-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PPzjQr6qxocyoQz7pZx0GmWMIs+n5m9MPEE0zQfteY5E5Ccf0eAR4SJKDXFWD3M/ S18sXtTt+4zqUXiEx+OiAw== 0000950123-04-002912.txt : 20040305 0000950123-04-002912.hdr.sgml : 20040305 20040305172450 ACCESSION NUMBER: 0000950123-04-002912 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040305 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METLIFE INC CENTRAL INDEX KEY: 0001099219 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 134075851 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15787 FILM NUMBER: 04652995 BUSINESS ADDRESS: STREET 1: ONE MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10010-3690 BUSINESS PHONE: 2125782211 MAIL ADDRESS: STREET 1: ONE MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10010-3690 10-K 1 y94438e10vk.txt METLIFE, INC. . . . 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, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-15787 METLIFE, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-4075851 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification 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 5.875% Senior Notes 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2003 was approximately $22 billion. As of March 1, 2004, 755,809,398 shares of the registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE THE INFORMATION REQUIRED TO BE FURNISHED PURSUANT TO PART OF ITEM 10, AND ITEMS 11, 12, 13 AND 14 OF 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 27, 2004, 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, 2003. TABLE OF CONTENTS
PAGE NUMBER ------ PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 27 Item 3. Legal Proceedings........................................... 28 Item 4. Submission of Matters to a Vote of Security Holders......... 35 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 36 Item 6. Selected Financial Data..................................... 37 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 41 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 107 Item 8. Financial Statements and Supplementary Data................. 112 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................... 113 Item 9A. Controls and Procedures..................................... 113 PART III Item 10. Directors and Executive Officers of the Registrant.......... 113 Item 11. Executive Compensation...................................... 113 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 114 Item 13. Certain Relationships and Related Transactions.............. 114 Item 14. Principal Accountant Fees and Services...................... 114 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 115 SIGNATURES............................................................ 122 EXHIBIT INDEX......................................................... E-1
NOTE REGARDING FORWARD-LOOKING STATEMENTS 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 the operations and financial results and the business and the products of the Registrