swaps, floors,
foreign exchange contracts, caps and options.
Effective January 4, 2001, the Company is authorized, under a newly enacted
provision of the New York Insurance Law, to use derivatives for replication.
This provision allows the Company to create and invest in synthetic investments
by combining a derivative with an existing security to create the
characteristics of a different desired security. The Company expects to take
advantage of this new law by transacting in derivatives to replicate securities
in order to manage risks or to increase risk adjusted returns. Many of these
transactions are not expected to receive hedge accounting under the requirements
of Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities. As of the date of this filing,
the Company has not entered into any replication transactions.
The Company held the following positions in derivative financial
instruments at December 31, 2000 and 1999:
AT DECEMBER 31,
---------------------------------------------------------------------------------------
2000 1999
------------------------------------------ ------------------------------------------
CURRENT MARKET CURRENT MARKET
OR FAIR VALUE OR FAIR VALUE
CARRYING NOTIONAL -------------------- CARRYING NOTIONAL --------------------
VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES
-------- -------- ------ ----------- -------- -------- ------ -----------
(DOLLARS IN MILLIONS)
Financial futures................ $23 $ 254 $ 23 $ -- $ 27 $ 3,140 $37 $ 10
Interest rate swaps.............. 41 1,549 49 1 (32) 1,316 11 40
Floors........................... -- 325 3 -- -- -- -- --
Caps............................. -- 9,950 -- -- 1 12,376 3 --
Foreign currency swaps........... (1) 1,469 267 85 -- 4,002 26 103
Exchange traded options.......... 1 10 -- 1 -- -- -- --
--- ------- ---- ---- ---- ------- --- ----
Total contractual commitments.... $64 $13,557 $342 $ 87 $ (4) $20,834 $77 $153
=== ======= ==== ==== ==== ======= === ====
SECURITIES LENDING
Pursuant to the Company's securities lending program, it lends securities
to major brokerage firms. The Company's policy requires a minimum of 102% of the
fair value of the loaned securities as collateral, calculated on a daily basis.
The Company's securities on loan at December 31, 2000 and 1999 had estimated
fair values of $12,289 million and $6,391 million, respectively.
SEPARATE ACCOUNT ASSETS
The Company manages each separate account's assets in accordance with the
prescribed investment policy that applies to that specific separate account. The
Company establishes separate accounts on a single client and multi-client
comingled basis in conformity with insurance laws. Generally, separate accounts
are not chargeable with liabilities that arise from any other business of the
Company. Separate account assets are subject to claims of the Company's general
account claims only to the extent that the value of such assets exceeds the
separate account liabilities, as defined by the account's contract. If the
Company uses a separate account to support a contract providing guaranteed
benefits, the Company
73
75
must comply with the asset maintenance requirements stipulated under Regulation
128 of the New York Insurance Department. The Company monitors these
requirements at least monthly and, in addition, performs cash flow analyses,
similar to that conducted for the general account, on an annual basis. The
Company reports separately as assets and liabilities investments held in
separate accounts and liabilities of the separate accounts. The Company reports
substantially all separate account assets at their fair market value. Investment
income and gains or losses on the investments of separate accounts accrue
directly to contract holders, and, accordingly, the Company does not reflect
them in its consolidated statements of income and cash flows. The Company
reflects in its revenues fees charged to the separate accounts by the Company,
including mortality charges, risk charges, policy administration fees,
investment management fees and surrender charges.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company must effectively manage, measure and monitor the market risk
associated with its invested assets and interest rate sensitive insurance
contracts. It has developed an integrated process for managing risk, which it
conducts through its Corporate Risk Management Department, several
asset/liability committees and additional specialists at the business segment
level. The Company has established and implemented comprehensive policies and
procedures at both the corporate and business segment level to minimize the
effects of potential market volatility.
Market Risk Exposures
The Company has exposure to market risk through its insurance operations
and investment activities. For purposes of this disclosure, "market risk" is
defined as the risk of loss resulting from changes in interest rates, equity
prices and foreign exchange rates.
Interest rates. The Company's exposure to interest rate changes results
from its significant holdings of fixed maturities, as well as its interest rate
sensitive liabilities. The fixed maturities include U.S. and foreign government
bonds, securities issued by government agencies, corporate bonds and
mortgage-backed securities, all of which are mainly exposed to changes in
medium- and long-term treasury rates. The interest rate sensitive liabilities
for purposes of this disclosure include guaranteed interest contracts and fixed
annuities, which have the same interest rate exposure (medium- and long-term
treasury rates) as the fixed maturities. The Company employs product design,
pricing and asset/liability management strategies to reduce the adverse effects
of interest rate volatility. Product design and pricing strategies include the
use of surrender charges or restrictions on withdrawals in some products.
Asset/liability management strategies include the use of derivatives, the
purchase of securities structured to protect against prepayments, prepayment
restrictions and related fees on mortgage loans and consistent monitoring of the
pricing of the Company's products in order to better match the duration of the
assets and the liabilities they support.
Equity prices. The Company's investments in equity securities expose it to
changes in equity prices. It manages this risk on an integrated basis with other
risks through its asset/liability management strategies. The Company also
manages equity price risk through industry and issuer diversification and asset
allocation techniques.
Foreign exchange rates. The Company's exposure to fluctuations in foreign
exchange rates against the U.S. dollar results from its holdings in non-U.S.
dollar denominated fixed maturity securities and equity securities and through
its investments in foreign subsidiaries. The principal currencies which create
foreign exchange rate risk in the Company's investment portfolios are Canadian
dollars, Euros, German marks, French francs, Spanish pesetas, Mexican pesos and
British pounds. The Company mitigates the majority of its fixed maturities'
foreign exchange rate risk through the utilization of foreign currency swaps and
forward contracts. Through its investments in foreign subsidiaries, the Company
is primarily exposed to the Spanish peseta, Mexican peso and South Korean won.
The Company has denominated substantially all assets and liabilities of its
foreign subsidiaries in their respective local currencies, thereby minimizing
its risk to foreign exchange rate fluctuations.
74
76
Risk Management
Corporate risk management. MetLife has established several financial and
non-financial senior management committees as part of its risk management
process. These committees manage capital and risk positions, approve
asset/liability management strategies and establish appropriate corporate
business standards.
MetLife also has a separate Corporate Risk Management Department, which is
responsible for risk throughout MetLife and reports directly to Metropolitan
Life's Chief Actuary. The Corporate Risk Management Department's primary
responsibilities consist of:
- implementing a board of directors-approved corporate risk framework,
which outlines the Company's approach for managing risk on an
enterprise-wide basis;
- developing policies and procedures for managing, measuring and monitoring
those risks identified in the corporate risk framework;
- establishing appropriate corporate risk tolerance levels;
- deploying capital on a risk-adjusted basis; and
- reporting on a periodic basis to the Audit Committee of the Holding
Company's board of directors and various financial and non-financial
senior management committees.
Asset/liability management. At MetLife, asset/liability management is the
responsibility of the General Account Portfolio Management Department ("GAPM"),
the operating business segments and various GAPM boards. The GAPM boards are
comprised of senior officers from the investment department, senior managers
from each business segment and the Chief Actuary. The GAPM boards' duties
include setting broad asset/liability management policy and strategy, reviewing
and approving target portfolios, establishing investment guidelines and limits,
and providing oversight of the portfolio management process.
The portfolio managers and asset sector specialists, who have
responsibility on a day-to-day basis for risk management of their respective
investing activities, implement the goals and objectives established by the GAPM
boards. 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 risk management objectives established by the GAPM boards stress
quality, diversification, asset/liability matching, liquidity and investment
return.
Each of MetLife's business segments has an asset/liability officer who
works with portfolio managers in the investment department to monitor
investment, product pricing, hedge strategy and liability management issues.
MetLife 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.
To manage interest rate risk, the Company performs periodic projections of
asset and liability cash flows to evaluate the potential sensitivity of its
securities investments and liabilities to interest rate movements. These
projections involve evaluating the potential gain or loss on most of the
Company's in-force business under various increasing and decreasing interest
rate environments. The Company has developed models of its in-force business
that reflect specific product characteristics and include assumptions based on
current and anticipated experience regarding lapse, mortality and interest
crediting rates. In addition, these models include asset cash flow projections
reflecting interest payments, sinking fund payments, principal payments, bond
calls, mortgage prepayments and defaults. New York Insurance Department
regulations require that MetLife perform some of these analyses annually as part
of the annual proof of the sufficiency of its regulatory reserves to meet
adverse interest rate scenarios.
Hedging activities. MetLife's risk management strategies incorporate the
use of various interest rate derivatives that are used to adjust the overall
duration and cash flow profile of its invested asset portfolios to better match
the duration and cash flow profile of its liabilities to reduce interest rate
risk. Such instruments include interest rate swaps, futures and caps. MetLife
also uses foreign currency swaps and forward contracts to hedge its foreign
currency denominated fixed income investments.
75
77
Risk Measurement; Sensitivity Analysis
The Company measures market risk related to its holdings of invested assets
and other financial instruments, including certain market risk sensitive
insurance contracts ("other financial instruments"), based on changes in
interest rates, equity prices and currency exchange rates, utilizing a
sensitivity analysis. This analysis estimates the potential changes in fair
value, cash flows and earnings based on a hypothetical 10% change (increase or
decrease) in interest rates, equity prices and currency exchange rates. The
Company believes that a 10% change (increase or decrease) in these market rates
and prices is reasonably possible in the near-term. In performing this analysis,
the Company used market rates at December 31, 2000 to re-price its invested
assets and other financial instruments. The sensitivity analysis separately
calculated each of MetLife's market risk exposures (interest rate, equity price
and currency exchange rate) related to its non-trading invested assets and other
financial instruments. The Company does not maintain a trading portfolio.
The sensitivity analysis performed included the market risk sensitive
holdings described above. The Company modeled the impact of changes in market
rates and prices on the fair values of its invested assets, earnings and cash
flows as follows:
Fair values. The Company bases its potential change in fair values on
an immediate change (increase or decrease) in:
- the net present values of its interest rate sensitive exposures
resulting from a 10% change (increase or decrease) in interest rates;
- the U.S. dollar equivalent balances of the Company's currency
exposures due to a 10% change (increase or decrease) in currency
exchange rates; and
- the market value of its equity positions due to a 10% change (increase
or decrease) in equity prices.
Earnings and cash flows. MetLife calculates the potential change in
earnings and cash flows on the change in its earnings and cash flows over a
one-year period based on an immediate 10% change (increase or decrease) in
market rates and equity prices. The following factors were incorporated
into the earnings and cash flows sensitivity analyses:
- the reinvestment of fixed maturity securities;
- the reinvestment of payments and prepayments of principal related to
mortgage-backed securities;
- the re-estimation of prepayment rates on mortgage-backed securities
for each 10% change (increase or decrease) in the interest rates; and
- the expected turnover (sales) of fixed maturities and equity
securities, including the reinvestment of the resulting proceeds.
The sensitivity analysis is an estimate and should not be viewed as
predictive of the Company's future financial performance. The Company cannot
assure that its actual losses in any particular year will not exceed the amounts
indicated in the table below. Limitations related to this sensitivity analysis
include:
- the market risk information is limited by the assumptions and parameters
established in creating the related sensitivity analysis, including the
impact of prepayment rates on mortgages;
- the analysis excludes other significant real estate holdings and
liabilities pursuant to insurance contracts; and
- the model assumes that the composition of assets and liabilities remains
unchanged throughout the year.
Accordingly, the Company uses such models as tools and not substitutes for
the experience and judgment of its corporate risk and asset/liability management
personnel.
76
78
Based on its analysis of the impact of a 10% change (increase or decrease)
in market rates and prices, MetLife has determined that such a change could have
a material adverse effect on the fair value of its interest rate sensitive
invested assets. The equity and foreign currency portfolios do not expose the
Company to material market risk.
The table below illustrates the potential loss in fair value of the
Company's interest rate sensitive financial instruments at December 31, 2000 and
1999. In addition, the potential loss with respect to the fair value of currency
exchange rates and the Company's equity price sensitive positions at December
31, 2000 and 1999 is set forth in the table below.
The potential loss in fair value for each market risk exposure of the
Company's portfolio, all of which is non-trading, for the periods indicated was:
2000 1999
------ ------
AT DECEMBER 31,
----------------
(DOLLARS IN
MILLIONS)
Interest rate risk.......................................... $3,959 $5,044
Equity price risk........................................... $ 181 $ 198
Currency exchange rate risk................................. $ 302 $ 263
The change in potential loss in fair value related to market risk exposure
between December 31, 2000 and 1999 was primarily attributable to a shift in the
yield curve.
77
79
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
Independent Auditors' Report................................ F-1
Financial Statements as of December 31, 2000 and 1999 and
for the years ended 2000, 1999 and 1998:
Consolidated Balance Sheets............................ F-2
Consolidated Statements of Income...................... F-3
Consolidated Statements of Stockholders' Equity........ F-4
Consolidated Statements of Cash Flows.................. F-5
Notes to Consolidated Financial Statements............. F-7
Financial Schedules as of December 31, 2000 and for the
years ended December 31, 2000, 1999 and 1998:
Schedule I -- Consolidated Summary of
Investments -- Other Than Investments in Affiliates... 81
Schedule II -- Condensed Financial Information of
MetLife, Inc. (Registrant)............................ 82
Schedule III -- Consolidated Supplementary Insurance
Information........................................... 84
Schedule IV -- Consolidated Reinsurance................ 86
78
80
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
MetLife, Inc.:
We have audited the accompanying consolidated balance sheets of MetLife,
Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2000. Our audits
also included the financial statement schedules listed in the Index to
Consolidated Financial Statements and Schedules. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of MetLife, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
February 9, 2001
F-1
81
METLIFE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS)
2000 1999
-------- --------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value........ $112,979 $ 96,981
Equity securities, at fair value.......................... 2,193 2,006
Mortgage loans on real estate............................. 21,951 19,739
Real estate and real estate joint ventures................ 5,504 5,649
Policy loans.............................................. 8,158 5,598
Other limited partnership interests....................... 1,652 1,331
Short-term investments.................................... 1,269 3,055
Other invested assets..................................... 2,821 1,501
-------- --------
Total investments................................. 156,527 135,860
Cash and cash equivalents................................... 3,434 2,789
Accrued investment income................................... 2,050 1,725
Premiums and other receivables.............................. 8,343 6,681
Deferred policy acquisition costs........................... 10,618 9,070
Deferred income taxes....................................... -- 603
Other assets................................................ 3,796 3,563
Separate account assets..................................... 70,250 64,941
-------- --------
Total assets...................................... $255,018 $225,232
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits.................................... $ 81,974 $ 73,582
Policyholder account balances............................. 54,309 45,901
Other policyholder funds.................................. 5,705 4,498
Policyholder dividends payable............................ 1,082 974
Policyholder dividend obligation.......................... 385 --
Short-term debt........................................... 1,094 4,208
Long-term debt............................................ 2,426 2,514
Current income taxes payable.............................. 112 548
Deferred income taxes payable............................. 752 --
Payables under securities loaned transactions............. 12,301 6,461
Other liabilities......................................... 7,149 7,915
Separate account liabilities.............................. 70,250 64,941
-------- --------
Total liabilities................................. 237,539 211,542
-------- --------
Commitments and contingencies (Note 10)
Company-obligated mandatorily redeemable securities of
subsidiary trusts......................................... 1,090 --
-------- --------
Stockholders' Equity:
Preferred stock, par value $0.01 per share; 200,000,000
shares authorized; none issued......................... -- --
Series A junior participating preferred stock............. -- --
Common stock, par value $0.01 per share; 3,000,000,000
shares authorized; 786,766,664 shares issued;
760,681,913 shares outstanding......................... 8 --
Additional paid-in capital................................ 14,926 --
Retained earnings......................................... 1,021 14,100
Treasury stock, at cost; 26,084,751 shares................ (613) --
Accumulated other comprehensive income (loss)............. 1,047 (410)
-------- --------
Total stockholders' equity........................ 16,389 13,690
-------- --------
Total liabilities and stockholders' equity........ $255,018 $225,232
======== ========
See accompanying notes to consolidated financial statements.
F-2
82
METLIFE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
2000 1999 1998
------- ------- -------
REVENUES
Premiums.................................................... $16,317 $12,088 $11,503
Universal life and investment-type product policy fees...... 1,820 1,433 1,360
Net investment income....................................... 11,768 9,816 10,228
Other revenues.............................................. 2,432 2,154 1,994
Net investment (losses) gains (net of amounts allocable to
other accounts of $(54), $(67) and $608, respectively).... (390) (70) 2,021
------- ------- -------
Total revenues.................................... 31,947 25,421 27,106
------- ------- -------
EXPENSES
Policyholder benefits and claims (excludes amounts directly
related to net investment gains and losses of $41, $(21)
and $368, respectively)................................... 16,893 13,100 12,638
Interest credited to policyholder account balances.......... 2,935 2,441 2,711
Policyholder dividends...................................... 1,919 1,690 1,651
Payments to former Canadian policyholders................... 327 -- --
Demutualization costs....................................... 230 260 6
Other expenses (excludes amounts directly related to net
investment and losses gains of $(95), $(46) and $240,
respectively)............................................. 8,227 6,755 8,019
------- ------- -------
Total expenses.................................... 30,531 24,246 25,025
------- ------- -------
Income before provision for income taxes.................... 1,416 1,175 2,081
Provision for income taxes.................................. 463 558 738
------- ------- -------
Net income.................................................. $ 953 $ 617 $ 1,343
======= ======= =======
Net income after April 7, 2000 (date of demutualization)
(Note 17)................................................. $ 1,173
=======
Net income per share
Basic..................................................... $ 1.52
=======
Diluted................................................... $ 1.49
=======
Cash dividends per share.................................... $ 0.20
=======
See accompanying notes to consolidated financial statements.
F-3
83
METLIFE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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 January 1,
1998.................... $-- $ -- $ 12,140 $ -- $ 1,898 $ (31) $ -- $14,007
Comprehensive income:
Net income.............. 1,343 1,343
Other comprehensive
loss:
Unrealized investment
losses, net of
related offsets,
reclassification
adjustments and
income taxes........ (358) (358)
Foreign currency
translation
adjustments......... (113) (113)
Minimum pension
liability
adjustment.......... (12) (12)
-------
Other comprehensive
loss................ (483)
-------
Comprehensive income.... 860
---- ------- -------- ----- ------- ----- ---- -------
Balance at December 31,
1998.................... -- -- 13,483 -- 1,540 (144) (12) 14,867
Comprehensive loss:
Net income.............. 617 617
Other comprehensive
loss:
Unrealized investment
losses, net of
related offsets,
reclassification
adjustments and
income taxes........ (1,837) (1,837)
Foreign currency
translation
adjustments......... 50 50
Minimum pension
liability
adjustment.......... (7) (7)
-------
Other comprehensive
loss................ (1,794)
-------
Comprehensive loss...... (1,177)
---- ------- -------- ----- ------- ----- ---- -------
Balance at December 31,
1999.................... -- -- 14,100 -- (297) (94) (19) 13,690
Policy credits and cash
payments to eligible
policyholders........... (2,958) (2,958)
Common stock issued in
demutualization......... 5 10,917 (10,922) --
Initial public offering of
common stock............ 2 3,152 3,154
Private placement of
common stock............ 1 854 855
Unit offering............. 3 3
Treasury stock acquired... (613) (613)
Dividends on common
stock................... (152) (152)
Comprehensive income:
Net loss before date of
demutualization....... (220) (220)
Net income after date of
demutualization....... 1,173 1,173
Other comprehensive
income:
Unrealized investment
gains, net of
related offsets,
reclassification
adjustments and
income taxes........ 1,472 1,472
Foreign currency
translation
adjustments......... (6) (6)
Minimum pension
liability
adjustment.......... (9) (9)
-------
Other comprehensive
income.............. 1,457
-------
Comprehensive income...... 2,410
-- ------- -------- ----- ------- ----- ---- -------
Balance at December 31,
2000.................... $8 $14,926 $ 1,021 $(613) $ 1,175 $(100) $(28) $16,389
== ======= ======== ===== ======= ===== ==== =======
See accompanying notes to consolidated financial statements.
F-4
84
METLIFE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN MILLIONS)
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 953 $ 617 $ 1,343
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expenses................. 510 173 56
Losses (gains) from sales of investments and
businesses, net...................................... 444 137 (2,629)
Change in undistributed income of real estate joint
ventures and other limited partnership interests..... (200) (322) (91)
Interest credited to other policyholder account
balances............................................. 2,935 2,441 2,711
Universal life and investment-type product policy
fees................................................. (1,820) (1,433) (1,360)
Change in accrued investment income.................... (170) 269 (181)
Change in premiums and other receivables............... (454) (619) (2,681)
Change in deferred policy acquisition costs, net....... (921) (389) (188)
Change in insurance-related liabilities................ 2,685 2,243 1,481
Change in income taxes payable......................... 239 22 251
Change in other liabilities............................ (2,105) 857 2,390
Other, net............................................. (770) (131) (260)
-------- -------- --------
Net cash provided by operating activities................... 1,326 3,865 842
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities....................................... 57,295 73,120 57,857
Equity securities...................................... 909 760 3,085
Mortgage loans on real estate.......................... 2,163 1,992 2,296
Real estate and real estate joint ventures............. 655 1,062 1,122
Other limited partnership interests.................... 422 469 146
Purchases of:
Fixed maturities....................................... (63,991) (72,253) (67,543)
Equity securities...................................... (863) (410) (854)
Mortgage loans on real estate.......................... (2,836) (4,395) (2,610)
Real estate and real estate joint ventures............. (407) (341) (423)
Other limited partnership interests.................... (660) (465) (723)
Net change in short-term investments...................... 2,043 (1,577) (761)
Net change in policy loans................................ (315) 2 133
Purchase of businesses, net of cash received.............. (416) (2,972) --
Proceeds from sales of businesses......................... 869 -- 7,372
Net change in payable under securities loaned
transactions........................................... 5,840 2,692 3,769
Other, net................................................ (625) (73) (183)
-------- -------- --------
Net cash provided by (used in) investing activities......... $ 83 $ (2,389) $ 2,683
-------- -------- --------
F-5
85
METLIFE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN MILLIONS)
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits............................................... $ 28,834 $ 18,428 $ 19,361
Withdrawals............................................ (28,235) (20,650) (21,706)
Net change in short-term debt............................. (3,114) 623 (1,002)
Long-term debt issued..................................... 212 44 693
Long-term debt repaid..................................... (124) (433) (481)
Common stock issued....................................... 4,009 -- --
Treasury stock acquired................................... (613) -- --
Net proceeds from issuance of company-obligated
mandatorily redeemable securities of subsidiary
trust.................................................. 969 -- --
Cash payments to eligible policyholders................... (2,550) -- --
Dividends on common stock................................. (152) -- --
-------- -------- --------
Net cash used in financing activities....................... (764) (1,988) (3,135)
-------- -------- --------
Change in cash and cash equivalents......................... 645 (512) 390
Cash and cash equivalents, beginning of year................ 2,789 3,301 2,911
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 3,434 $ 2,789 $ 3,301
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ 440 $ 388 $ 367
======== ======== ========
Income taxes........................................... $ 222 $ 587 $ 579
======== ======== ========
Non-cash transactions during the year:
Policy credits to eligible policyholders............... $ 408 $ -- $ --
======== ======== ========
Business acquisitions -- assets........................ $ 22,936 $ 4,832 $ --
======== ======== ========
Business acquisitions -- liabilities................... $ 22,437 $ 1,860 $ --
======== ======== ========
Business dispositions -- assets........................ $ 1,184 $ -- $ 10,663
======== ======== ========
Business dispositions -- liabilities................... $ 1,014 $ -- $ 3,691
======== ======== ========
Real estate acquired in satisfaction of debt........... $ 22 $ 37 $ 69
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
86
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
MetLife, Inc. (the "Holding Company") and its subsidiaries ("MetLife" or
the "Company") is a leading provider of insurance and financial services to a
broad section of institutional and individual customers. The Company offers life
insurance, annuities and mutual funds to individuals and 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 requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. The most significant estimates include
those used in determining deferred policy acquisition costs, investment
allowances and the liability for future policyholder benefits. Actual results
could differ from those estimates.
The accompanying consolidated financial statements include the accounts of
the Holding Company and its subsidiaries, partnerships and joint ventures in
which the Company has a majority voting interest or general partner interest
with limited removal rights by limited partners. Closed block assets,
liabilities, revenues and expenses are combined on a line by line basis with the
assets, liabilities, revenues and expenses outside the closed block based on the
nature of the particular item. Intercompany accounts and transactions have been
eliminated.
The Company uses the equity method to account for its investments in real
estate joint ventures and other limited partnership interests in which it does
not have a controlling interest, but has more than a minimal interest.
Minority interest related to consolidated entities included in other
liabilities was $479 million and $245 million at December 31, 2000 and 1999,
respectively.
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform with the 2000 presentation.
DEMUTUALIZATION AND INITIAL PUBLIC OFFERING
On April 7, 2000 (the "date of demutualization"), Metropolitan Life
Insurance Company ("Metropolitan Life") converted from a mutual life insurance
company to a stock life insurance company and became a wholly-owned subsidiary
of MetLife, Inc. The conversion was pursuant to an order by the New York
Superintendent of Insurance ("Superintendent") approving Metropolitan Life's
plan of reorganization, as amended (the "plan").
On the date of demutualization, policyholders' membership interests in
Metropolitan Life were extinguished and eligible policyholders received, in
exchange for their interests, trust interests representing 494,466,664 shares of
common stock of MetLife, Inc. to be held in a trust, cash payments aggregating
$2,550 million and adjustments to their policy values in the form of policy
credits aggregating $408 million, as provided in the plan. In addition,
Metropolitan Life's Canadian branch made cash payments of $327 million to
holders of certain policies transferred to Clarica Life Insurance Company in
connection with the sale of a substantial portion of Metropolitan Life's
Canadian operations in 1998, as a result of a commitment made in connection with
obtaining Canadian regulatory approval of that sale.
F-7
87
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENTS
The Company's fixed maturity and equity securities are classified as
available-for-sale and are reported at their estimated fair value. Unrealized
investment gains and losses on securities are recorded as a separate component
of other comprehensive income (loss), net of policyholder related amounts and
deferred income taxes. The cost of fixed maturity and equity securities is
adjusted for impairments in value deemed to be other than temporary. These
adjustments are recorded as investment losses. Investment gains and losses on
sales of securities are determined on a specific identification basis. All
security transactions are recorded on a trade date basis.
Mortgage loans on real estate are stated at amortized cost, net of
valuation allowances. Valuation allowances are established for the excess
carrying value of the mortgage loan over its estimated fair value when it is
probable that, based upon current information and events, the Company will be
unable to collect all amounts due under the contractual terms of the loan
agreement. Valuation allowances are based upon the present value of expected
future cash flows discounted at the loan's original effective interest rate or
the collateral value if the loan is collateral dependent. Interest income earned
on impaired loans is accrued on the net carrying value amount of the loan based
on the loan's effective interest rate. However, interest ceases to be accrued
for loans on which interest is more than 60 days past due.
Real estate, including related improvements, is stated at cost less
accumulated depreciation. Depreciation is provided on a straight-line basis over
the estimated useful life of the asset (typically 20 to 40 years). Cost is
adjusted for impairment whenever events or changes in circumstances indicate the
carrying amount of the asset may not be recoverable. Impaired real estate is
written down to estimated fair value with the impairment loss being included in
net investment gains (losses). Impairment losses are based upon the estimated
fair value of real estate, which is generally computed using the present value
of expected future cash flows from the real estate discounted at a rate
commensurate with the underlying risks. Real estate acquired in satisfaction of
debt is recorded at estimated fair value at the date of foreclosure. Valuation
allowances on real estate held-for-sale are computed using the lower of
depreciated cost or estimated fair value, net of disposition costs.
Policy loans are stated at unpaid principal balances.
Short-term investments are stated at amortized cost, which approximates
fair value.
DERIVATIVE INSTRUMENTS
The Company uses derivative instruments to reduce the risk associated with
changing market values or variable cash flows related to the Company's financial
assets and liabilities. This objective is achieved through one of two principal
risk management strategies: hedging the changes in fair value of financial
assets, liabilities or firm commitments or hedging the variable cash flows of
assets, liabilities or forecasted transactions. Hedged forecasted transactions,
other than the receipt or payment of variable interest payments, are not
expected to occur more than 12 months after hedge inception. The Company's
derivative strategy employs a variety of instruments including financial
futures, financial forwards, interest rate and foreign currency swaps, floors,
foreign exchange contracts, caps and options.
The Company's derivative program is monitored by senior management. The
Company's risk of loss is typically limited to the fair value of its derivative
instruments and not to the notional or contractual amounts of these derivatives.
Risk arises from changes in the fair value of the underlying instruments and,
with respect to over-the-counter transactions, from the possible inability of
counterparties to meet the terms of the contracts. The Company has policies
regarding the financial stability and credit standing of its major
counterparties.
F-8
88
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company uses derivative instruments to hedge designated risks. The
hedge is expected to be highly effective in offsetting the designated risk at
the inception of the contract. The Company monitors the effectiveness of its
hedges throughout the contract term using an offset ratio of 80 to 125 percent
as its minimum acceptable threshold for hedge effectiveness. During any period
the derivative instruments are outside their threshold for hedge effectiveness,
or if the relationship no longer qualifies as a hedge, all changes in the
derivative's value are marked to market through net investment gains and losses.
Gains or losses on financial futures contracts entered into in anticipation
of investment transactions are deferred and, at the time of the ultimate
investment purchase or disposition, recorded as an adjustment to the basis of
the purchased assets or to the proceeds on disposition. Gains or losses on
financial futures used in asset risk management are deferred and amortized into
net investment income over the remaining term of the investment. Gains or losses
on financial futures used in portfolio risk management are deferred and
amortized into net investment income or policyholder benefits over the remaining
life of the hedged sector of the underlying portfolio.
Financial forward contracts that are entered into to purchase securities
are marked to fair value through other comprehensive income, similar to the
accounting for the security to be purchased. Such contracts are accounted for at
settlement by recording the purchase of the specified securities at the
contracted value. Gains or losses resulting from the termination of forward
contracts are recognized immediately as a component of net investment gains and
losses.
Interest rate and certain foreign currency swaps involve the periodic
exchange of payments without the exchange of underlying principal or notional
amounts. Net receipts or payments are accrued and recognized over the term of
the swap agreement as an adjustment to net investment income or other expenses.
Gains or losses resulting from swap terminations are amortized over the
remaining term of the underlying asset or liability. Gains and losses on swaps
and certain foreign forward exchange contracts entered into in anticipation of
investment transactions are deferred and, at the time of the ultimate investment
purchase or disposition, reflected as an adjustment to the basis of the
purchased assets or to the proceeds of disposition. In the event the asset or
liability underlying a swap is disposed of, the swap position is closed
immediately and any gain or loss is recorded in net investment gains and losses.
The Company periodically enters into collars, which consist of purchased
put and written call options, to lock in unrealized gains on equity securities.
Collars are marked to market through other comprehensive income or loss, similar
to the accounting for the underlying equity securities.
Purchased interest rate caps and floors are used to offset the risk of
interest rate changes related to insurance liabilities. Premiums paid on floors,
caps and options are amortized over the life of the applicable derivative
instrument. Any gains or losses relating to these derivative instruments are
deferred and are recognized as a component of net investment income over the
original term of the derivative instrument.
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with an original maturity
of three months or less to be cash equivalents.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements, which are included in other
assets, are stated at cost, less accumulated depreciation and amortization.
Depreciation is determined using either the straight-line or
sum-of-the-years-digits method over the estimated useful lives of the assets.
Estimated lives range from ten to 40 years for leasehold improvements and three
to 15 years for all other property and equipment. Accumulated depreciation of
property and equipment and accumulated amortization on leasehold improvements
was $1,304 million and $1,224 million at December 31, 2000 and 1999,
respectively.
F-9
89
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Related depreciation and amortization expense was $120 million, $109 million and
$116 million for the years ended December 31, 2000, 1999 and 1998, respectively.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business that vary with, and are
primarily related to, the production of new business are deferred. Such costs,
which consist principally of commissions, agency and policy issue expenses, are
amortized with interest over the expected life of the contract for participating
traditional life, universal life and investment-type products. Generally,
deferred policy acquisition costs are amortized in proportion to the present
value of estimated gross margins or profits from investment, mortality, expense
margins and surrender charges. Interest rates are based on rates in effect at
the inception or acquisition of the contracts. Actual gross margins or profits
can vary from management's estimates resulting in increases or decreases in the
rate of amortization. Management periodically updates these estimates and
evaluates the recoverability of deferred policy acquisition costs. When
appropriate, management revises its assumptions of the estimated gross margins
or profits of these contracts, and the cumulative amortization is re-estimated
and adjusted by a cumulative charge or credit to current operations.
Deferred policy acquisition costs for non-participating traditional life,
non-medical health and annuity policies with life contingencies are amortized in
proportion to anticipated premiums. Assumptions as to anticipated premiums are
made at the date of policy issuance or acquisition and are consistently applied
during the lives of the contracts. Deviations from estimated experience are
included in operations when they occur. For these contracts, the amortization
period is typically the estimated life of the policy.
Deferred policy acquisition costs related to internally replaced contracts
are expensed at the date of replacement.
Deferred policy acquisition costs for property and casualty insurance
contracts, which are primarily comprised of commissions and certain underwriting
expenses, are deferred and amortized on a pro rata basis over the applicable
contract term or reinsurance treaty.
Value of business acquired, included as part of deferred policy acquisition
costs, represents the present value of future profits generated from existing
insurance contracts in force at the date of acquisition and is amortized over
the expected policy or contract duration in relation to the present value of
estimated gross profits from such policies and contracts.
F-10
90
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding deferred policy acquisition costs is as follows:
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- ------
(DOLLARS IN MILLIONS)
Balance at January 1.................................. $ 9,070 $ 7,028 $6,948
Capitalization of policy acquisition costs............ 1,863 1,160 1,025
Value of business acquired............................ 1,681 156 32
------- ------- ------
Total....................................... 12,614 8,344 8,005
------- ------- ------
Amortization allocated to:
Net investment (losses) gains....................... (95) (46) 240
Unrealized investment gains (losses)................ 590 (1,628) (216)
Other expenses...................................... 1,478 930 641
------- ------- ------
Total amortization.......................... 1,973 (744) 665
------- ------- ------
Dispositions and other................................ (23) (18) (312)
------- ------- ------
Balance at December 31................................ $10,618 $ 9,070 $7,028
======= ======= ======
Amortization of deferred policy acquisition costs is allocated to (1)
investment gains and losses to provide consolidated statement of income
information regarding the impact of such gains and losses on the amount of the
amortization, (2) unrealized investment gains and losses to provide information
regarding the amount of deferred policy acquisition costs that would have been
amortized if such gains and losses had been recognized, and (3) other expenses
to provide amounts related to the gross margins or profits originating from
transactions other than investment gains and losses.
Investment gains and losses related to certain products have a direct
impact on the amortization of deferred policy acquisition costs. Presenting
investment gains and losses net of related amortization of deferred policy
acquisition costs provides information useful in evaluating the operating
performance of the Company. This presentation may not be comparable to
presentations made by other insurers.
GOODWILL
The excess of cost over the fair value of net assets acquired ("goodwill")
is included in other assets. Goodwill is amortized on a straight-line basis over
a period ranging from ten to 30 years. The Company reviews goodwill to assess
recoverability from future operations using undiscounted cash flows. Impairments
are recognized in operating results if a permanent diminution in value is deemed
to have occurred.
YEARS ENDED DECEMBER 31
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Net Balance at January 1.................................... $611 $404 $359
Acquisitions................................................ 279 237 67
Amortization................................................ (62) (30) (22)
Dispositions................................................ (125) -- --
---- ---- ----
Net Balance at December 31.................................. $703 $611 $404
==== ==== ====
DECEMBER 31
----------------------
2000 1999
------- -------
(DOLLARS IN MILLIONS)
Accumulated Amortization.................................... $ 74 $118
==== ====
F-11
91
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FUTURE POLICY BENEFITS AND POLICYHOLDER ACCOUNT BALANCES
Future policy benefit liabilities for participating traditional life
insurance policies are equal to the aggregate of (1) net level premium reserves
for death and endowment policy benefits (calculated based upon the nonforfeiture
interest rate, ranging from 3% to 11%, and mortality rates guaranteed in
calculating the cash surrender values described in such contracts), (2) the
liability for terminal dividends, and (3) premium deficiency reserves, which are
established when the liabilities for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for expected
future policy benefits and expenses after deferred policy acquisition costs are
written off.
Future policy benefit liabilities for traditional annuities are equal to
accumulated contractholder fund balances during the accumulation period and the
present value of expected future payments after annuitization. Interest rates
used in establishing such liabilities range from 3% to 12%. Future policy
benefit liabilities for non-medical health insurance are calculated using the
net level premium method and assumptions as to future morbidity, withdrawals and
interest, which provide a margin for adverse deviation. Interest rates used in
establishing such liabilities range from 3% to 11%. Future policy benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest. Interest rates used in establishing such liabilities range from 3% to
11%.
Policyholder account balances for universal life and investment-type
contracts are equal to the policy account values, which consist of an
accumulation of gross premium payments plus credited interest, ranging from 2%
to 17%, less expenses, mortality charges, and withdrawals.
The liability for unpaid claims and claim expenses for property and
casualty insurance represents the amount estimated for claims that have been
reported but not settled and claims incurred but not reported. Liabilities for
unpaid claims are estimated based upon the Company's historical experience and
other actuarial assumptions that consider the effects of current developments,
anticipated trends and risk management programs, reduced for anticipated salvage
and subrogation. Revisions of these estimates are included in operations in the
year such refinements are made.
RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS
Premiums related to traditional life and annuity policies with life
contingencies are recognized as revenues when due. Benefits and expenses are
provided against such revenues to recognize profits over the estimated lives of
the policies. When premiums are due over a significantly shorter period than the
period over which benefits are provided, any excess profit is deferred and
recognized into operations in a constant relationship to insurance in-force or,
for annuities, the amount of expected future policy benefit payments.
Premiums related to non-medical health contracts are recognized on a pro
rata basis over the applicable contract term.
Deposits related to universal life and investment-type products are
credited to policyholder account balances. Revenues from such contracts consist
of amounts assessed against policyholder account balances for mortality, policy
administration and surrender charges. Amounts that are charged to operations
include interest credited and benefit claims incurred in excess of related
policyholder account balances.
Premiums related to property and casualty contracts are recognized as
revenue on a pro rata basis over the applicable contract term. Unearned premiums
are included in other liabilities.
F-12
92
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POLICYHOLDER DIVIDENDS
Policyholder dividends are approved annually by the boards of directors.
The aggregate amount of policyholder dividends is related to actual interest,
mortality, morbidity and expense experience for the year, as well as
management's judgment as to the appropriate level of statutory surplus to be
retained by the insurance subsidiaries.
PARTICIPATING BUSINESS
Participating business represented approximately 22% and 19% of the
Company's life insurance in-force, and 81% and 83% of the number of life
insurance policies in-force, at December 31, 2000 and 1999, respectively.
Participating policies represented approximately 47% and 50%, 50% and 54%, and
45% and 47% of gross and net life insurance premiums for the years ended
December 31, 2000, 1999 and 1998, respectively. The percentages indicated are
calculated excluding the business of the Reinsurance segment.
INCOME TAXES
The Holding Company and its includable life insurance and non-life
insurance subsidiaries file a consolidated U.S. federal income tax return in
accordance with the provisions of the Internal Revenue Code of 1986, as amended
(the "Code"). Non-includable subsidiaries file either separate tax returns or
separate consolidated tax returns. Under the Code, the amount of federal income
tax expense incurred by mutual life insurance companies includes an equity tax
calculated based upon a prescribed formula that incorporates a differential
earnings rate between stock and mutual life insurance companies. Metropolitan
Life is not subject to the equity tax after the date of demutualization. The
future tax consequences of temporary differences between financial reporting and
tax bases of assets and liabilities are measured at the balance sheet dates and
are recorded as deferred income tax assets and liabilities.
REINSURANCE
The Company has reinsured certain of its life insurance and property and
casualty insurance contracts with other insurance companies under various
agreements. Amounts due from reinsurers are estimated based upon assumptions
consistent with those used in establishing the liabilities related to the
underlying reinsured contracts. Policy and contract liabilities are reported
gross of reinsurance credits. Deferred policy acquisition costs are reduced by
amounts recovered under reinsurance contracts. Amounts received from reinsurers
for policy administration are reported in other revenues.
The Company assumes and retrocedes financial reinsurance contracts, which
represent low mortality risk reinsurance treaties. These contracts are reported
as deposits and are included in other assets. The amount of revenue reported on
these contracts represents fees and the cost of insurance under the terms of the
reinsurance agreement.
SEPARATE ACCOUNTS
Separate accounts are established in conformity with insurance laws and are
generally not chargeable with liabilities that arise from any other business of
the Company. Separate account assets are subject to general account claims only
to the extent the value of such assets exceeds the separate account liabilities.
Investments (stated at estimated fair value) and liabilities of the separate
accounts are reported separately as assets and liabilities. Deposits to separate
accounts, investment income and recognized and unrealized gains and losses on
the investments of the separate accounts accrue directly to contractholders and,
accordingly, are not reflected in the Company's consolidated statements of
income and cash flows. Mortality, policy administration and surrender charges to
all separate accounts are included in revenues.
F-13
93
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of foreign operations are translated at the exchange
rates in effect at each year-end and income and expense accounts are translated
at the average rates of exchange prevailing during the year. The local
currencies of foreign operations are the functional currencies unless the local
economy is highly inflationary. Translation adjustments are charged or credited
directly to other comprehensive income or loss. Gains and losses from foreign
currency transactions are reported in earnings.
EARNINGS PER SHARE
Earnings per share amounts, on a basic and diluted basis, have been
calculated based upon the weighted average common shares outstanding or deemed
to be outstanding only for the period after the date of demutualization.
Basic earnings per share is computed based on the weighted average number
of shares outstanding during the period. Diluted earnings per share includes the
dilutive effect of forward purchase contracts, using the treasury stock method.
Under the treasury stock method, exercise of the forward purchase contracts is
assumed with the proceeds used to purchase common stock at the average market
price for the period. The difference between the number of shares assumed issued
and number of shares assumed purchased represents the dilutive shares.
APPLICATION OF ACCOUNTING PRONOUNCEMENTS
Effective December 31, 2000, the Company early adopted Statement of
Position ("SOP") 00-3, Accounting by Insurance Enterprises for Demutualizations
and Formations of Mutual Insurance Holding Companies and for Certain
Long-Duration Participating Contracts ("SOP 00-3"). SOP 00-3 provides guidance
on accounting by insurance enterprises for demutualizations and the formation of
mutual insurance holding companies, including the emergence of earnings from and
the financial statement presentation of the closed block formed as a part of a
demutualization. Adoption of SOP 00-3 did not have a material effect on the
Company's consolidated results of operations other than the reclassification of
demutualization costs as operating expenses rather than as an extraordinary
item.
Effective October 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101
summarizes certain of the Securities and Exchange Commission's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The requirements of SAB 101 did not have a material effect on the
Company's consolidated financial statements.
Effective January 1, 2000, the Company adopted Statement of Position 98-7,
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk ("SOP 98-7"). SOP 98-7 provides guidance on the method of
accounting for insurance and reinsurance contracts that do not transfer
insurance risk, defined in the SOP as the deposit method. SOP 98-7 classifies
insurance and reinsurance contracts for which the deposit method is appropriate
into those that (1) transfer only significant timing risk, (2) transfer only
significant underwriting risk, (3) transfer neither significant timing nor
underwriting risk and (4) have an indeterminate risk. Adoption of SOP 98-7 did
not have a material effect on the Company's consolidated financial statements.
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities -- a replacement of FASB Statement No. 125 ("SFAS 140"). SFAS 140 is
effective for transfers and extinguishments of liabilities occurring after March
31, 2001 and is effective for disclosures about securitizations and collateral
and for recognition and reclassification of collateral for fiscal years ending
after December 15, 2000. The Company is in the process of quantifying the
impact, if any, of the provisions of SFAS 140 effective for future periods.
F-14
94
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1999, the Company adopted SOP 98-5, Reporting on the
Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 broadly defines start-up
activities. SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. Adoption of SOP 98-5 did not have a material
effect on the Company's consolidated financial statements.
Effective January 1, 1999, the Company adopted SOP 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1").
SOP 98-1 provides guidance for determining when an entity should capitalize or
expense external and internal costs of computer software developed or obtained
for internal use. Adoption of the provisions of SOP 98-1 had the effect of
increasing other assets by $82 million at December 31, 1999.
Effective January 1, 1999, the Company adopted SOP 97-3, Accounting for
Insurance and Other Enterprises for Insurance Related Assessments ("SOP 97-3").
SOP 97-3 provides guidance on accounting by insurance and other enterprises for
assessments related to insurance activities including recognition, measurement
and disclosure of guaranty fund and other insurance related assessments.
Adoption of SOP 97-3 did not have a material effect on the Company's
consolidated financial statements.
In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133 ("SFAS 138"). In June 1999,
the FASB also issued Statement of Financial Accounting Standards No. 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 ("SFAS 137"). SFAS 137 deferred the
provisions of Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133") until January 1,
2001. SFAS 133 and SFAS 138 require, among other things, that all derivatives be
recognized in the consolidated balance sheets as either assets or liabilities
and measured at fair value. The corresponding derivative gains and losses should
be reported based upon the hedge relationship, if such a relationship exists.
Changes in the fair value of derivatives that are not designated as hedges or
that do not meet the hedge accounting criteria in SFAS 133 and SFAS 138 are
required to be reported in income. The Company estimates that the cumulative
effect of the adoption SFAS 133 and SFAS 138, as of January 1, 2001, will result
in a $32 million, net of income taxes of $19 million, increase in other
comprehensive income and an insignificant impact on net income.
In July 2000, the Emerging Issues Task Force ("EITF") reached consensus on
Issue No. 99-20, Recognition of Interest Income and Impairment on Certain
Investments ("EITF No. 99-20"). This pronouncement requires investors in certain
asset-backed securities to record changes in their estimated yield on a
prospective basis and to evaluate these securities for an other-than-temporary
decline in value. This consensus is effective for financial statements with
fiscal quarters beginning after December 15, 2000. While the Company currently
is in the process of quantifying the impact of EITF No. 99-20, the provisions of
the consensus are not expected to have a material impact on the Company's
consolidated financial statements.
F-15
95
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
Fixed maturities and equity securities at December 31, 2000 were as
follows:
COST OR GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- ------ ------ ----------
(DOLLARS IN MILLIONS)
Fixed Maturities:
Bonds:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies......... $ 8,461 $1,189 $ 16 $ 9,634
States and political subdivisions... 1,563 79 3 1,639
Foreign governments................. 5,153 341 153 5,341
Corporate........................... 48,893 1,181 1,493 48,581
Mortgage- and asset-backed
securities........................ 33,039 699 165 33,573
Other............................... 13,872 384 366 13,890
-------- ------ ------ --------
Total bonds.................... 110,981 3,873 2,196 112,658
Redeemable preferred stocks............ 321 -- -- 321
-------- ------ ------ --------
Total fixed maturities......... $111,302 $3,873 $2,196 $112,979
======== ====== ====== ========
Equity Securities:
Common stocks.......................... $ 872 $ 785 $ 55 $ 1,602
Nonredeemable preferred stocks......... 577 19 5 591
-------- ------ ------ --------
Total equity securities........ $ 1,449 $ 804 $ 60 $ 2,193
======== ====== ====== ========
F-16
96
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fixed maturities and equity securities at December 31, 1999 were as
follows:
COST OR GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- ------ ------ ----------
(DOLLARS IN MILLIONS)
Fixed Maturities:
Bonds:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies......... $ 5,990 $ 456 $ 147 $ 6,299
States and political subdivisions... 1,583 4 45 1,542
Foreign governments................. 4,090 210 94 4,206
Corporate........................... 47,505 585 1,913 46,177
Mortgage- and asset-backed
securities........................ 27,396 112 847 26,661
Other............................... 12,235 313 462 12,086
------- ------ ------ -------
Total bonds.................... 98,799 1,680 3,508 96,971
Redeemable preferred stocks............ 10 -- -- 10
------- ------ ------ -------
Total fixed maturities......... $98,809 $1,680 $3,508 $96,981
======= ====== ====== =======
Equity Securities:
Common stocks.......................... $ 980 $ 921 $ 35 $ 1,866
Nonredeemable preferred stocks......... 151 -- 11 140
------- ------ ------ -------
Total equity securities........ $ 1,131 $ 921 $ 46 $ 2,006
======= ====== ====== =======
The Company held foreign currency derivatives with notional amounts of
$3,885 million and $4,002 million to hedge the exchange rate risk associated
with foreign bonds at December 31, 2000 and 1999, respectively.
At December 31, 2000, fixed maturities at estimated fair values held by the
Company that were below investment grade or not rated by an independent rating
agency totaled $9,864 million. At December 31, 2000, non-income producing fixed
maturities were insignificant.
The cost or amortized cost and estimated fair value of bonds at December
31, 2000, by contractual maturity date, are shown below:
COST OR
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(DOLLARS IN MILLIONS)
Due in one year or less.............................. $ 3,465 $ 3,460
Due after one year through five years................ 21,041 21,275
Due after five years through ten years............... 23,872 23,948
Due after ten years.................................. 29,564 30,402
-------- --------
Total...................................... 77,942 79,085
Mortgage- and asset-backed securities................ 33,039 33,573
-------- --------
Total bonds................................ $110,981 $112,658
======== ========
F-17
97
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Bonds not due at a single maturity date have been included in the above
table in the year of final maturity. Actual maturities may differ from
contractual maturities due to the exercise of prepayment options.
Sales of securities classified as available-for-sale were as follows:
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Proceeds............................................ $46,205 $59,852 $46,913
Gross investment gains.............................. $ 599 $ 605 $ 2,053
Gross investment losses............................. $ 1,520 $ 911 $ 486
Gross investment losses above exclude writedowns recorded during 2000 and
1999 for permanently impaired available-for-sale securities of $324 million and
$133 million, respectively.
Excluding investments in U.S. Treasury securities and obligations of U.S.
government corporations and agencies, the Company is not exposed to any
significant concentration of credit risk in its fixed maturities portfolio.
SECURITIES LENDING PROGRAM
The Company participates in securities lending programs 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 $11,746 million and
$6,458 million and an estimated fair value of $12,289 million and $6,391 million
were on loan under the program at December 31, 2000 and 1999, respectively. The
Company was liable for cash collateral under its control of $12,301 million and
$6,461 million at December 31, 2000 and 1999, respectively. Security collateral
on deposit from customers may not be sold or repledged and is not reflected in
the consolidated financial statements.
ASSETS ON DEPOSIT AND HELD IN TRUST
The Company had investment assets on deposit with regulatory agencies with
a fair market value of $597 million and $476 million at December 31, 2000 and
1999, respectively. Company securities held in trust to satisfy collateral
requirements had an amortized cost of $1,234 million at December 31, 2000.
MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate were categorized as follows:
DECEMBER 31,
----------------------------------------
2000 1999
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Commercial mortgage loans.................. $16,944 77% $14,931 75%
Agricultural mortgage loans................ 4,980 22% 4,816 24%
Residential mortgage loans................. 110 1% 82 1%
------- --- ------- ---
Total................................. 22,034 100% 19,829 100%
=== ===
Less: Valuation allowances................. 83 90
------- -------
Mortgage loans........................ $21,951 $19,739
======= =======
F-18
98
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage loans on real estate are collateralized by properties primarily
located throughout the United States. At December 31, 2000, approximately 16%,
7% and 6% of the properties were located in California, New York and Georgia,
respectively. Generally, the Company (as the lender) requires that a minimum of
one-fourth of the purchase price of the underlying real estate be paid by the
borrower.
Certain of the Company's real estate joint ventures have mortgage loans
with the Company. The carrying values of such mortgages were $540 million and
$547 million at December 31, 2000 and 1999, respectively.
Changes in mortgage loan valuation allowances were as follows:
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
---- ----- -----
(DOLLARS IN MILLIONS)
Balance at January 1.................................... $90 $ 173 $ 289
Additions............................................... 38 40 40
Deductions for writedowns and dispositions.............. (74) (123) (130)
Acquisitions (dispositions) of affiliates............... 29 -- (26)
---- ----- -----
Balance at December 31.................................. $83 $ 90 $ 173
==== ===== =====
A portion of the Company's mortgage loans on real estate was impaired and
consisted of the following:
DECEMBER 31,
------------
2000 1999
---- ----
(DOLLARS IN
MILLIONS)
Impaired mortgage loans with valuation allowances........... $592 $540
Impaired mortgage loans without valuation allowances........ 330 437
---- ----
Total.................................................. 922 977
Less: Valuation allowances.................................. 77 83
---- ----
Impaired mortgage loans................................ $845 $894
==== ====
The average investment in impaired mortgage loans on real estate was $912
million, $1,134 million and $1,282 million for the years ended December 31,
2000, 1999 and 1998, respectively. Interest income on impaired mortgage loans
was $76 million, $101 million and $109 million for the years ended December 31,
2000, 1999 and 1998, respectively.
The investment in restructured mortgage loans on real estate was $784
million and $980 million at December 31, 2000 and 1999, respectively. Interest
income of $62 million, $80 million and $74 million was recognized on
restructured loans for the years ended December 31, 2000, 1999 and 1998,
respectively. Gross interest income that would have been recorded in accordance
with the original terms of such loans amounted to $74 million, $92 million and
$87 million for the years ended December 31, 2000, 1999 and 1998, respectively.
Mortgage loans on real estate with scheduled payments of 60 days (90 days
for agriculture mortgages) or more past due or in foreclosure had an amortized
cost of $40 million and $44 million at December 31, 2000 and 1999, respectively.
F-19
99
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REAL ESTATE AND REAL ESTATE JOINT VENTURES
Real estate and real estate joint ventures consisted of the following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Real estate and real estate joint ventures
held-for-investment.................................... $5,495 $5,440
Impairments.............................................. (272) (289)
------ ------
Total............................................... 5,223 5,151
------ ------
Real estate and real estate joint ventures
held-for-sale.......................................... 417 719
Impairments.............................................. (97) (187)
Valuation allowance...................................... (39) (34)
------ ------
Total............................................... 281 498
------ ------
Real estate and real estate joint ventures..... $5,504 $5,649
====== ======
Accumulated depreciation on real estate was $2,337 million and $2,235
million at December 31, 2000 and 1999, respectively. Related depreciation
expense was $224 million, $247 million and $282 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
Real estate and real estate joint ventures were categorized as follows:
DECEMBER 31,
------------------------------------------
2000 1999
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
------ --------- -------- -------
(DOLLARS IN MILLIONS)
Office....................................... $3,635 66% $3,846 68%
Retail....................................... 586 10 587 10
Apartments................................... 558 10 474 8
Land......................................... 202 4 258 5
Agriculture.................................. 84 2 96 2
Other........................................ 439 8 388 7
------ --- ------ ---
Total.............................. $5,504 100% $5,649 100%
====== === ====== ===
The Company's real estate holdings are primarily located throughout the
United States. At December 31, 2000, approximately 26%, 25% and 10% of the
Company's real estate holdings were located in New York, California and Texas,
respectively.
Changes in real estate and real estate joint ventures held-for-sale
valuation allowance were as follows:
YEARS ENDED DECEMBER 31,
-------------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Balance at January 1....................................... $ 34 $ 33 $110
Additions charged (credited) to operations................. 17 36 (5)
Deductions for writedowns and dispositions................. (12) (35) (72)
---- ---- ----
Balance at December 31..................................... $ 39 $ 34 $ 33
==== ==== ====
F-20
100
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment income related to impaired real estate and real estate joint
ventures held-for-investment was $45 million, $61 million and $105 million for
the years ended December 31, 2000, 1999 and 1998, respectively. Investment
income related to impaired real estate and real estate joint ventures
held-for-sale was $18 million, $14 million and $3 million for the years ended
December 31, 2000, 1999 and 1998, respectively. The carrying value of non-income
producing real estate and real estate joint ventures was $15 million and $22
million at December 31, 2000 and 1999, respectively.
The Company owned real estate acquired in satisfaction of debt of $66
million and $47 million at December 31, 2000 and 1999, respectively.
LEVERAGED LEASES
Leveraged leases, included in other invested assets, consisted of the
following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Investment............................................... $1,002 $1,016
Estimated residual values................................ 546 559
------ ------
Total............................................... 1,548 1,575
Unearned income.......................................... (384) (417)
------ ------
Leveraged leases.................................... $1,164 $1,158
====== ======
The investment amounts set forth above are generally due in monthly
installments. The payment periods generally range from three to 15 years, but in
certain circumstances are as long as 30 years. These receivables are generally
collateralized by the related property.
NET INVESTMENT INCOME
The components of net investment income were as follows:
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Fixed maturities.................................... $ 8,538 $ 7,171 $ 6,990
Equity securities................................... 41 40 78
Mortgage loans on real estate....................... 1,693 1,484 1,580
Real estate and real estate joint ventures.......... 1,407 1,426 1,529
Policy loans........................................ 515 340 387
Other limited partnership interests................. 142 199 196
Cash, cash equivalents and short-term investments... 288 173 187
Other............................................... 162 91 406
------- ------- -------
Total.......................................... 12,786 10,924 11,353
Less: Investment expenses........................... 1,018 1,108 1,125
------- ------- -------
Net investment income.......................... $11,768 $ 9,816 $10,228
======= ======= =======
F-21
101
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INVESTMENT GAINS (LOSSES)
Net investment gains (losses), including changes in valuation allowances,
were as follows:
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------- ----- ------
(DOLLARS IN MILLIONS)
Fixed maturities........................................ $(1,437) $(538) $ 573
Equity securities....................................... 192 99 994
Mortgage loans on real estate........................... (18) 28 23
Real estate and real estate joint ventures.............. 101 265 424
Other limited partnership interests..................... (7) 33 13
Sales of businesses..................................... 660 -- 531
Other................................................... 65 (24) 71
------- ----- ------
Total.............................................. (444) (137) 2,629
Amounts allocable to:
Future policy benefit loss recognition................ -- -- (272)
Deferred policy acquisition costs..................... 95 46 (240)
Participating contracts............................... (126) 21 (96)
Policyholder dividend obligation...................... 85 -- --
------- ----- ------
Net investment (losses) gains...................... $ (390) $ (70) $2,021
======= ===== ======
Investment gains and losses have been reduced by (1) additions to future
policy benefits resulting from the need to establish additional liabilities due
to the recognition of investment gains, (2) deferred policy acquisition cost
amortization to the extent that such amortization results from investment gains
and losses, (3) additions to participating contractholder accounts when amounts
equal to such investment gains and losses are credited to the contractholders'
accounts, and (4) adjustments to the policyholder dividend obligation resulting
from investment gains and losses. This presentation may not be comparable to
presentations made by other insurers.
F-22
102
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET UNREALIZED INVESTMENT GAINS (LOSSES)
The components of net unrealized investment gains (losses), included in
accumulated other comprehensive income (loss), were as follows:
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Fixed maturities...................................... $ 1,677 $(1,828) $ 4,809
Equity securities..................................... 744 875 832
Other invested assets................................. 70 165 154
------- ------- -------
Total............................................ 2,491 (788) 5,795
------- ------- -------
Amounts allocable to:
Future policy benefit loss recognition.............. (284) (249) (2,248)
Deferred policy acquisition costs................... 107 697 (931)
Participating contracts............................. (133) (118) (212)
Policyholder dividend obligation.................... (385) -- --
Deferred income taxes................................. (621) 161 (864)
------- ------- -------
Total............................................ (1,316) 491 (4,255)
------- ------- -------
Net unrealized investment gains (losses).... $ 1,175 $ (297) $ 1,540
======= ======= =======
The changes in net unrealized investment gains (losses) were as follows:
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------ ------- ------
(DOLLARS IN MILLIONS)
Balance at January 1................................... $ (297) $ 1,540 $1,898
Unrealized investment gains (losses) during the year... 3,279 (6,583) (870)
Unrealized investment gains (losses) relating to:
Future policy benefit (loss) gain recognition........ (35) 1,999 (59)
Deferred policy acquisition costs.................... (590) 1,628 216
Participating contracts.............................. (15) 94 100
Policyholder dividend obligation..................... (385) -- --
Deferred income taxes.................................. (782) 1,025 255
------ ------- ------
Balance at December 31................................. $1,175 $ (297) $1,540
====== ======= ======
Net change in unrealized investment gains (losses)..... $1,472 $(1,837) $ (358)
====== ======= ======
F-23
103
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DERIVATIVE INSTRUMENTS
The table below provides a summary of the carrying value, notional amount
and current market or fair value of derivative financial instruments held at
December 31, 2000 and 1999:
2000 1999
------------------------------------------ ------------------------------------------
CURRENT MARKET CURRENT MARKET
OR FAIR VALUE OR FAIR VALUE
CARRYING NOTIONAL -------------------- CARRYING NOTIONAL --------------------
VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES
-------- -------- ------ ----------- -------- -------- ------ -----------
(DOLLARS IN MILLIONS)
Financial futures.......... $23 $ 254 $ 23 $ -- $ 27 $ 3,140 $37 $ 10
Interest rate swaps........ 41 1,549 49 1 (32) 1,316 11 40
Floors..................... -- 325 3 -- -- -- -- --
Caps....................... -- 9,950 -- -- 1 12,376 3 --
Foreign currency swaps..... (1) 1,469 267 85 -- 4,002 26 103
Exchange traded options.... 1 10 -- 1 -- -- -- --
--- ------- ---- ---- ---- ------- --- ----
Total contractual
commitments.............. $64 $13,557 $342 $ 87 $ (4) $20,834 $77 $153
=== ======= ==== ==== ==== ======= === ====
The following is a reconciliation of the notional amounts by derivative
type and strategy at December 31, 2000 and 1999:
DECEMBER 31, 1999 TERMINATIONS/ DECEMBER 31, 2000
NOTIONAL AMOUNT ADDITIONS MATURITIES NOTIONAL AMOUNT
----------------- --------- ------------- -----------------
(DOLLARS IN MILLIONS)
BY DERIVATIVE TYPE
Financial futures........ $ 3,140 $14,255 $17,141 $ 254
Financial forwards....... -- 12 12 --
Interest rate swaps...... 1,316 1,605 1,372 1,549
Floors................... -- 325 -- 325
Caps..................... 12,376 1,000 3,426 9,950
Foreign currency swaps... 4,002 687 3,220 1,469
Exchange traded
options................ -- 41 31 10
------- ------- ------- -------
Total contractual
commitments............ $20,834 $17,925 $25,202 $13,557
======= ======= ======= =======
BY STRATEGY
Liability hedging........ $12,571 $ 2,876 $ 3,830 $11,617
Invested asset hedging... 4,215 781 3,310 1,686
Portfolio hedging........ 2,021 14,255 16,022 254
Anticipated transaction
hedging................ 2,027 13 2,040 --
------- ------- ------- -------
Total contractual
commitments............ $20,834 $17,925 $25,202 $13,557
======= ======= ======= =======
F-24
104
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the notional amounts of derivative financial
instruments by maturity at December 31, 2000:
REMAINING LIFE
-------------------------------------------------------------
AFTER ONE AFTER FIVE
ONE YEAR YEAR THROUGH YEARS THROUGH AFTER TEN
OR LESS FIVE YEARS TEN YEARS YEARS TOTAL
-------- ------------ ------------- --------- -------
(DOLLARS IN MILLIONS)
Financial futures............ $ 254 $ -- $ -- $ -- $ 254
Interest rate swaps.......... 243 714 268 324 1,549
Floors....................... -- -- 325 -- 325
Caps......................... 5,210 4,740 -- -- 9,950
Foreign currency swaps....... 91 508 685 185 1,469
Exchange traded options...... 10 -- -- -- 10
------ ------ ------ ---- -------
Total contractual
commitments................ $5,808 $5,962 $1,278 $509 $13,557
====== ====== ====== ==== =======
4. FAIR VALUE INFORMATION
The estimated fair values of financial instruments have been determined by
using available market information and the valuation methodologies described
below. Considerable judgment is often required in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented herein may
not necessarily be indicative of amounts that could be realized in a current
market exchange. The use of different assumptions or valuation methodologies may
have a material effect on the estimated fair value amounts.
Amounts related to the Company's financial instruments were as follows:
NOTIONAL CARRYING ESTIMATED
AMOUNT VALUE FAIR VALUE
-------- -------- ----------
(DOLLARS IN MILLIONS)
DECEMBER 31, 2000
Assets:
Fixed maturities................................ $112,979 $112,979
Equity securities............................... 2,193 2,193
Mortgage loans on real estate................... 21,951 22,847
Policy loans.................................... 8,158 8,914
Short-term investments.......................... 1,269 1,269
Cash and cash equivalents....................... 3,434 3,434
Mortgage loan commitments....................... $534 -- 17
Liabilities:
Policyholder account balances................... 43,196 42,958
Short-term debt................................. 1,094 1,094
Long-term debt.................................. 2,426 2,326
Payable under securities loaned transactions.... 12,301 12,301
Other:
Company-obligated mandatorily redeemable
securities of subsidiary trusts.............. 1,090 1,153
F-25
105
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTIONAL CARRYING ESTIMATED
AMOUNT VALUE FAIR VALUE
-------- -------- ----------
(DOLLARS IN MILLIONS)
DECEMBER 31, 1999
Assets:
Fixed maturities.................................. $96,981 $96,981
Equity securities................................. 2,006 2,006
Mortgage loans on real estate..................... 19,739 19,452
Policy loans...................................... 5,598 5,618
Short-term investments............................ 3,055 3,055
Cash and cash equivalents......................... 2,789 2,789
Mortgage loan commitments......................... $465 -- (7)
Liabilities:
Policyholder account balances..................... 37,170 36,893
Short-term debt................................... 4,208 4,208
Long-term debt.................................... 2,514 2,466
Payable under securities loaned transactions...... 6,461 6,461
The methods and assumptions used to estimate the fair values of financial
instruments are summarized as follows:
FIXED MATURITIES AND EQUITY SECURITIES
The fair value of fixed maturities and equity securities are based
upon quotations published by applicable stock exchanges or received from
other reliable sources. For securities in which the market values were not
readily available, fair values were estimated using quoted market prices of
comparable investments.
MORTGAGE LOANS ON REAL ESTATE AND MORTGAGE LOAN COMMITMENTS
Fair values for mortgage loans on real estate are estimated by
discounting expected future cash flows, using current interest rates for
similar loans with similar credit risk. For mortgage loan commitments, the
estimated fair value is the net premium or discount of the commitments.
POLICY LOANS
Fair values for policy loans are estimated by discounting expected
future cash flows using U.S. Treasury rates to approximate interest rates
and the Company's past experiences to project patterns of loan accrual and
repayment characteristics.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The carrying values for cash and cash equivalents and short-term
investments approximated fair market values due to the short-term
maturities of these instruments.
POLICYHOLDER ACCOUNT BALANCES
The fair value of policyholder account balances are estimated by
discounting expected future cash flows, based upon interest rates currently
being offered for similar contracts with maturities consistent with those
remaining for the agreements being valued.
F-26
106
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHORT-TERM AND LONG-TERM DEBT, PAYABLES UNDER SECURITIES LOANED TRANSACTIONS AND
COMPANY-OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS
The fair values of short-term and long-term debt, payables under securities
loaned transactions and Company-obligated mandatorily redeemable securities of
subsidiary trusts are determined by discounting expected future cash flows,
using risk rates currently available for debt with similar terms and remaining
maturities.
DERIVATIVE INSTRUMENTS
The fair value of derivative instruments, including financial futures,
financial forwards, interest rate and foreign currency swaps, floors, foreign
exchange contracts, caps and options are based upon quotations obtained from
dealers or other reliable sources. See Note 3 for derivative fair value
disclosures.
5. EMPLOYEE BENEFIT PLANS
PENSION BENEFIT AND OTHER BENEFIT PLANS
The Company is both the sponsor and administrator of defined benefit
pension plans covering all eligible employees and sales representatives of
Metropolitan Life and certain of its subsidiaries. Retirement benefits are based
upon years of credited service and final 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.
F-27
107
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
------------------------------------
PENSION BENEFITS OTHER BENEFITS
---------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Change in projected benefit obligation:
Projected benefit obligation at beginning of
year............................................ $3,737 $3,920 $1,483 $1,708
Service cost.................................... 98 100 29 28
Interest cost................................... 291 271 113 107
Acquisitions.................................... 107 -- 37
Actuarial losses (gains)........................ 176 (260) 59 (281)
Curtailments and terminations................... (3) (22) 2 10
Change in benefits.............................. (2) -- (86) --
Benefits paid................................... (259) (272) (95) (89)
------ ------ ------ ------
Projected benefit obligation at end of year........ 4,145 3,737 1,542 1,483
------ ------ ------ ------
Change in plan assets:
Contract value of plan assets at beginning of
year............................................ 4,726 4,403 1,199 1,123
Actual return on plan assets.................... 54 575 179 141
Acquisitions.................................... 79 -- --
Employer contribution........................... 19 20 3 24
Benefits paid................................... (259) (272) (63) (89)
------ ------ ------ ------
Contract value of plan assets at end of year....... 4,619 4,726 1,318 1,199
------ ------ ------ ------
Over (under) funded.................................. 474 989 (224) (284)
Unrecognized net asset at transition................. (31) (66) -- --
Unrecognized net actuarial losses (gains)............ 2 (564) (478) (487)
Unrecognized prior service cost...................... 109 127 (89) (2)
------ ------ ------ ------
Prepaid (accrued) benefit cost....................... $ 554 $ 486 $ (791) $ (773)
====== ====== ====== ======
Qualified plan prepaid pension cost.................. $ 775 $ 632
Non-qualified plan accrued pension cost.............. (263) (182)
Unamortized prior service cost....................... 14 17
Accumulated other comprehensive income............... 28 19
------ ------
Prepaid benefit cost................................. $ 554 $ 486
====== ======
The aggregate projected benefit obligation and aggregate contract value of
plan assets for the pension plans were as follows:
NON-QUALIFIED
QUALIFIED PLAN PLAN TOTAL
----------------- ------------- -----------------
2000 1999 2000 1999 2000 1999
------- ------- ----- ----- ------- -------
(DOLLARS IN MILLIONS)
Aggregate projected benefit obligation..... $(3,775) $(3,482) $(370) $(255) $(4,145) $(3,737)
Aggregate contract value of plan assets
(principally Company contracts).......... 4,619 4,726 -- -- 4,619 4,726
------- ------- ----- ----- ------- -------
Over (under) funded........................ $ 844 $ 1,244 $(370) $(255) $ 474 $ 989
======= ======= ===== ===== ======= =======
F-28
108
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assumptions used in determining the aggregate projected benefit
obligation and aggregate contract value for the pension and other benefits were
as follows:
PENSION BENEFITS OTHER BENEFITS
---------------------------- ----------------------
2000 1999 2000 1999
------------ ------------- --------- ----------
(DOLLARS IN MILLIONS)
Weighted average assumptions at
December 31:
Discount rate........................ 6.9% - 7.75% 6.25% - 7.75% 6% - 7.5% 6% - 7.75%
Expected rate of return on plan
assets............................. 8% - 9% 8% - 10.5% 6% - 9% 6% - 9%
Rate of compensation increase........ 4% - 6% 4.5% - 8.5% N/A N/A
The assumed health care cost trend rates used in measuring the accumulated
nonpension postretirement benefit obligation were 6.5% per year for pre-Medicare
eligible claims and 6% for Medicare eligible claims in 2000 and 1999.
Assumed health care cost trend rates may have a significant effect on the
amounts reported for health care plans. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
ONE PERCENT ONE PERCENT
INCREASE DECREASE
----------- -----------
(DOLLARS IN MILLIONS)
Effect on total of service and interest cost components... $ 16 $ 13
Effect of accumulated postretirement benefit obligation... $143 $118
The components of periodic benefit costs were as follows:
PENSION BENEFITS OTHER BENEFITS
--------------------- ------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ---- ---- ----
(DOLLARS IN MILLIONS)
Service cost................................ $ 98 $ 100 $ 90 $ 29 $ 28 $ 31
Interest cost............................... 291 271 257 113 107 114
Expected return on plan assets.............. (420) (363) (337) (97) (89) (79)
Amortization of prior actuarial gains....... (19) (6) (11) (22) (11) (13)
Curtailment (credit) cost................... (3) (17) (10) 2 10 4
----- ----- ----- ---- ---- ----
Net periodic benefit (credit) cost.......... $ (53) $ (15) $ (11) $ 25 $ 45 $ 57
===== ===== ===== ==== ==== ====
SAVINGS AND INVESTMENT PLANS
The Company sponsors savings and investment plans for substantially all
employees under which the Company matches a portion of employee contributions.
The Company contributed $65 million, $45 million and $43 million for the years
ended December 31, 2000, 1999 and 1998, respectively.
F-29
109
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CLOSED BLOCK
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. Assets have been allocated to the closed block in an
amount that has been determined to produce cash flows which, together with
anticipated revenues from the policies included in the closed block, are
reasonably expected to be sufficient to support obligations and liabilities
relating to these policies, including, but not limited to, provisions for the
payment of claims and certain expenses and taxes, and to provide for the
continuation of policyholder dividend scales in effect for 1999, if the
experience underlying such dividend scales continues, and for appropriate
adjustments in such scales if the experience changes. The closed block assets,
the cash flows generated by the closed block assets and the anticipated revenues
from the policies in the closed block will benefit only the holders of the
policies in the closed block. To the extent that, over time, cash flows from the
assets allocated to the closed block and claims and other experience related to
the closed block are, in the aggregate, more or less favorable than what was
assumed when the closed block was established, total dividends paid to closed
block policyholders in the future may be greater than or less than the total
dividends that would have been paid to these policyholders if the policyholder
dividend scales in effect for 1999 had been continued. Any cash flows in excess
of amounts assumed will be available for distribution over time to closed block
policyholders and will not be available to stockholders. If the closed block has
insufficient funds to make guaranteed policy benefit payments, such payments
will be made from assets outside of the closed block. The closed block will
continue in effect as long as any policy in the closed block remains in-force.
The expected life of the closed block is over 100 years.
The Company uses the same accounting principles to account for the
participating policies included in the closed block as it used prior to the date
of demutualization. However, the Company establishes a policyholder dividend
obligation for earnings that will be paid to policyholders as additional
dividends as described below. The excess of closed block liabilities over closed
block assets at the effective date of the demutualization (adjusted to eliminate
the impact of related amounts in accumulated other comprehensive income)
represents the estimated maximum future earnings from the closed block expected
to result from operations attributed to the closed block after income taxes.
Earnings of the closed block are recognized in income over the period the
policies and contracts in the closed block remain in-force. Management believes
that over time the actual cumulative earnings of the closed block will
approximately equal the expected cumulative earnings due to the effect of
dividend changes. If, over the period the closed block remains in existence, the
actual cumulative earnings of the closed block is greater than the expected
cumulative earnings of the closed block, the Company will pay the excess of the
actual cumulative earnings of the closed block over the expected cumulative
earnings to closed block policyholders as additional policyholder dividends
unless offset by future unfavorable experience of the closed block and,
accordingly, will recognize only the expected cumulative earnings in income with
the excess recorded as a policyholder dividend obligation. If over such period,
the actual cumulative earnings of the closed block is less than the expected
cumulative earnings of the closed block, the Company will recognize only the
actual earnings in income. However, the Company may change policyholder dividend
scales in the future, which would be intended to increase future actual earnings
until the actual cumulative earnings equal the expected cumulative earnings.
Amounts reported at April 7, 2000 and for the period after demutualization are
as of April 1, 2000 and for the period beginning on April 1, 2000 (the effect of
transaction from April 1, 2000 through April 6, 2000 are not considered
material).
F-30
110
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Closed block liabilities and assets designated to the closed block at
December 31, 2000 and April 7, 2000 were as follows:
DECEMBER 31, APRIL 7,
2000 2000
------------ --------
(DOLLARS IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits............................. $39,415 $38,661
Other policyholder funds........................... 278 321
Policyholder dividends payable..................... 740 747
Policyholder dividend obligation................... 385 --
Payable under securities loaned transactions....... 3,268 1,856
Other.............................................. 37 330
------- -------
Total closed block liabilities........... 44,123 41,915
------- -------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Investments:
Fixed maturities available-for-sale, at fair
value (amortized cost: $25,660 and $24,725)... 25,634 23,940
Equity securities, at fair value (cost: $51)..... 54 --
Mortgage loans on real estate.................... 5,801 4,744
Policy loans..................................... 3,826 3,762
Short-term investments........................... 223 168
Other invested assets............................ 248 325
------- -------
Total investments........................ 35,786 32,939
Cash and cash equivalents.......................... 661 655
Accrued investment income.......................... 557 538
Deferred income taxes.............................. 1,234 1,390
Premiums and other receivables..................... 117 267
------- -------
Total assets designated to the closed
block.................................. 38,355 35,789
------- -------
Excess of closed block liabilities over assets
designated to the closed block................... 5,768 6,126
------- -------
Amounts included in other comprehensive loss:
Net unrealized investment loss, net of deferred
income tax of $9 and $287..................... (14) (498)
Allocated to policyholder dividend obligation,
net of deferred income tax of $143............ (242) --
------- -------
(256) (498)
------- -------
Maximum future earnings to be recognized from
closed block assets and liabilities.............. $ 5,512 $ 5,628
======= =======
Information regarding the policyholder dividend obligation is as follows:
(DOLLARS IN MILLIONS)
Balance at April 7, 2000.......................... $ --
Change in policyholder dividend obligation........ 85
Net investment losses............................. (85)
Net unrealized investment gains at December 31,
2000............................................ 385
-----
Balance at December 31, 2000...................... $ 385
=====
F-31
111
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Closed block revenues and expenses were as follows:
APRIL 7, 2000
THROUGH
DECEMBER 31, 2000
---------------------
(DOLLARS IN MILLIONS)
REVENUES
Premiums.......................................... $2,900
Net investment income............................. 1,949
Net investment losses (net of amounts allocable to
the policyholder dividend obligation of
$(85)).......................................... (150)
------
Total revenues 4,699
------
EXPENSES
Policyholder benefits and claims.................. 2,874
Policyholder dividends............................ 1,132
Change in policyholder dividend obligation
(includes amounts directly related to net
investment losses of $(85))..................... 85
Other expenses.................................... 425
------
Total expenses 4,516
------
Revenues net of expenses before income taxes...... 183
Income taxes...................................... 67
------
Revenues net of expenses and income taxes......... $ 116
======
The change in maximum future earnings of the closed block was as follows:
(DOLLARS IN MILLIONS)
April 7, 2000..................................... $5,628
December 31, 2000................................. 5,512
------
Change during the period.......................... $ (116)
======
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 reorganization. Metropolitan Life also charges the closed block for
expenses of maintaining the policies included in the closed block.
7. SEPARATE ACCOUNTS
Separate accounts reflect two categories of risk assumption: non-guaranteed
separate accounts totaling $53,656 million and $47,618 million at December 31,
2000 and 1999, respectively, for which the policyholder assumes the investment
risk, and guaranteed separate accounts totaling $16,594 million and $17,323
million at December 31, 2000 and 1999, respectively, for which the Company
contractually guarantees either a minimum return or account value to the
policyholder.
Fees charged to the separate accounts by the Company (including mortality
charges, policy administration fees and surrender charges) are reflected in the
Company's revenues as universal life and investment-type product policy fees and
totaled $667 million, $485 million and $413 million for the years ended December
31, 2000, 1999 and 1998, respectively. Guaranteed separate accounts consisted
primarily of Met Managed Guaranteed Interest Contracts and participating close
out contracts. The average interest rates credited on these contracts were 6.9%
and 6.5% at December 31, 2000 and 1999, respectively. The assets that support
these liabilities were comprised of $15,708 million and $16,874 million in fixed
F-32
112
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maturities at December 31, 2000 and 1999, respectively. The portfolios are
segregated from other investments and are managed to minimize liquidity and
interest rate risk. In order to minimize the risk of disintermediation
associated with early withdrawals, these investment products carry a graded
surrender charge as well as a market value adjustment.
8. DEBT
Debt consisted of the following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Surplus notes, interest rates ranging from 6.30% to
7.80%, maturity dates ranging from 2003 to 2025........ $1,650 $1,546
Investment related exchangeable debt, interest rates
ranging from 4.90% to 5.40%, due 2001 and 2002......... 271 369
Fixed rate notes, interest rates ranging from 5.29% to
10.50%, maturity dates ranging from 2001 to 2009....... 316 187
Senior notes, interest rates ranging from 7.06% to 7.25%,
maturity dates ranging from 2003 to 2007............... 98 270
Capital lease obligations................................ 42 44
Other notes with varying interest rates.................. 49 98
------ ------
Total long-term debt..................................... 2,426 2,514
Total short-term debt.................................... 1,094 4,208
------ ------
Total.......................................... $3,520 $6,722
====== ======
Metropolitan Life and certain of its subsidiaries maintain committed and
unsecured credit facilities aggregating $2,000 million (five-year facility of
$1,000 million expiring in April 2003 and a 364-day facility of $1,000 million
expiring in April of 2001). Both facilities bear interest at LIBOR plus 20 basis
points. The facilities can be used for general corporate purposes and also
provide backup for the Company's commercial paper program. At December 31, 2000,
there were no outstanding borrowings under either of the facilities.
Reinsurance Group of America, Incorporated ("RGA"), a subsidiary of the
Company, maintains committed and unsecured credit facilities aggregating $178
million (two three-year facilities of $140 million and $22 million expiring May
2003 and a three month $16 million revolving line of credit). The interest on
borrowing is based on the terms of each specific borrowing. At December 31, 2000
there was $98 million outstanding under these facilities. Subsequent to December
31, 2000, RGA amended its revolving line of credit agreement into a $20 million
facility.
Payments of interest and principal on the surplus notes, subordinated to
all other indebtedness, may be made only with the prior approval of the
insurance department of the state of domicile. Subject to the prior approval of
the Superintendent, the $300 million 7.45% surplus notes due 2023 may be
redeemed, in whole or in part, at the election of Metropolitan Life at any time
on or after November 1, 2003.
Each issue of investment related debt is payable in cash or by delivery of
an underlying security owned by the Company. The amount of the debt payable at
maturity is greater than the principal of the debt if the market value of the
underlying security appreciates above certain levels at the date of debt
repayment as compared to the market value of the underlying security at the date
of debt issuance. At December 31, 2000, the underlying securities pledged as
collateral had a market value of $295 million.
The aggregate maturities of long-term debt for the Company are $172 million
in 2001, $210 million in 2002, $500 million in 2003, $14 million in 2004, $381
million in 2005 and $1,149 million thereafter.
F-33
113
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Short-term debt of the Company consisted of commercial paper with a
weighted average interest rate of 6.60% and 6.05% and a weighted average
maturity of 44 days and 74 days at December 31, 2000 and 1999, respectively.
Interest expense related to the Company's indebtedness was $377 million,
$384 million and $333 million for the years ended December 31, 2000, 1999 and
1998, respectively.
9. COMPANY-OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS
On April 7, 2000, MetLife Capital Trust I, a Delaware statutory business
trust wholly owned by the Holding Company, issued 20,125,000 8.00% equity
security units ("units"). Each unit consists of (i) a purchase contract under
which the holder agrees to purchase, for $50.00, shares of common stock of the
Holding Company on May 15, 2003 (52,771,250 shares at December 31, 2000 based on
the average market price at December 31, 2000) and (ii) a capital security, with
a stated liquidation amount of $50.00 and mandatorily redeemable on May 15,
2005. The number of shares to be purchased at such date will be determined based
on the average trading price of the Holding Company's common stock. The proceeds
from the sale of the units were used to acquire $1,006 million 8.00% debentures
of the Holding Company ("MetLife debentures"). The capital securities represent
undivided beneficial ownership interests in MetLife Capital Trust I's assets,
which consist solely of the MetLife debentures. These securities are pledged to
collateralize the obligations of the unit holder under the related purchase
contracts. Holders of the capital securities are entitled to receive cumulative
cash distributions accruing from April 7, 2000 and payable quarterly in arrears
commencing August 15, 2000 at an annual rate of 8.00%. The Holding Company
irrevocably guarantees, on a senior and unsecured basis, the payment in full of
distributions on the capital securities and the stated liquidation amount of the
capital securities, in each case to the extent of available trust funds. Holders
of the capital securities generally have no voting rights. Capital securities
outstanding at December 31, 2000 were $972 million, net of unamortized discount
of $34 million.
The MetLife debentures bear interest at an annual rate of 8.00% of the
principal amount, payable quarterly in arrears commencing August 15, 2000 and
mature on May 15, 2005. These debentures are unsecured. The Holding Company's
right to participate in the distribution of assets of any subsidiary upon the
subsidiary's liquidation, reorganization or otherwise, is subject to the prior
claims of creditors of the subsidiary, except to the extent the Holding Company
may be recognized as a creditor of that subsidiary. Accordingly, the Holding
Company's obligations under the debentures are effectively subordinated to all
existing and future liabilities of its subsidiaries.
In connection with the contribution to Metropolitan Life of the net
proceeds from the initial public offering, the private placements and the units
offering, Metropolitan Life issued to the Holding Company a $1,006 million 8.00%
mandatorily convertible note due 2005 having the same interest and payment terms
as set forth in the MetLife debentures issued to MetLife Capital Trust I. The
principal amount of the capital note is mandatorily convertible into common
stock of Metropolitan Life upon maturity or acceleration of the capital note and
without any further action by the Holding Company or Metropolitan Life. In
addition, the capital note provides that Metropolitan Life may not make any
payment of principal or interest on the capital note so long as specified
payment restrictions exist and have not been waived by the Superintendent.
Payment restrictions would exist if Metropolitan Life fails to exceed certain
thresholds relative to the level of its statutory risk-based capital or the
amount of its outstanding capital notes, surplus notes or similar obligations.
At December 31, 2000, Metropolitan Life's statutory total adjusted capital
exceeded these limitations.
In June 1997, GenAmerica Corporation ("GenAmerica") issued $125 million of
8.525% capital securities through a wholly-owned subsidiary trust, GenAmerica
Capital I. GenAmerica has fully and unconditionally guaranteed, on a
subordinated basis, the obligation of the trust under the capital securities and
is obligated to mandatorily redeem the securities on June 30, 2027. GenAmerica
may prepay the securities
F-34
114
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
any time after June 30, 2007. Capital securities outstanding at December 31,
2000 were $118 million, net of unamortized discount of $7 million.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
Metropolitan Life is currently a defendant in approximately 500 lawsuits
raising allegations of improper marketing and sales of individual life insurance
policies or annuities. These lawsuits are generally referred to as "sales
practices claims."
On December 28, 1999, after a fairness hearing, the United States District
Court for the Western District of Pennsylvania approved a class action
settlement resolving a multidistrict litigation proceeding involving alleged
sales practices claims. No appeal was taken, and the settlement is final. The
settlement class includes most of the 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.
In addition to dismissing the consolidated class actions, the District
Court's order also bars sales practices claims by class members with respect to
policies or annuities issued by the defendant insurers during the class period,
effectively resolving all pending sales practices class actions against these
insurers in the United States.
Under the terms of the order, only those class members who excluded
themselves from the settlement may continue an existing, or start a new, sales
practices lawsuit against Metropolitan Life, Metropolitan Insurance and Annuity
Company or Metropolitan Tower Life Insurance Company for policies or annuities
issued during the class period. Approximately 20,000 class members elected to
exclude themselves from the settlement. At December 31, 2000, approximately 300
of these "opt-outs" have filed new individual lawsuits.
The settlement provides three forms of relief. General relief, in the form
of free death benefits, is provided automatically to class members who did not
exclude themselves from the settlement or who did not elect the claim evaluation
procedures set forth in the settlement. The claim evaluation procedures permit a
class member to have a claim evaluated by a third party under procedures set
forth in the settlement. Claim awards made under the claim evaluation procedures
will be in the form of policy adjustments, free death benefits or, in some
instances, cash payments. In addition, class members who have or had an
ownership interest in specified policies will also automatically receive
deferred acquisition cost tax relief in the form of free death benefits. The
settlement fixes the aggregate amounts that are available under each form of
relief. Implementation of the class action settlement is proceeding.
Metropolitan Life expects that the total cost of the settlement will be
approximately $957 million. This amount is equal to the amount of the increase
in liabilities for the death benefits and policy adjustments and the present
value of expected cash payments to be provided to included class members, as
well as attorneys' fees and expenses and estimated other administrative costs,
but does not include the cost of litigation with policyholders who are excluded
from the settlement. The Company believes that the cost of the settlement will
be substantially covered by available reinsurance and the provisions made in the
consolidated financial statements, and thus will not have a material adverse
effect on its business, results of operations or financial position.
Metropolitan Life made some recoveries in 2000 under those reinsurance
agreements and, although there is no assurance that other reinsurance claim
submissions will be paid, Metropolitan Life believes payment is likely to occur.
The Company believes it has made adequate provision in the consolidated
financial statements for all probable losses for sales practices claims, includ-
F-35
115
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ing litigation costs involving policyholders who are excluded from the
settlement as well as for the two class action settlements described in the two
paragraphs immediately following the next paragraph.
The Metropolitan Life class action settlement did not resolve two putative
class actions involving sales practices claims filed against Metropolitan Life
in Canada. A certified class action with conditionally certified subclasses is
pending in the United States District Court for the Southern District of New
York against Metropolitan Life, Metropolitan Insurance and Annuity Company,
Metropolitan Tower Life Insurance Company and various individual defendants
alleging improper sales abroad; settlement discussions are continuing.
Separate from the Metropolitan Life class action settlement, similar sales
practices class action litigation against New England Mutual Life Insurance
Company ("New England Mutual"), with which Metropolitan Life merged in 1996, and
General American, which was acquired in 2000, has been settled. The New England
Mutual case, a consolidated multidistrict litigation in the United States
District Court for the District of Massachusetts, involves approximately 600,000
life insurance policies sold during the period January 1, 1983 through August
31, 1996. The settlement of this case was approved by the District Court in
October 2000 and is not being appealed. Implementation of the class action
settlement is proceeding. The Company expects that the total cost of this
settlement will be approximately $150 million. Approximately 2,400 class members
opted-out of the settlement. As of December 31, 2000, New England Mutual was a
defendant in approximately 30 opt-out lawsuits involving sales practices claims.
The settlement of the consolidated multidistrict sales practices class
action case against General American was approved by the United States District
Court for the Eastern District of Missouri. The General American case involves
approximately 250,000 life insurance policies sold during the period January 1,
1982 through December 31, 1996. One appeal has been filed. The Company expects
that the approximate cost of the settlement will be $55 million, not including
legal fees and costs for plaintiffs' counsel. The District Court has scheduled a
hearing in March 2001 with respect to plaintiffs' class counsels' request for
such fees and costs. Approximately 700 class members have elected to exclude
themselves from the General American settlement. As of December 31, 2000,
General American was a defendant in approximately ten opt-out lawsuits involving
sales practices claims.
In the past, some individual sales practices claims have been resolved
through settlement, have been 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.
Regulatory authorities in a small number of states have had investigations
or inquiries relating to Metropolitan Life's, New England Mutual's or General
American's sales of individual life insurance policies or annuities. Over the
past several years, these and a number of investigations by other regulatory
authorities were resolved for monetary payments and certain other relief. The
Company may continue to resolve investigations in a similar manner.
Metropolitan Life is also a defendant in numerous lawsuits seeking
compensatory and punitive damages for personal injuries allegedly caused by
exposure to asbestos or asbestos-containing products. Metropolitan Life has
never engaged in the business of manufacturing, producing, distributing or
selling asbestos or asbestos-containing products. Rather, these lawsuits,
currently numbering in the thousands, have principally been based upon
allegations relating to certain research, publication and other activities of
one or more of Metropolitan Life's employees during the period from the 1920's
through approximately the 1950's and alleging that Metropolitan Life learned or
should have learned of certain health risks posed by asbestos and, among other
things, improperly publicized or failed to disclose those health risks. Legal
theories asserted against Metropolitan Life have included negligence,
intentional tort claims and conspiracy claims concerning the health risks
associated with asbestos. While Metropolitan Life believes it has
F-36
116
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
meritorious defenses to these claims, and has not suffered any adverse judgments
in respect of these claims, most of the cases have been resolved by settlements.
Metropolitan Life intends to continue to exercise its best judgment regarding
settlement or defense of such cases, including when trials of these cases are
appropriate. The number of such cases that may be brought or the aggregate
amount of any liability that Metropolitan Life may ultimately incur is
uncertain.
Significant portions of amounts paid in settlement of such cases have been
funded with proceeds from a previously-resolved dispute with Metropolitan Life's
primary, umbrella and first level excess liability insurance carriers.
Metropolitan Life was involved in litigation with several of its excess
liability insurers regarding amounts payable under its policies with respect to
coverage for these claims. The trial court granted summary judgment to these
insurers and Metropolitan Life appealed. The Connecticut Supreme Court in 2001
affirmed the decision of the trial court. The Company believes that Metropolitan
Life's asbestos-related litigation with these insurers should have no effect on
its recoveries under excess insurance policies that were obtained in 1998 for
asbestos-related claims.
The Company has recorded, in other expenses, charges of $15 million ($10
million after-tax), $499 million ($317 million after-tax), and $1,895 million
($1,203 million after-tax) for the years ended December 31, 2000, 1999, and
1998, respectively, for sales practices claims and claims for personal injuries
caused by exposure to asbestos or asbestos-containing products. The 2000 charge
was principally related to sales practices claims. The 1999 charge was
principally related to the settlement of the multidistrict litigation proceeding
involving alleged improper sales practices, accruals for sales practices claims
not covered by the settlement and other legal costs. The 1998 charge was
comprised of $925 million and $970 million for sales practices claims and
asbestos-related claims, respectively. The Company recorded the charges for
sales practices claims in 1998 based on preliminary settlement discussions and
the settlement history of other insurers.
Prior to the fourth quarter of 1998, Metropolitan Life established a
liability for asbestos-related claims based on settlement costs for claims that
Metropolitan Life had settled, estimates of settlement costs for claims pending
against Metropolitan Life and an estimate of settlement costs for unasserted
claims. The amount for unasserted claims was based on management's estimate of
unasserted claims that would be probable of assertion. A liability is not
established for claims which management believes are only reasonably possible of
assertion. Based on this process, the accrual for asbestos-related claims at
December 31, 1997 was $386 million. Potential liabilities for asbestos-related
claims are not easily quantified, due to the nature of the allegations against
Metropolitan Life, which are not related to the business of manufacturing,
producing, distributing or selling asbestos or asbestos-containing products,
adding to the uncertainty as to the number of claims that may be brought against
Metropolitan Life.
During 1998, Metropolitan Life decided to pursue the purchase of excess
insurance to limit its exposure to asbestos-related claims. In connection with
the negotiations with the casualty insurers to obtain this insurance,
Metropolitan Life obtained information that caused management to reassess the
accruals for asbestos-related claims. This information included:
- Information from the insurers regarding the asbestos-related claims
experience of other insureds, which indicated that the number of claims
that were probable of assertion against Metropolitan Life in the future
was significantly greater than it had assumed in its accruals. The number
of claims brought against Metropolitan Life is generally a reflection of
the number of asbestos-related claims brought against asbestos defendants
generally and the percentage of those claims in which Metropolitan Life
is included as a defendant. The information provided to Metropolitan Life
relating to other insureds indicated that Metropolitan Life had been
included as a defendant for a significant percentage of total
asbestos-related claims and that it may be included in a larger
percentage of claims in the future, because of greater awareness of
asbestos litigation generally by potential plaintiffs and plaintiffs'
lawyers and because of the bankruptcy and reorganization or the
exhaustion
F-37
117
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of insurance coverage of other asbestos defendants; and that, although
volatile, there was an upward trend in the number of total claims brought
against asbestos defendants.
- Information derived from actuarial calculations Metropolitan Life made in
the fourth quarter of 1998 in connection with these negotiations, which
helped to frame, define and quantify this liability. These calculations
were made using, among other things, current information regarding
Metropolitan Life's claims and settlement experience (which reflected
Metropolitan Life's decision to resolve an increased number of these
claims by settlement), recent and historic claims and settlement
experience of selected other companies and information obtained from the
insurers.
Based on this information, Metropolitan Life concluded that certain claims
that previously were considered as only reasonably possible of assertion were
probable of assertion, increasing the number of assumed claims to approximately
three times the number assumed in prior periods. As a result of this
reassessment, Metropolitan Life increased its liability for asbestos-related
claims to $1,278 million at December 31, 1998.
During 1998, Metropolitan Life paid $1,407 million of premiums for excess
of loss reinsurance agreements and excess insurance policies, consisting of $529
million for the excess of loss reinsurance agreements for sales practices claims
and excess mortality losses and $878 million for the excess insurance policies
for asbestos-related claims.
Metropolitan Life obtained the excess of loss reinsurance agreements to
provide reinsurance with respect to sales practices claims made on or prior to
December 31, 1999 and for certain mortality losses in 1999. These reinsurance
agreements have a maximum aggregate limit of $650 million, with a maximum
sublimit of $550 million for losses for sales practices claims. This coverage is
in excess of an aggregate self-insured retention of $385 million with respect to
sales practices claims and $506 million, plus Metropolitan Life's statutory
policy reserves released upon the death of insureds, with respect to life
mortality losses. At December 31, 1999, the subject losses under the reinsurance
agreements due to sales practices claims and related counsel fees from the time
Metropolitan Life entered into the reinsurance agreements did not exceed that
self-insured retention. No recoveries were made with respect to the coverage for
excess mortality losses for 1999. As noted above, recoveries have been made in
2000 under the reinsurance agreements for the sales practices claims. The
maximum sublimit of $550 million for sales practices claims was within a range
of losses that management believed were reasonably possible at December 31,
1998. Each excess of loss reinsurance agreement for sales practices claims and
mortality losses contains an experience fund, which provides for payments to
Metropolitan Life at the commutation date if experience is favorable at such
date. The Company accounts for the aggregate excess of loss reinsurance
agreements as reinsurance; however, if deposit accounting were applied, the
effect on the Company's consolidated financial statements in 1998, 1999 and 2000
would not be significant.
Under reinsurance accounting, the excess of the liability recorded for
sales practices losses recoverable under the agreements of $550 million over the
premium paid of $529 million resulted in a deferred gain of $21 million which
was amortized into income over the settlement period from January 1999 through
April 2000. Under deposit accounting, the premium would be recorded as an other
asset rather than as an expense, and the reinsurance loss recoverable and the
deferred gain would not have been recorded. Because the agreements also contain
an experience fund which increases with the passage of time, the increase in the
experience fund in 1999 and 2000 under deposit accounting would be recognized as
interest income in an amount approximately equal to the deferred gain that was
amortized into income under reinsurance accounting.
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 ($878 million of which was recorded as a recoverable at
December 31, 2000, 1999 and 1998). The asbestos-related policies are also
subject to annual and per-claim sublimits. Amounts are recoverable under the
policies annually with respect to claims
F-38
118
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
paid during the prior calendar year. Although amounts paid in any given year
that are recoverable under the policies will be reflected as a reduction in the
Company's operating cash flows for that year, management believes that the
payments will not have a material adverse effect on the Company's liquidity.
Each asbestos-related policy contains an experience fund and a reference fund
that provides for payments to the Company at the commutation date if experience
under the policy to such date has been favorable, or pro rata reductions from
time to time in the loss reimbursements to the Company if the cumulative return
on the reference fund is less than the return specified in the experience fund.
The Company believes adequate provision has been made in its consolidated
financial statements for all reasonably probable and estimable losses for sales
practices and asbestos-related claims.
With respect to Metropolitan Life's asbestos litigation, estimates can be
uncertain due to the limitations of available data and the difficulty of
predicting with any certainty numerous variables that can affect liability
estimates, including the number of future claims, the cost to settle claims and
the impact of any possible future adverse verdicts and their amounts. Recent
bankruptcies of other companies involved in asbestos litigation 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 verdicts Metropolitan Life may experience.
Plaintiffs are seeking additional funds from defendants, including Metropolitan
Life, in light of recent bankruptcy filings by certain other defendants.
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
consolidated financial statements. Metropolitan Life will continue to study the
variables in light of additional information, including legislative and judicial
developments, gained over time in order to identify trends that may become
evident and to assess their impact on the previously established liability;
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.
A purported class action suit involving policyholders in four states has
been filed in a Rhode Island state court against a Metropolitan Life subsidiary,
Metropolitan Property and Casualty Insurance Company, with respect to claims by
policyholders for the alleged diminished value of automobiles after accident-
related repairs. The trial court recently denied a motion by Metropolitan
Property and Casualty Insurance Company for summary judgment, and discovery has
commenced. A class certification motion has been denied. Similar "diminished
value" purported class action suits have been filed in Texas and Tennessee
against Metropolitan Property and Casualty Insurance Company. A purported class
action has been filed against Metropolitan Property and Casualty Insurance
Company's subsidiary, Metropolitan Casualty Insurance Company, in Florida by a
policyholder 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. A motion for class certification is pending. In addition, a
plaintiff in Louisiana state court recently amended an individual lawsuit to
state a putative class action on behalf of Louisiana insureds challenging the
method that Metropolitan Property and Casualty Insurance Company uses to
determine the value of a motor vehicle that has sustained a total loss. A class
certification motion is pending. These suits are in the early stages of
litigation and Metropolitan Property and Casualty Insurance Company and
Metropolitan Casualty Insurance Company intend to defend themselves vigorously
against these suits. Similar suits have been filed against many other personal
lines property and casualty insurers.
The United States, the Commonwealth of Puerto Rico and various hotels and
individuals have sued MetLife Capital Corporation, a former subsidiary of the
Company, seeking damages for clean up costs, natural resource damages, personal
injuries and lost profits and taxes based upon, among other things, a release of
oil from a barge which was being towed by the M/V Emily S. In connection with
the sale of MetLife Capital, the Company acquired MetLife Capital's potential
liability with respect to the M/V Emily S lawsuits. MetLife Capital had entered
into a sale and leaseback financing arrangement with respect to the M/V Emily S.
The plaintiffs have taken the position that MetLife Capital, as the owner of
record of the M/V
F-39
119
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Emily S, is responsible for all damages caused by the barge, including the oil
spill. The claims of the governments of the United States and Puerto Rico were
settled in 2000 within amounts previously accrued by the Company.
Metropolitan Life has completed a tender offer to purchase the shares of
Conning Corporation that it had not already owned. After Metropolitan Life had
announced its intention to make a tender offer, three putative class actions
were filed by Conning shareholders alleging that the prospective offer was
inadequate and constituted a breach of fiduciary duty. The parties to the
litigation have reached an agreement providing for a settlement of the actions;
a motion seeking court approval for the settlement will be filed with the New
York State Supreme Court in New York County after a final agreement is signed.
Several lawsuits were brought in 2000 challenging the fairness of
Metropolitan Life's plan of reorganization and the adequacy and accuracy of
Metropolitan Life's disclosure to policyholders regarding the plan. These
actions name as defendants some or all of Metropolitan Life, the Holding
Company, the individual directors, the New York Superintendent of Insurance and
the underwriters for MetLife, Inc.'s initial public offering, Goldman Sachs &
Company and Credit Suisse First Boston. Five purported class actions pending in
the Supreme Court of the State of New York for New York County have been
consolidated within the commercial part. In addition, there remains a separate
purported class action in New York state court in New York County and another in
Kings County. The plaintiffs in the state court class actions seek injunctive,
declaratory and compensatory relief, as well as an accounting. Some of the
plaintiffs in the above described actions have also brought a proceeding under
Article 78 of New York's Civil Practice Law and Rules challenging the Opinion
and Decision of the New York Superintendent of Insurance that 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. Another
purported class action is pending in the Supreme Court of the State of New York
for New York County and has been brought on behalf of a purported class of
beneficiaries of Metropolitan Life annuities purchased to fund structured
settlements claiming that the class members should have received common stock or
cash in connection with the demutualization. Three purported class actions were
filed in the United States District Court for the Eastern District of New York
claiming violation of the Securities Act of 1933. The plaintiffs in these
actions, which have been consolidated, claim that the Policyholder Information
Booklets relating to the plan failed to disclose certain material facts and seek
rescission and compensatory damages. A purported class action was filed in the
United States District Court for the Southern District of New York seeking
damages from Metropolitan Life and the Holding Company for alleged violations of
various provisions of the Constitution of the United States in connection with
the plan of reorganization. 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. The defendants have moved to dismiss most of these actions; the Kings
County action and the Article 78 proceeding are being voluntarily held in
abeyance.
Three lawsuits were also filed against Metropolitan Life in 2000 in the
United States District Courts for the Southern District of New York, for the
Eastern District of Louisiana, and for the District of Kansas, alleging racial
discrimination in the marketing, sale, and administration of life insurance
policies, including "industrial" life insurance policies, sold by Metropolitan
Life decades ago. The plaintiffs in these three purported class actions seek
unspecified compensatory damages, punitive damages, reformation, imposition of a
constructive trust, a declaration that the alleged practices are discriminatory
and illegal, injunctive relief requiring Metropolitan Life to discontinue the
alleged discriminatory practices and adjust policy values, and other relief.
Metropolitan Life believes it has meritorious defenses to the plaintiffs' claims
and is contesting vigorously plaintiffs' claims in these actions. Metropolitan
Life has successfully transferred the Louisiana action to the United States
District Court for the Southern District of New York and has also filed a motion
to transfer the Kansas action to the same court. Metropolitan Life has moved for
summary
F-40
120
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
judgment in the two actions pending in New York, citing the applicable statute
of limitations. The New York cases are scheduled for trial in November 2001.
Insurance departments in a number of states have initiated inquiries in
2000 about possible race-based underwriting of life insurance. These inquiries
generally have been directed to all life insurers licensed in the respective
states, including Metropolitan Life and certain of its subsidiaries. The New
York Insurance Department has commenced examinations of certain domestic life
insurance companies, including Metropolitan Life and certain of its
subsidiaries, concerning possible past race-based underwriting practices.
Various litigation, claims and assessments against the Company, in addition
to those discussed above and those otherwise provided for in the Company's
consolidated financial statements, have arisen in the course of the Company's
business, including, but not limited to, in connection with its activities as an
insurer, employer, investor, investment advisor and taxpayer. Further, state
insurance regulatory authorities and other Federal and state authorities
regularly make inquiries and conduct investigations concerning the Company's
compliance with applicable insurance and other laws and regulations.
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses. In some of the matters referred to above, very large and/or
indeterminate amounts, including punitive and treble damages, are sought. 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 a material adverse effect on the Company's consolidated financial position.
However, given the large and/or indeterminate amounts sought in certain of these
matters and the inherent unpredictability of litigation, it is possible that an
adverse outcome in certain matters could, from time to time, have a material
adverse effect on the Company's operating results or cash flows in particular
quarterly or annual periods.
LEASES
In accordance with industry practice, certain of the Company's income from
lease agreements with retail tenants is contingent upon the level of the
tenants' sales revenues. Additionally, the Company, as lessee, has entered into
various lease and sublease agreements for office space, data processing and
other equipment. Future minimum rental and subrental income, and minimum gross
rental payments relating to these lease agreements were as follows:
GROSS
RENTAL SUBLEASE RENTAL
INCOME INCOME PAYMENTS
------ -------- --------
(DOLLARS IN MILLIONS)
2001........................................ $ 881 $17 $145
2002........................................ 679 15 114
2003........................................ 631 12 93
2004........................................ 574 11 76
2005........................................ 538 11 61
Thereafter.................................. 2,322 21 264
COMMITMENTS TO FUND PARTNERSHIP INVESTMENTS
The Company makes commitments to fund partnership investments in the normal
course of business. The amounts of these unfunded commitments were $1,311
million and $1,131 million at December 31, 2000 and 1999, respectively. The
Company anticipates that these amounts will be invested in the partnerships over
the next three to five years.
F-41
121
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
On January 6, 2000, Metropolitan Life completed its acquisition of
GenAmerica for $1.2 billion. As part of the GenAmerica acquisition, General
American Life Insurance Company paid Metropolitan Life a fee of $120 million in
connection with the assumption of certain funding agreements. The fee has been
considered as part of the purchase price of GenAmerica. GenAmerica is a holding
company which includes General American Life Insurance Company, approximately
49% of the outstanding shares of RGA common stock, a provider of reinsurance,
and 61.0% of the outstanding shares of Conning Corporation ("Conning") common
stock, an asset manager. Metropolitan Life owned 10% of the outstanding shares
of RGA common stock prior to the completion of the GenAmerica acquisition. At
December 31, 2000 Metropolitan Life's ownership percentage of the outstanding
shares of RGA common stock was approximately 59%.
In April 2000, Metropolitan Life acquired the outstanding shares of Conning
common stock not already owned by Metropolitan Life for $73 million.
The Company's total revenues and net income for the year ended December 31,
1999 on both a historical and pro forma basis as if the acquisition of
GenAmerica had occurred on January 1, 1999 were as follows:
TOTAL NET
REVENUES INCOME
---------- --------
(DOLLARS IN MILLIONS)
Historical.............................................. $25,421 $617
Pro forma (unaudited)................................... $29,278 $403
The pro forma results include adjustments to give effect to the
amortization of discounts on fixed maturities, goodwill and value of business
acquired, adjustments to liabilities for future policy benefits, and certain
other adjustments, together with related income tax effects. The pro forma
information is not necessarily indicative of the results that would have
occurred had the purchase been made on January 1, 1999 or the future results of
the combined operations.
DISPOSITIONS
During 2000, the Company completed the sale of its 48% ownership interest
in its affiliates, Nvest, L.P. and Nvest Companies L.P. This transaction
resulted in an investment gain of $663 million.
During 1998, the Company sold MetLife Capital Holdings, Inc. (a commercial
financing company) and a substantial portion of its Canadian and Mexican
insurance operations, which resulted in an investment gain of $531 million.
12. INCOME TAXES
The provision for income taxes was as follows:
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ----- -----
(DOLLARS IN MILLIONS)
Current:
Federal................................................. $(153) $608 $666
State and local......................................... 34 24 60
Foreign................................................. 5 4 99
----- ---- ----
(114) 636 825
----- ---- ----
F-42
122
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ----- -----
(DOLLARS IN MILLIONS)
Deferred:
Federal................................................. 563 (78) (25)
State and local......................................... 8 2 (8)
Foreign................................................. 6 (2) (54)
----- ---- ----
577 (78) (87)
----- ---- ----
Provision for income taxes................................ $ 463 $558 $738
===== ==== ====
Reconciliations of the income tax provision at the U.S. statutory rate to
the provision for income taxes as reported were as follows:
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ----- -----
(DOLLARS IN MILLIONS)
Tax provision at U.S. statutory rate...................... $ 496 $411 $728
Tax effect of:
Tax exempt investment income............................ (52) (39) (40)
Surplus tax............................................. (145) 125 18
State and local income taxes............................ 30 18 31
Prior year taxes........................................ (37) (31) 4
Demutualization costs................................... 21 56 --
Payments to former Canadian policyholders............... 114 -- --
Sales of businesses..................................... 31 -- (19)
Other, net.............................................. 5 18 16
----- ---- ----
Provision for income taxes................................ $ 463 $558 $738
===== ==== ====
F-43
123
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes represent the tax effect of the differences between
the book and tax bases of assets and liabilities. Net deferred income tax assets
and liabilities consisted of the following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Deferred income tax assets:
Policyholder liabilities and receivables............... $3,057 $3,042
Net operating losses................................... 262 72
Net unrealized investment losses....................... -- 161
Employee benefits...................................... 167 192
Litigation related..................................... 232 468
Other.................................................. 348 242
------ ------
4,066 4,177
Less: Valuation allowance.............................. 78 72
------ ------
3,988 4,105
------ ------
Deferred income tax liabilities:
Investments............................................ 1,330 1,472
Deferred policy acquisition costs...................... 2,752 1,967
Net unrealized investment gains........................ 621 --
Other.................................................. 37 63
------ ------
4,740 3,502
------ ------
Net deferred income tax (liability) asset................ $ (752) $ 603
====== ======
Domestic net operating loss carryforwards amount to $404 million at
December 31, 2000 and expire in 2020. Foreign net operating loss carryforwards
amount to $354 million at December 31, 2000 and were generated in various
foreign countries with expiration periods of five years to infinity.
The Company has recorded a valuation allowance related to tax benefits of
certain foreign net operating loss carryforwards. The valuation allowance
reflects management's assessment, based on available information, that it is
more likely than not that the deferred income tax asset for certain foreign net
operating loss carryforwards will not be realized. The tax benefit will be
recognized when management believes that it is more likely than not that these
deferred income tax assets are realizable.
The Internal Revenue Service has audited the Company for the years through
and including 1996. The Company is being audited for the years 1997, 1998 and
1999. The Company believes that any adjustments that might be required for open
years will not have a material effect on the Company's consolidated financial
statements.
13. REINSURANCE
The Company's life insurance operations participate in reinsurance in order
to limit losses, minimize exposure to large risks, and to provide additional
capacity for future growth. Risks in excess of $25 million on single
survivorship policies and $35 million on joint survivorship policies are 100
percent coinsured. Life reinsurance is accomplished through various plans of
reinsurance, primarily yearly renewable term and coinsurance. In addition, the
Company has exposure to catastrophes, which are an inherent risk of the property
and casualty insurance business and could contribute to significant fluctuations
in the Company's results of operations. The Company uses excess of loss and
quota share reinsurance arrangements to limit its maximum loss, provide greater
diversification of risk and minimize exposure to larger risks. The Com-
F-44
124
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pany is contingently liable with respect to ceded reinsurance should any
reinsurer be unable to meet its obligations under these agreements.
The Company is engaged in life reinsurance whereby it indemnifies another
insurance company for all or a portion of the insurance risk underwritten by the
ceding company.
See Note 10 for information regarding certain excess of loss reinsurance
agreements providing coverage for risks associated primarily with sales
practices claims.
The amounts in the consolidated statements of income are presented net of
reinsurance ceded. The effects of reinsurance were as follows:
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Direct premiums..................................... $15,661 $13,249 $12,763
Reinsurance assumed................................. 2,918 484 409
Reinsurance ceded................................... (2,262) (1,645) (1,669)
------- ------- -------
Net premiums........................................ $16,317 $12,088 $11,503
======= ======= =======
Reinsurance recoveries netted against policyholder
benefits.......................................... $ 1,942 $ 1,626 $ 1,744
======= ======= =======
Reinsurance recoverables, included in premiums and other receivables, were
$3,410 million and $2,898 million at December 31, 2000 and 1999, respectively,
including $1,359 million and $1,372 million, respectively, relating to
reinsurance of long-term guaranteed interest contracts and structured settlement
lump sum contracts accounted for as a financing transaction. Reinsurance and
ceded commissions payables, included in other liabilities, were $225 million and
$148 million at December 31, 2000 and 1999, respectively.
F-45
125
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following provides an analysis of the activity in the liability for
benefits relating to property and casualty and group accident and non-medical
health policies and contracts:
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Balance at January 1.................................. $ 3,789 $ 3,320 $ 3,655
Reinsurance recoverables............................ (415) (382) (378)
------- ------- -------
Net balance at January 1.............................. 3,374 2,938 3,277
------- ------- -------
Acquisition of business............................... 35 204 --
------- ------- -------
Incurred related to:
Current year........................................ 3,773 3,129 2,726
Prior years......................................... (111) (16) (245)
------- ------- -------
3,662 3,113 2,481
------- ------- -------
Paid related to:
Current year........................................ (2,243) (2,012) (1,967)
Prior years......................................... (1,023) (869) (853)
------- ------- -------
(3,266) (2,881) (2,820)
------- ------- -------
Net balance at December 31............................ 3,805 3,374 2,938
Add: reinsurance recoverables....................... 214 415 382
------- ------- -------
Balance at December 31................................ $ 4,019 $ 3,789 $ 3,320
======= ======= =======
14. OTHER EXPENSES
Other expenses were comprised of the following:
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Compensation.......................................... $ 2,712 $ 2,590 $ 2,478
Commissions........................................... 1,768 937 902
Interest and debt issue costs......................... 424 405 379
Amortization of policy acquisition costs (excludes
amortization of $(95), $(46) and $240, respectively,
related to investment (losses) gains)............... 1,478 930 641
Capitalization of policy acquisition costs............ (1,863) (1,160) (1,025)
Rent, net of sublease income.......................... 296 239 155
Minority interest..................................... 115 55 67
Restructuring charge.................................. -- -- 81
Other................................................. 3,297 2,759 4,341
------- ------- -------
Total other expenses........................ $ 8,227 $ 6,755 $ 8,019
======= ======= =======
During 1998, the Company recorded charges of $81 million to restructure
headquarters operations and consolidate certain agencies and other operations.
These costs were paid during 1999.
F-46
126
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. STOCKHOLDERS' EQUITY
PREFERRED STOCK
On September 29, 1999, the Holding Company adopted a stockholder rights
plan (the "rights plan") under which each outstanding share of common stock
issued between April 4, 2000 and the distribution date (as defined in the rights
plan) will be coupled with a stockholder right. Each right will entitle the
holder to purchase one one-hundredth of a share of Series A Junior Participating
Preferred Stock. Each one one-hundredth of a share of Series A Junior
Participating Preferred Stock will have economic and voting terms equivalent to
one share of common stock. Until it is exercised, the right itself will not
entitle the holder thereof to any rights as a stockholder, including the right
to receive dividends or to vote at stockholder meetings. Stockholder rights are
not exercisable until the distribution date, and will expire at the close of
business on April 4, 2010, unless earlier redeemed or exchanged by the Holding
Company. The rights plan is designed to protect stockholders in the event of
unsolicited offers to acquire the Holding Company and other coercive takeover
tactics.
COMMON STOCK
On the date of demutualization, the Holding Company conducted an initial
public offering of 202,000,000 shares of its common stock and concurrent private
placements of an aggregate of 60,000,000 shares of its common stock at an
initial public offering price of $14.25 per share. The shares of common stock
issued in the offerings were in addition to 494,466,664 shares of common stock
of the Holding Company distributed to the Metropolitan Life Policyholder Trust
for the benefit of policyholders of Metropolitan Life in connection with the
demutualization. On April 10, 2000, the Holding Company issued 30,300,000
additional shares of common stock as a result of the exercise of over-allotment
options granted to underwriters in the initial public offering.
On June 27, 2000, the Holding Company's Board of Directors authorized the
repurchase of up to $1 billion of the Holding Company's outstanding common
stock, over an unspecified period of time. Under this authorization, the Holding
Company may purchase the common stock from the Metropolitan Life Policyholder
Trust, in the open market, and in private transactions. Through December 31,
2000, 26,084,751 shares of common stock have been acquired for $613 million.
DIVIDEND RESTRICTIONS
Under the New York Insurance Law, Metropolitan Life is permitted without
prior insurance regulatory clearance to pay a stockholder dividend to the
Holding Company as long as the aggregate amount of all such dividends in any
calendar year does not exceed the lesser of (i) 10% of its surplus to
policyholders as of the immediately preceding calendar year and (ii) its net
gain from operations for the immediately preceding calendar year (excluding
realized investment gains). Metropolitan Life will be permitted to pay a
stockholder dividend to the Holding Company in excess of the lesser of such two
amounts only if it files notice of its intention to declare such a dividend and
the amount thereof with the Superintendent and the Superintendent does not
disapprove the distribution. Under the New York Insurance Law, the
Superintendent has broad discretion in determining whether the financial
condition of a stock life insurance company would support the payment of such
dividends to its stockholders. The New York State Insurance Department (the
"Department") has established informal guidelines for such determinations. The
guidelines, among other things, focus on the insurer's overall financial
condition and profitability under statutory accounting practices. At December
31, 2000, Metropolitan Life could pay the Holding Company a stockholder dividend
of $721 million without prior approval of the Superintendent.
F-47
127
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION PLANS
The Holding Company has adopted the MetLife, Inc. 2000 Stock Incentive Plan
("Stock Incentive Plan") and the MetLife, Inc. 2000 Directors Stock Plan
("Directors Stock Plan"). These plans provide for the issuance of incentive
stock options primarily to employees and directors of the Company. Under the
terms of these plans, options will be granted at not less than the fair market
value of the common stock on the date of grant. Under the terms of the Stock
Incentive Plan, options will become exercisable as established by the board of
directors (generally ratably over three years) and generally will expire ten
years from the date of grant. Under the terms of the Directors Stock Plan,
options will have a term of ten years and vest immediately at the date of grant.
At December 31, 2000, 37,823,333 shares of common stock are available for grant.
There were no options granted or outstanding relating to these plans at December
31, 2000.
STATUTORY EQUITY AND INCOME
Applicable insurance department regulations require that the insurance
subsidiaries prepare statutory financial statements in accordance with statutory
accounting practices prescribed or permitted by the insurance department of the
state of domicile. Statutory accounting practices primarily differ from
accounting principles generally accepted in the United States of America by
charging policy acquisition costs to expense as incurred, establishing future
policy benefit liabilities using different actuarial assumptions, not providing
for deferred income taxes, reporting surplus notes as surplus, and valuing
securities on a different basis. Statutory net income of Metropolitan Life, as
filed with the Department, was $1,027 million, $790 million, and $875 million
for the years ended 2000, 1999 and 1998, respectively; statutory capital and
surplus,as filed, was $7,213 million and $7,630 million at December 31, 2000 and
1999, respectively.
In March 1998, the National Association of Insurance Commissioners ("NAIC")
adopted the Codification of Statutory Accounting Principles (the
"Codification"). The Codification, which is intended to standardize regulatory
accounting and reporting to state insurance departments, is effective January 1,
2001. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices. The Department requires
adoption of the Codification, with certain modifications, for the preparation of
statutory financial statements effective January 1, 2001. The Company believes
that the adoption, effective January 1, 2001, of the Codification by the NAIC
and the Codification as modified by the Department, as currently interpreted,
will not adversely affect statutory capital and surplus.
F-48
128
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. OTHER COMPREHENSIVE INCOME (LOSS)
The following table sets forth the reclassification adjustments required
for the years ended December 31, 2000, 1999 and 1998 to avoid double-counting in
other comprehensive income (loss) items that are included as part of net income
for the current year that have been reported as a part of other comprehensive
income (loss) in the current or prior year:
2000 1999 1998
------ ------- ------
(DOLLARS IN MILLIONS)
Holding gains (losses) on investments arising during the
year...................................................... $2,789 $(6,314) $1,493
Income tax effect of holding gains or losses................ (969) 2,262 (617)
Reclassification adjustments:
Recognized holding losses (gains) included in current year
income................................................. 989 38 (2,013)
Amortization of premium and discount on investments....... (499) (307) (350)
Recognized holding (losses) gains allocated to other
policyholder amounts................................... (54) (67) 608
Income tax effect......................................... (151) 120 729
Allocation of holding (gains) losses on investments relating
to other policyholder amounts............................. (971) 3,788 (351)
Income tax effect of allocation of holding gains or losses
to other policyholder amounts............................. 338 (1,357) 143
------ ------- ------
Net unrealized investment gains (losses).................... 1,472 (1,837) (358)
------ ------- ------
Foreign currency translation adjustments arising during the
year...................................................... (6) 50 (115)
Reclassification adjustment for sale of investment in
foreign operation......................................... -- -- 2
------ ------- ------
Foreign currency translation adjustment..................... (6) 50 (113)
------ ------- ------
Minimum pension liability adjustment........................ (9) (7) (12)
------ ------- ------
Other comprehensive income (loss)........................... $1,457 $(1,794) $ (483)
====== ======= ======
17. EARNINGS AFTER DATE OF DEMUTUALIZATION AND EARNINGS PER SHARE
Net income after the date of demutualization is based on the results of
operations after March 31, 2000, adjusted for the payments to the former
Canadian policyholders and costs of demutualization recorded in April 2000 which
are applicable to the period prior to April 7, 2000.
The following presents a reconciliation of the weighted average shares used
in calculating basic earnings per share to those used in calculating diluted
earnings per share.
NET PER SHARE
INCOME SHARES AMOUNT
------ ----------- ---------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA)
FOR THE PERIOD APRIL 7, 2000 THROUGH DECEMBER 31, 2000
Amounts for basic earnings per share........................ $1,173 772,027,666 $1.52
====== =====
Incremental shares from conversion of forward purchase
contracts................................................. 16,480,028
-----------
Amounts for diluted earnings per share...................... $1,173 788,507,694 $1.49
====== =========== =====
F-49
129
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the years ended December
31, 2000 and 1999 are summarized in the table below:
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
2000
Total revenues................... $7,666 $8,111 $7,744 $8,426
Total expenses................... 7,247 8,094 7,432 7,758
Net income (loss)................ 236 (115)* 241 591
Basic earnings per share......... N/A 0.44 0.31 0.77
Diluted earnings per share....... N/A 0.44 0.31 0.74
1999
Total revenues................... $5,964 $6,172 $6,198 $7,087
Total expenses................... 5,560 6,303 5,779 6,604
Net income (loss)................ 229 (120) 242 266
---------------
N/A -- not applicable
* Net income after date of demutualization is $341 million.
Earnings per share data is presented only for periods after the date of
demutualization.
The unaudited results of operations for the fourth quarter of 2000 include
an investment gain of $663 million from the sale of the Company's interest in
Nvest, L.P. and Nvest Companies L.P. and a surplus tax credit of $175 million.
As a result of the adoption of SOP 00-3 in the fourth quarter of 2000, total
expenses for all periods include demutualization costs which were previously
reported as an extraordinary item.
On September 28, 1999, Metropolitan Life's board of directors adopted a
plan of reorganization. Consequently, in the fourth quarter of 1999,
Metropolitan Life was able to commit to state insurance regulatory authorities
that it would establish investment sub-segments to further align investments
with the traditional individual life business of the Individual Business
segment. As a result, future dividends for the traditional individual life
business will be determined based on the results of such investment
sub-segments. Additionally, estimated future gross margins used to determine
amortization of deferred policy acquisition costs and the amount of unrealized
investment gains and losses relating to these products are based on investments
in such sub-segments. Using the investments in the sub-segments to determine
estimated gross margins and unrealized investment gains and losses increased
1999 amortization of deferred policy acquisition costs by $56 million, net of
income taxes of $32 million, and decreased other comprehensive loss in 1999 by
$123 million, net of income taxes of $70 million.
19. BUSINESS SEGMENT INFORMATION
The Company provides insurance and financial services to customers in the
United States, Canada, Central America, South America, Europe, South Africa,
Asia and Australia. The Company's business is divided into six major segments:
Individual Business, Institutional Business, Reinsurance, Auto & Home, Asset
Management and International. These segments are managed separately because they
either provide different products and services, require different strategies or
have different technology requirements.
Individual Business offers a wide variety of individual insurance and
investment products, including life insurance, annuities and mutual funds.
Institutional Business offers a broad range of group insurance and retirement
and savings products and services, including group life insurance, non-medical
health insurance
F-50
130
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
such as short and long-term disability, long-term care, and dental insurance,
and other insurance products and services. Reinsurance provides life reinsurance
and international life and disability on a direct and reinsurance basis. Auto &
Home provides insurance coverages, including private passenger automobile,
homeowners and personal excess liability insurance. Asset Management provides a
broad variety of asset management products and services to individuals and
institutions. 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.
Set forth in the tables below is certain financial information with respect
to the Company's operating segments for the years ended December 31, 2000, 1999
and 1998. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies, except for the
method of capital allocation. 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 income or loss from operations before provision for
income taxes and non-recurring items (e.g. items of unusual or infrequent
nature). The Company allocates non-recurring items (primarily consisting of
sales practices claims and claims for personal injuries caused by exposure to
asbestos or asbestos-containing products and demutualization costs) and, prior
to its sale in 1998, the results of MetLife Capital Holdings, Inc., to the
Corporate segment.
AUTO
AT OR FOR THE YEAR ENDED & ASSET
DECEMBER 31, 2000 INDIVIDUAL INSTITUTIONAL REINSURANCE HOME MANAGEMENT INTERNATIONAL CORPORATE
------------------------ ---------- ------------- ------------- ------ ---------- ------------- ---------
(DOLLARS IN MILLIONS)
Premiums.................. $ 4,673 $ 6,900 $1,450 $2,636 $ -- $ 660 $ --
Universal life and
investment-type product
policy fees.............. 1,221 547 -- -- -- 53 --
Net investment income..... 6,475 3,959 379 194 90 254 662
Other revenues............ 838 673 29 40 760 9 121
Net investment gains
(losses)................. 227 (475) (2) (20) -- 18 (200)
Policyholder benefits and
claims................... 5,054 8,178 1,096 2,005 -- 562 (2)
Interest credited to
policyholder account
balances................. 1,680 1,090 109 -- -- 56 --
Policyholder dividends.... 1,742 124 21 -- -- 32 --
Payments to former
Canadian policyholders... -- -- -- -- -- 327 --
Demutualization costs..... -- -- -- -- -- -- 230
Other expenses............ 3,511 1,753 513 827 784 292 773
Income (loss) before
provision for income
taxes.................... 1,447 459 117 18 66 (275) (418)
Net income (loss)......... 920 307 69 30 34 (285) (146)
Total assets.............. 132,433 90,279 7,280 4,511 418 5,119 18,542
Deferred policy
acquisition costs........ 8,610 446 1,030 176 -- 354 1
Separate account assets... 34,860 33,918 28 -- -- 1,491 --
Policyholder
liabilities.............. 84,049 50,223 5,145 2,559 -- 2,435 24
Separate account
liabilities.............. 34,860 33,918 28 -- -- 1,491 --
AT OR FOR THE YEAR ENDED CONSOLIDATION/
DECEMBER 31, 2000 ELIMINATION TOTAL
------------------------ -------------- --------
(DOLLARS IN MILLIONS)
Premiums.................. $ (2) $ 16,317
Universal life and
investment-type product
policy fees.............. (1) 1,820
Net investment income..... (245) 11,768
Other revenues............ (38) 2,432
Net investment gains
(losses)................. 62 (390)
Policyholder benefits and
claims................... -- 16,893
Interest credited to
policyholder account
balances................. -- 2,935
Policyholder dividends.... -- 1,919
Payments to former
Canadian policyholders... -- 327
Demutualization costs..... -- 230
Other expenses............ (226) 8,227
Income (loss) before
provision for income
taxes.................... 2 1,416
Net income (loss)......... 24 953
Total assets.............. (3,564) 255,018
Deferred policy
acquisition costs........ 1 10,618
Separate account assets... (47) 70,250
Policyholder
liabilities.............. (980) 143,455
Separate account
liabilities.............. (47) 70,250
F-51
131
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AUTO
AT OR FOR THE YEAR ENDED & ASSET
DECEMBER 31, 1999 INDIVIDUAL INSTITUTIONAL REINSURANCE HOME MANAGEMENT INTERNATIONAL CORPORATE
------------------------ ---------- ------------- ----------- ------ ---------- ------------- ---------
(DOLLARS IN MILLIONS)
Premiums.................. $ 4,289 $ 5,525 $ -- $1,751 $-- $523 $ --
Universal life and
investment-type product
policy fees.............. 888 502 -- -- -- 43 --
Net investment income..... 5,346 3,755 -- 103 80 206 605
Other revenues............ 558 629 -- 21 803 12 59
Net investment (losses)
gains.................... (14) (31) -- 1 -- 1 (41)
Policyholder benefits and
claims................... 4,625 6,712 -- 1,301 -- 458 --
Interest credited to
policyholder account
balances................. 1,359 1,030 -- -- -- 52 --
Policyholder dividends.... 1,509 159 -- -- -- 22 --
Demutualization costs..... -- -- -- -- -- -- 260
Other expenses............ 2,719 1,589 -- 514 795 248 1,031
Income (loss) before
provision for income
taxes.................... 855 890 -- 61 88 5 (668)
Net income (loss)......... 555 567 -- 56 51 21 (583)
Total assets.............. 109,401 88,127 -- 4,443 1,036 4,381 20,499
Deferred policy
acquisition costs........ 8,228 364 -- 167 -- 311 --
Separate account assets... 28,828 35,236 -- -- -- 877 --
Policyholder
liabilities.............. 72,956 47,781 -- 2,318 -- 2,187 6
Separate account
liabilities.............. 28,828 35,236 -- -- -- 877 --
AT OR FOR THE YEAR ENDED CONSOLIDATION/
DECEMBER 31, 1999 ELIMINATION TOTAL
------------------------ -------------- --------
(DOLLARS IN MILLIONS)
Premiums.................. $ -- $ 12,088
Universal life and
investment-type product
policy fees.............. -- 1,433
Net investment income..... (279) 9,816
Other revenues............ 72 2,154
Net investment (losses)
gains.................... 14 (70)
Policyholder benefits and
claims................... 4 13,100
Interest credited to
policyholder account
balances................. -- 2,441
Policyholder dividends.... -- 1,690
Demutualization costs..... -- 260
Other expenses............ (141) 6,755
Income (loss) before
provision for income
taxes.................... (56) 1,175
Net income (loss)......... (50) 617
Total assets.............. (2,655) 225,232
Deferred policy
acquisition costs........ -- 9,070
Separate account assets... -- 64,941
Policyholder
liabilities.............. (293) 124,955
Separate account
liabilities.............. -- 64,941
F-52
132
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AUTO
AT OR FOR THE YEAR ENDED & ASSET
DECEMBER 31, 1998 INDIVIDUAL INSTITUTIONAL REINSURANCE HOME MANAGEMENT INTERNATIONAL CORPORATE
------------------------ ---------- ------------- ----------- ------ ---------- ------------- ---------
(DOLLARS IN MILLIONS)
Premiums.................. $ 4,323 $ 5,159 $-- $1,403 $ -- $ 618 $ --
Universal life and
investment-type product
policy fees.............. 817 475 -- -- -- 68 --
Net investment income..... 5,480 3,885 -- 81 75 343 682
Other revenues............ 474 575 -- 36 817 33 111
Net investment gains...... 659 557 -- 122 -- 117 679
Policyholder benefits and
claims................... 4,606 6,416 -- 1,029 -- 597 (10)
Interest credited to
policyholder account
balances................. 1,423 1,199 -- -- -- 89 --
Policyholder dividends.... 1,445 142 -- -- -- 64 --
Demutualization costs..... -- -- -- -- -- -- 6
Other expenses............ 2,577 1,613 -- 386 799 352 2,601
Income (loss) before
provision for income
taxes.................... 1,702 1,281 -- 227 93 77 (1,125)
Net income (loss)......... 1,069 846 -- 161 49 56 (695)
Total assets.............. 103,614 88,741 -- 2,763 1,164 3,432 20,852
Deferred policy
acquisition costs........ 6,386 354 -- 57 -- 231 --
Separate account assets... 23,013 35,029 -- -- -- 26 --
Policyholder
liabilities.............. 71,571 49,406 -- 1,477 -- 2,043 1
Separate account
liabilities.............. 23,013 35,029 -- -- -- 26 --
AT OR FOR THE YEAR ENDED CONSOLIDATION/
DECEMBER 31, 1998 ELIMINATION TOTAL
------------------------ -------------- --------
(DOLLARS IN MILLIONS)
Premiums.................. $ -- $ 11,503
Universal life and
investment-type product
policy fees.............. -- 1,360
Net investment income..... (318) 10,228
Other revenues............ (52) 1,994
Net investment gains...... (113) 2,021
Policyholder benefits and
claims................... -- 12,638
Interest credited to
policyholder account
balances................. -- 2,711
Policyholder dividends.... -- 1,651
Demutualization costs..... -- 6
Other expenses............ (309) 8,019
Income (loss) before
provision for income
taxes.................... (174) 2,081
Net income (loss)......... (143) 1,343
Total assets.............. (5,220) 215,346
Deferred policy
acquisition costs........ -- 7,028
Separate account assets... -- 58,068
Policyholder
liabilities.............. (295) 124,203
Separate account
liabilities.............. -- 58,068
The Individual Business segment included an equity ownership interest in
Nvest under the equity method of accounting. Nvest was included within the Asset
Management segment due to the types of products and strategies employed by the
entity. The Individual Business segment's equity in earnings of Nvest, which is
included in net investment income, was $30 million, $48 million and $49 million
for the years ended December 31, 2000, 1999 and 1998, respectively. The
Individual Business segment includes $538 million (after allocating $118 million
to participating contracts) of the gain on the sale of Nvest in 2000. As part of
the GenAmerica acquisition, the Company acquired General American Life Insurance
Company, the results of which are included primarily in the Individual Business
segment.
The Reinsurance segment includes the life reinsurance business of RGA,
acquired in 2000, combined with Exeter, an ancillary life reinsurance business
of the Company. Exeter has been reported as a component of the Individual
Business segment rather than as a separate segment for periods prior to January
1, 2000 due to its immateriality.
The Auto & Home segment includes the standard personal lines property and
casualty insurance operations of The St. Paul Companies which were acquired in
September, 1999.
As part of the GenAmerica acquisition, the Company acquired Conning, the
results of which are included in the Asset Management segment.
The International segment includes a $87 million gain resulting from the
sale of a substantial portion of the Company's Canadian operations in 1998.
The Corporate segment includes a $433 million gain resulting from the sale
of MetLife Capital Holdings, Inc. in 1998.
F-53
133
METLIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net investment income and net investment gains and losses are based upon
the actual results of each segment's specifically identifiable asset portfolio.
Other costs and operating costs were allocated to each of the segments based
upon: (1) a review of the nature of such costs, (2) time studies analyzing the
amount of employee compensation costs incurred by each segment, and (3) cost
estimates included in the Company's product pricing.
The consolidation/elimination column includes the elimination of all
intersegment amounts and the Individual Business segment's ownership interest in
Nvest. The principal component of the intersegment amounts related to
intersegment loans, which bore interest at rates commensurate with related
borrowings.
Revenues derived from any customer did not exceed 10% of consolidated
revenues. Revenues from U.S. operations were $30,953 million, $24,637 million
and $25,643 million for the years ended December 31, 2000, 1999 and 1998,
respectively, which represented 97%, 97% and 96%, respectively, of consolidated
revenues.
F-54
134
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this Item is hereby incorporated herein by
reference to the sections entitled "Proposal One -- Election of Directors,"
"Corporate Governance -- Director Compensation" and "Corporate
Governance -- Executive Officers" in the registrant's definitive proxy statement
for the Annual Meeting of Shareholders to be held on April 24, 2001, to be filed
by the registrant with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the year ended December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this Item is hereby incorporated herein by
reference to the section entitled "Executive Compensation" in the registrant's
definitive proxy statement for the Annual Meeting of Shareholders to be held on
April 24, 2001, to be filed by the registrant with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the year ended
December 31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this Item is hereby incorporated herein by
reference to the sections entitled "Stock Ownership of Directors and Executive
Officers" and "Ownership of MetLife Stock" in the registrant's definitive proxy
statement for the Annual Meeting of Shareholders to be held on April 24, 2001,
to be filed by the registrant with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the year ended December 31,
2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this Item is hereby incorporated herein by
reference to the section entitled "Corporate Governance -- Certain Relations and
Related Party Transactions" in the registrant's definitive proxy statement for
the Annual Meeting of Shareholders to be held on April 24, 2001, to be filed by
the registrant with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the year ended December 31, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) The following documents are filed as part of this report:
1. Financial Statements
The financial statements are listed in the Index to Consolidated
Financial Statements and Schedules on page 78.
2. Financial Statement Schedules
The financial statement schedules are listed in the Index to
Consolidated Financial Statements and Schedules on page 78.
3. Exhibits
The exhibits are listed in the Exhibit Index which begins on page
E-1.
79
135
(B) Reports on Form 8-K
The following Reports on Form 8-K were filed during the fourth quarter
of 2000:
1. Form 8-K filed December 20, 2000 (dated December 19, 2000)
2. Form 8-K filed December 8, 2000 (dated December 7, 2000)
3. Form 8-K filed November 8, 2000 (dated November 7, 2000)
4. Form 8-K field October 31, 2000 and dated October 30, 2000
5. Form 8-K filed October 26, 2000 (dated October 26, 2000)
6. Form 8-K filed October 25, 2000 (dated October 24, 2000)
The following Reports on Form 8-K were filed during the first quarter of
2001:
1. Form 8-K filed March 13, 2001 (dated March 13, 2001)
2. Form 8-K filed February 13, 2001 (dated February 13, 2001)
3. Form 8-K filed January 24, 2001 (dated January 23, 2001)
80
136
METLIFE, INC.
SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN AFFILIATES
DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
AMOUNT AT
COST OR WHICH
AMORTIZED ESTIMATED SHOWN ON
COST FAIR VALUE BALANCE SHEET
TYPE OF INVESTMENT --------- ---------- ---------------
Fixed maturities:
Bonds:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies............ $ 8,461 $ 9,634 $ 9,634
States and political subdivisions................. 1,563 1,639 1,639
Foreign governments............................... 5,153 5,341 5,341
Corporate......................................... 48,893 48,581 48,581
Mortgage-and asset-backed securities.............. 33,039 33,573 33,573
Other............................................. 13,872 13,890 13,890
Redeemable preferred stocks.......................... 321 321 321
-------- -------- --------
Total fixed maturities....................... 111,302 112,979 112,979
Equity securities:
Common stocks........................................ 872 1,602 1,602
Nonredeemable preferred stocks....................... 577 591 591
-------- -------- --------
Total equity securities...................... 1,449 2,193 2,193
Mortgage loans on real estate.......................... 21,951 22,847 21,951
Policy loans........................................... 8,158 8,914 8,158
Real estate and real estate joint ventures............. 5,438 -- 5,438
Real estate acquired in satisfaction of debt........... 66 -- 66
Other limited partnership interests.................... 1,652 -- 1,652
Short-term investments................................. 1,269 1,269 1,269
Other invested assets.................................. 2,821 -- 2,821
-------- --------
TOTAL INVESTMENTS............................ $154,106 $156,527
======== ========
81
137
METLIFE, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF METLIFE, INC. (REGISTRANT)
AT
BALANCE SHEET DECEMBER 31, 2000
------------- ---------------------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 11
Short-term investments...................................... 339
Mandatorily convertible note -- affiliated.................. 1,006
Investment in subsidiaries.................................. 16,137
Other assets................................................ 11
-------
Total assets...................................... $17,504
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Long-term debt -- affiliated................................ $ 1,037
Other liabilities........................................... 78
-------
Total liabilities................................. 1,115
Total stockholders' equity........................ 16,389
-------
Total liabilities and stockholders' equity........ $17,504
=======
FOR THE PERIOD
APRIL 7, 2000
(DATE OF DEMUTUALIZATION)
THROUGH
STATEMENT OF INCOME DECEMBER 31, 2000(1)
------------------- -------------------------
(DOLLARS IN MILLIONS)
Interest income............................................. $ 78
Interest expense............................................ 74
Other expenses.............................................. 38
------
Loss before income tax benefit......................... (34)
Income tax benefit.......................................... (12)
Equity in earnings of subsidiaries.......................... 1,195
------
Net income............................................. $1,173
======
---------------
(1) MetLife, Inc. was incorporated August 10, 1999 as a wholly-owned subsidiary
of Metropolitan Life. On April 7, 2000, Metropolitan Life converted from a
mutual life insurance company to a stock life insurance company and became a
wholly-owned subsidiary of MetLife, Inc. MetLife, Inc. commenced operations
as a holding company on April 7, 2000.
82
138
METLIFE, INC.
SCHEDULE II (CONTINUED)
CONDENSED FINANCIAL INFORMATION OF METLIFE, INC. (REGISTRANT)
FOR THE PERIOD
APRIL 7, 2000
(DATE OF DEMUTUALIZATION)
THROUGH
DECEMBER 31, 2000
-------------------------
(DOLLARS IN MILLIONS)
CONDENSED STATEMENT OF CASH FLOWS
Cash flows from operating activities:
Net income.................................................. $ 1,173
Undistributed earnings of subsidiaries(1)................... (432)
Other, net.................................................. 67
-------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 808
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in short-term investments........................ (339)
Purchase of mandatorily convertible note.................... (1,006)
Purchase of subsidiary...................................... (33)
Capital contribution to subsidiary.......................... (3,700)
-------
Net cash used in investing activities.................. (5,078)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued......................................... 4,009
Treasury stock acquired..................................... (613)
Dividends paid.............................................. (152)
Long-term debt issued....................................... (1,037)
-------
Net cash provided by financing activities.............. 4,281
-------
Change in cash and cash equivalents......................... 11
Cash and cash equivalents, beginning of period.............. --
-------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 11
=======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................. $ 63
=======
Income taxes.............................................. $ --
=======
---------------
(1) In December 2000, $763 million of dividends were paid to the Holding Company
by its subsidiary, Metropolitan Life.
83
139
METLIFE, INC.
SCHEDULE III
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN MILLIONS)
DEFERRED POLICY FUTURE POLICY POLICYHOLDER POLICYHOLDER
ACQUISITION BENEFITS AND OTHER ACCOUNT DIVIDENDS UNEARNED PREMIUM REVENUE
SEGMENT COSTS POLICYHOLDER FUNDS BALANCES PAYABLE REVENUE AND POLICY CHANGES
------- --------------- ------------------ ------------ ------------ -------- ------------------
2000
Individual................ $ 8,610 $50,727 $32,455 $ 867 $796 $ 5,894
Institutional............. 446 31,293 18,719 211 4 7,447
Reinsurance............... 1,030 3,016 2,129 -- -- 1,450
Auto & Home............... 176 2,559 -- -- -- 2,636
Asset Management.......... -- -- -- -- -- --
International............. 354 1,423 1,008 4 25 713
Corporate................. 1 24 -- -- -- --
Consolidation/
elimination............. 1 (978) (2) -- -- (3)
------- ------- ------- ------ ---- -------
$10,618 $88,064 $54,309 $1,082 $825 $18,137
======= ======= ======= ====== ==== =======
1999
Individual................ $ 8,228 $44,962 $27,280 $ 714 $799 $ 5,177
Institutional............. 364 29,895 17,627 259 6 6,027
Auto & Home............... 167 2,318 -- -- -- 1,751
Asset Management.......... -- -- -- -- -- --
International............. 311 1,192 994 1 15 566
Corporate................. -- 6 -- -- -- --
Consolidation/
elimination............. -- (293) -- -- -- --
------- ------- ------- ------ ---- -------
$ 9,070 $78,080 $45,901 $ 974 $820 $13,521
======= ======= ======= ====== ==== =======
1998
Individual................ $ 6,386 $43,775 $27,109 $ 687 $749 $ 5,140
Institutional............. 354 30,905 18,253 248 5 5,634
Auto & Home............... 57 1,477 -- -- -- 1,403
Asset Management.......... -- -- -- -- -- --
International............. 231 899 1,132 12 8 686
Corporate................. -- 1 -- -- -- --
Consolidation/
elimination............. -- (295) -- -- -- --
------- ------- ------- ------ ---- -------
$ 7,028 $76,762 $46,494 $ 947 $762 $12,863
======= ======= ======= ====== ==== =======
84
140
METLIFE, INC.
SCHEDULE III (CONTINUED)
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN MILLIONS)
AMORTIZATION OF
AMORTIZATION OF DEFERRED POLICY
DEFERRED POLICY ACQUISITION COSTS
INVESTMENT POLICYHOLDER ACQUISITION COSTS CHARGED AGAINST OTHER
INCOME, BENEFITS AND CHARGED TO NET INVESTMENT OPERATING PREMIUMS WRITTEN
SEGMENT NET INTEREST CREDITED OTHER EXPENSES GAINS (LOSSES) EXPENSES EXCLUDING LIFE
------- ---------- ----------------- ----------------- ------------------- --------- ----------------
2000
Individual............ $ 6,475 $ 6,734 $ 723 $ (95) $4,530 $ --
Institutional......... 3,959 9,268 76 -- 1,801 --
Reinsurance........... 379 1,205 207 -- 327 --
Auto & Home........... 194 2,005 422 -- 405 2,686
Asset Management...... 90 -- -- -- 784 --
International......... 254 618 50 -- 601 268
Corporate............. 662 (2) -- -- 1,003 --
Consolidation/
elimination......... (245) -- -- -- (226) --
------- ------- ------ ----- ------ ------
$11,768 $19,828 $1,478 $ (95) $9,225 $2,954
======= ======= ====== ===== ====== ======
1999
Individual............ $ 5,346 $ 5,984 $ 625 $ (46) $3,602 $ --
Institutional......... 3,755 7,742 48 -- 1,701 --
Auto & Home........... 103 1,301 237 -- 277 2,109
Asset Management...... 80 -- -- -- 795 --
International......... 206 510 20 -- 250 64
Corporate............. 605 -- -- -- 1,291 --
Consolidation/
elimination......... (279) 4 -- -- (141) --
------- ------- ------ ----- ------ ------
$ 9,816 $15,541 $ 930 $ (46) $7,775 $2,173
======= ======= ====== ===== ====== ======
1998
Individual............ $ 5,480 $ 6,029 $ 386 $ 240 $3,636 $ --
Institutional......... 3,885 7,615 39 -- 1,716 --
Auto & Home........... 81 1,029 166 -- 220 1,422
Asset Management...... 75 -- -- -- 799 --
International......... 343 686 50 -- 366 44
Corporate............. 682 (10) -- -- 2,607 --
Consolidation/
elimination......... (318) -- -- -- (309) --
------- ------- ------ ----- ------ ------
$10,228 $15,349 $ 641 $ 240 $9,035 $1,466
======= ======= ====== ===== ====== ======
85
141
METLIFE, INC.
SCHEDULE IV
CONSOLIDATED REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER ASSUMED TO
AMOUNT COMPANIES COMPANIES NET AMOUNT NET
---------- --------- ---------- ---------- -------------
(DOLLARS IN MILLIONS)
2000
Life Insurance In-Force......... $1,967,481 $363,038 $604,780 $2,209,223 27.5%
========== ======== ======== ========== =====
INSURANCE PREMIUMS
Life insurance.................. $ 11,049 $ 1,894 $ 2,069 $ 11,224 18.4%
Accident and health insurance... 2,542 318 153 2,377 6.4%
Property and casualty
insurance..................... 2,070 50 696 2,716 25.6%
---------- -------- -------- ---------- -----
Total Insurance
Premium............. $ 15,661 $ 2,262 $ 2,918 $ 16,317 17.9%
========== ======== ======== ========== =====
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER ASSUMED TO
AMOUNT COMPANIES COMPANIES NET AMOUNT NET
---------- --------- ---------- ---------- -------------
(DOLLARS IN MILLIONS)
1999
Life Insurance In-Force......... $1,743,945 $217,358 $ 12,168 $1,538,755 0.8%
========== ======== ======== ========== =====
INSURANCE PREMIUMS
Life insurance.................. $ 9,503 $ 1,269 $ 217 $ 8,451 2.6%
Accident and health insurance... 2,102 323 48 1,827 2.6%
Property and casualty
insurance..................... 1,644 53 219 1,810 12.1%
---------- -------- -------- ---------- -----
Total Insurance
Premium............. $ 13,249 $ 1,645 $ 484 $ 12,088 4.0%
========== ======== ======== ========== =====
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER ASSUMED TO
AMOUNT COMPANIES COMPANIES NET AMOUNT NET
---------- --------- ---------- ---------- -------------
(DOLLARS IN MILLIONS)
1998
Life Insurance In-Force......... $1,652,179 $167,941 $ 11,435 $1,495,673 0.8%
========== ======== ======== ========== =====
INSURANCE PREMIUMS
Life insurance.................. $ 9,572 $ 1,281 $ 313 $ 8,604 3.6%
Accident and health insurance... 1,718 301 53 1,470 3.6%
Property and casualty
insurance..................... 1,473 87 43 1,429 3.0%
---------- -------- -------- ---------- -----
Total Insurance
Premium............. $ 12,763 $ 1,669 $ 409 $ 11,503 3.6%
========== ======== ======== ========== =====
86
142
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ ROBERT H. BENMOSCHE
------------------------------------
Name: Robert H. Benmosche
Title: Chairman of the Board,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT H. BENMOSCHE Chairman of the Board, President, March 14, 2001
--------------------------------------------------- Chief Executive Officer and Director
Robert H. Benmosche
/s/ CURTIS H. BARNETTE Director March 14, 2001
---------------------------------------------------
Curtis H. Barnette
/s/ GERALD CLARK Vice-Chairman of the Board, Chief March 14, 2001
--------------------------------------------------- Investment Officer and Director
Gerald Clark
/s/ JOAN GANZ COONEY Director March 14, 2001
---------------------------------------------------
Joan Ganz Cooney
/s/ JOHN C. DANFORTH Director March 14, 2001
---------------------------------------------------
John C. Danforth
/s/ BURTON A. DOLE, JR. Director March 14, 2001
---------------------------------------------------
Burton A. Dole, Jr.
/s/ JAMES R. HOUGHTON Director March 14, 2001
---------------------------------------------------
James R. Houghton
/s/ HARRY P. KAMEN Director March 14, 2001
---------------------------------------------------
Harry P. Kamen
/s/ HELENE L. KAPLAN Director March 14, 2001
---------------------------------------------------
Helene L. Kaplan
/s/ CHARLES M. LEIGHTON Director March 14, 2001
---------------------------------------------------
Charles M. Leighton
87
143
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLEN E. MURRAY Director March 14, 2001
---------------------------------------------------
Allen E. Murray
/s/ STEWART G. NAGLER Vice-Chairman of the Board, March 14, 2001
--------------------------------------------------- Chief
Stewart G. Nagler Financial Officer and
Director
/s/ JOHN J. PHELAN, JR. Director March 14, 2001
---------------------------------------------------
John J. Phelan, Jr.
/s/ HUGH B. PRICE Director March 14, 2001
---------------------------------------------------
Hugh B. Price
/s/ RUTH J. SIMMONS Director March 14, 2001
---------------------------------------------------
Ruth J. Simmons
/s/ WILLIAM C. STEERE, JR. Director March 14, 2001
---------------------------------------------------
William C. Steere, Jr.
/s/ VIRGINIA M. WILSON Senior Vice President and March 14, 2001
--------------------------------------------------- Controller
Virginia M. Wilson
88
144
EXHIBIT INDEX
PAGE
EXHIBIT NO. DESCRIPTION NO.
----------- ----------- ----
2.1 -- Plan of Reorganization (Incorporated by reference to Exhibit
2.1 to MetLife, Inc.'s Registration Statement on Form S-1
(No. 333-91517) (the "Registration Statement")
2.2 -- Amendment to Plan of Reorganization dated as of March 9,
2000 (Incorporated by reference to Exhibit 2.2 to the
Registration Statement)
3.1 -- Amended and Restated Certificate of Incorporation of 148
MetLife, Inc.
3.2 -- Amended and Restated By-Laws of MetLife, Inc. 155
4.1 -- Form of Certificate for Common Stock, par value $0.01 per
share (Incorporated by reference to Exhibit 4.1 to the
Registration Statement)
4.2 -- Indenture between MetLife, Inc. and The Bank of New York, as 188
trustee, relating to the debt securities
4.3 -- First Supplemental Indenture between MetLife, Inc. and The 259
Bank of New York, as trustee, relating to the Debentures
4.4 -- Certificate of Trust of MetLife Capital Trust I
(Incorporated by reference to Exhibit 4.3 to MetLife, Inc.'s
and MetLife Capital Trust I's Registration Statement on Form
S-1 (Nos. 333-32074 and 333-32074-01) (the "Trust
Registration Statement")
4.5 -- Declaration of Trust of MetLife Capital Trust I
(Incorporated by reference to Exhibit 4.4 to the Trust
Registration Statement)
4.6 -- Amended and Restated Declaration of Trust of MetLife Capital 284
Trust I
4.7 -- Capital Securities Guarantee Agreement for MetLife Capital 366
Trust I
4.8 -- Capital Security Certificate of MetLife Capital Trust I
(included in Exhibit 4.6)
4.9 -- Purchase Contract Agreement 389
4.10 -- Pledge Agreement 537
4.11 -- Form of Debenture (Included in Exhibit 4.3)
4.12 -- Form of Normal Unit (Included in Exhibit 4.9)
4.13 -- Form of Stripped Unit (Included in Exhibit 4.9)
4.14 -- Common Securities Guarantee Agreement 580
10.1 -- MetLife Deferred Compensation Plan 2000 for Senior Officers
(Incorporated by reference to Exhibit 10.1 to the
Registration Statement)*
10.2 -- MetLife Deferred Compensation Plan 2000 for Officers
(Incorporated by reference to Exhibit 10.2 to the
Registration Statement)*
10.3 -- Form of Employment Continuation Agreement with Messrs.
Benmosche, Nagler and Clark (Incorporated by reference to
Exhibit 10.3 to the Registration Statement)*
10.4 -- Form of Employment Continuation Agreement with Mr. Henrikson
and other executive officers (Incorporated by reference to
Exhibit 10.4 to the Registration Statement)*
10.5 -- Employment Continuation Agreement with Mr. Benson
(Incorporated by reference to Exhibit 10.5 to the
Registration Statement)*
10.6 -- Rights Agreement 591
10.7 -- MetLife, Inc. 2000 Stock Incentive Plan, as amended and
restated March 28, 2000 (Incorporated by reference to
Exhibit 10.7 to the Registration Statement)*
---------------
* Indicates management contracts or compensatory plans or arrangements.
E-1
145
PAGE
EXHIBIT NO. DESCRIPTION NO.
----------- ----------- ----
10.8 -- MetLife, Inc. 2000 Directors Stock Plan, as amended and
restated March 28, 2000 (Incorporated by reference to
Exhibit 10.8 to the Registration Statement)*
10.9 -- Amended and Restated Employment Continuation Agreement with
Ms. Rein (Incorporated by reference to Exhibit 10.9 to the
Registration Statement)*
10.10 -- Employment Continuation Agreement between Ms. Rein and
Metropolitan Property and Casualty Insurance Company, dated
March 3, 2000 (Incorporated by reference to Exhibit 10.10 to
the Registration Statement)*
10.11 -- Employment Agreement between New England Life Insurance
Company and James M. Benson, dated June 16, 1997
(Incorporated by reference to Exhibit 10.11 to the
Registration Statement)*
10.12 -- Policyholder Trust Agreement (Incorporated by reference to
Exhibit 10.12 to the Registration Statement)
10.13 -- Restatement of the Excess Asbestos Indemnity Insurance
Policy, dated as of December 31, 1998, between Stockwood
Reinsurance Company, Ltd. and Metropolitan Life Insurance
Company (Incorporated by reference to Exhibit 10.13 to the
Registration Statement)
10.14 -- Restatement of the Excess Asbestos Indemnity Insurance
Policy, dated as of December 31, 1998, between European
Reinsurance Corporation of America and Metropolitan Life
Insurance Company (Incorporated by reference to Exhibit
10.14 to the Registration Statement)
10.15 -- Restatement of the Aggregate Excess of Loss Reinsurance
Agreement, dated as of December 31, 1998, between Stockwood
Reinsurance Company, Ltd. and Metropolitan Life Insurance
Company (Incorporated by reference to Exhibit 10.15 to the
Registration Statement)
10.16 -- Restatement of the Excess Asbestos Indemnity Insurance
Policy, dated as of December 31, 1998, between Granite State
Insurance Company and Metropolitan Life Insurance Company
(Incorporated by reference to Exhibit 10.16 to the
Registration Statement)
10.17 -- Restatement of the Aggregate Excess of Loss Reinsurance
Agreement, dated as of December 31, 1998, between American
International Life Assurance Company of New York and
Metropolitan Life Insurance Company (Incorporated by
reference to Exhibit 10.17 to the Registration Statement)
10.18 -- Form of Reinsurance Agreement, dated as of October 1, 2000, 654
between Metropolitan Life Insurance Company and certain
reinsurers
10.19 -- Five-Year Credit Agreement, dated as of April 27, 1998, and
as amended as of April 26, 1999, among Metropolitan Life
Insurance Company, MetLife Funding, Inc. and the other
parties signatory thereto (Incorporated by reference to
Exhibit 10.18 to the Registration Statement)
10.20 -- Amendment No. 2, dated as of June 30, 2000, to the Five Year 716
Credit Agreement, among Metropolitan Life Insurance Company,
MetLife Funding, Inc. and the other parties signatory
thereto
10.21 -- 364-Day Credit Agreement, dated as of April 27, 1998, as
amended and restated as of April 26, 1999, among
Metropolitan Life Insurance Company, MetLife Funding, Inc.
and the other parties signatory thereto (Incorporated by
reference to Exhibit 10.19 to the Registration Statement)
---------------
* Indicates management contracts or compensatory plans or arrangements.
E-2
146
PAGE
EXHIBIT NO. DESCRIPTION NO.
----------- ----------- ----
10.22 -- Second Amended and Restated 364-Day Credit Agreement, dated 724
as of April 25, 2000, among Metropolitan Life Insurance
Company, MetLife Funding, Inc. and the other parties
signatory thereto
10.23 -- 364-Day Credit Agreement, dated as of September 29, 1999,
among Metropolitan Life Insurance Company, MetLife Funding,
Inc. and the other parties signatory thereto (Incorporated
by reference to Exhibit 10.20 to the Registration Statement)
10.24 -- Amendment No. 1, dated as of June 30, 2000, to the 364-Day 737
Credit Agreement dated as of September 29, 1999, among
Metropolitan Life Insurance Company, MetLife Funding, Inc.
and the other parties signatory thereto
10.25 -- Stipulation of Settlement, as amended, relating to
Metropolitan Life Insurance Company Sales Practices
Litigation (Incorporated by reference to Exhibit 10.21 to
the Registration Statement)
10.26 -- Consulting Agreement with Harry P. Kamen, effective July 1,
1999 (Incorporated by reference to Exhibit 10.22 to the
Registration Statement)*
10.27 -- Metropolitan Life Insurance Company Long Term Performance
Compensation Plan (for performance periods starting on or
after January 1, 2000) (Incorporated by reference to Exhibit
10.24 to the Registration Statement)*
10.28 -- Metropolitan Life Insurance Company Long Term Performance
Compensation Plan (for performance periods starting on or
after January 1, 1999) (Incorporated by reference to Exhibit
10.25 to the Registration Statement)*
10.29 -- Metropolitan Life Insurance Company Long Term Performance
Compensation Plan (for performance periods starting on or
after January 1, 1998) (Incorporated by reference to Exhibit
10.26 to the Registration Statement)*
10.30 -- Metropolitan Life Insurance Company Long Term Performance
Compensation Plan (for performance periods starting on or
after January 1, 1997) (Incorporated by reference to Exhibit
10.27 to the Registration Statement)*
10.31 -- Metropolitan Life Insurance Company Annual Variable
Incentive Plan (for performance periods starting on or after
January 1, 2000) (Incorporated by reference to Exhibit 10.28
to the Registration Statement)*
10.32 -- The New Metropolitan Life Auxiliary Retirement Benefits
Plan, as amended and restated, effective January 1, 1996
(Incorporated by reference to Exhibit 10.29 to the
Registration Statement)*
10.33 -- The New Metropolitan Life Supplemental Auxiliary Retirement
Benefits Plan, effective January 1, 1996, and Amendment
thereto (Incorporated by reference to Exhibit 10.30 to the
Registration Statement)*
10.34 -- Metropolitan Life Auxiliary Savings and Investment Plan,
restated effective through August 15, 1998 (Incorporated by
reference to Exhibit 10.31 to the Registration Statement)*
10.35 -- Metropolitan Life Supplemental Auxiliary Savings and
Investment Plan (as amended and restated as of September 1,
1998) and Amendment thereto (Incorporated by reference to
Exhibit 10.32 to the Registration Statement)*
10.36 -- Supplemental Auxiliary Savings and Investment Plan of
Participating Metropolitan Affiliates, effective January 1,
1996 (Incorporated by reference to Exhibit 10.33 to the
Registration Statement)*
---------------
* Indicates management contracts or compensatory plans or arrangements.
E-3
147
PAGE
EXHIBIT NO. DESCRIPTION NO.
----------- ----------- ----
10.37 -- Metropolitan Life Supplemental Retirement Benefits Plan and
Amendment thereto, effective January 1, 1995 (Incorporated
by reference to Exhibit 10.34 to the Registration
Statement)*
10.38 -- New England Financial Annual Variable Incentive Plan (for
performance periods starting on or after January 1, 2000)
(Incorporated by reference to Exhibit 10.35 to the
Registration Statement)*
10.39 -- New England Financial Long Term Performance Compensation
Plan (for performance periods starting on or after January
1, 2000) (Incorporated by reference to Exhibit 10.36 to the
Registration Statement)*
10.40 -- New England Life Insurance Company Select Employees
Supplemental 401(k) Plan, as amended and restated effective
January 1, 2000 (Incorporated by reference to Exhibit 10.37
to the Registration Statement)*
10.41 -- New England Life Insurance Company Supplemental Retirement
Plan, as amended and restated effective January 1, 2000
(Incorporated by reference to Exhibit 10.38 to the
Registration Statement)*
10.42 -- The New England Life Insurance Company Select Employees
Supplemental Retirement Plan, as amended and restated
effective January 1, 2000 (Incorporated by reference to
Exhibit 10.39 to the Registration Statement)*
10.43 -- The New England Life Insurance Company Senior Executive
Nonqualified Elective Deferral Plan, effective January 1,
1998 (Incorporated by reference to Exhibit 10.40 to the
Registration Statement)*
10.44 -- New England Financial Long Term Performance Compensation
Plan (for each of the three-year performance periods
commencing on January 1, 1997, 1998 and 1999, respectively)
(Incorporated by reference to Exhibit 10.41 to the
Registration Statement)*
10.45 -- The New England Short-Term Incentive Plan (for performance
periods starting on or after January 1, 1999) (Incorporated
by reference to Exhibit 10.42 to the Registration
Statement)*
10.46 -- Metropolitan Life Insurance Company Annual Variable
Incentive Plan (for performance periods starting on or after
January 1, 1999) (Incorporated by reference to Exhibit 10.43
to the Registration Statement)
10.47 -- Form of Capital Note (Incorporated by reference to Exhibit
10.44 to the Registration Statement)
10.48 -- 1993 Fiscal Agency Agreement between Metropolitan Life
Insurance Company and The Chase Manhattan Bank, N.A., dated
as of November 1, 1993 (Incorporated by reference to Exhibit
10.45 to the Registration Statement)
10.49 -- 1995 Fiscal Agency Agreement between Metropolitan Life
Insurance Company and The Chase Manhattan Bank, N.A., dated
as of November 13, 1995 (Incorporated by reference to
Exhibit 10.46 to the Registration Statement)
10.50 -- Fiscal Agency Agreement between New England Mutual Life
Insurance Company and The First National Bank of Boston,
dated as of February 10, 1994 (Incorporated by reference to
Exhibit 10.47 to the Registration Statement)
10.51 -- Fiscal Agency Agreement between General American Life
Insurance Company and The Bank of New York, dated as of
January 24, 1994 (Incorporated by reference to Exhibit 10.48
to the Registration Statement)
---------------
* Indicates management contracts or compensatory plans or arrangements.
E-4
148
PAGE
EXHIBIT NO. DESCRIPTION NO.
----------- ----------- ----
10.52 -- Amended and Restated Trust Agreement among GenAmerica
Corporation and Wilmington Trust Company, David L. Herzog,
John W. Hayden and Christopher A. Martin dated as of June 6,
1997 (Incorporated by reference to Exhibit 10.49 to the
Registration Statement)
10.53 -- Employment Continuation Agreement with Ms. Weber
(Incorporated by reference to Exhibit 10.50 to the
Registration Statement)*
10.54 -- Form of Stock Purchase Agreement among MetLife, Inc.,
Metropolitan Life Insurance Company, Credit Suisse Group or
its affiliates and Banco Santander, Central Hispano S.A. or
its affiliates (Incorporated by reference to Exhibit 10.51
to the Registration Statement)
10.55 -- MetLife Deferred Compensation Plan for Officers 2001* 746
10.56 -- MetLife Individual Business Special Deferred Compensation 759
Plan 2001*
10.57 -- Amendment to the New Metropolitan Life Auxiliary Retirement 772
Benefits Plan*
10.58 -- Amendment to the New Metropolitan Life Supplemental 777
Auxiliary Retirement Benefits Plan*
10.59 -- Amendment to the Metropolitan Life Supplemental Retirement 781
Benefits Plan*
10.60 -- Amendment to the Metropolitan Life Supplemental Auxiliary 785
Savings and Investment Plan*
21.1 -- Subsidiaries of the Registrant 786
---------------
* Indicates management contracts or compensatory plans or arrangements.
E-5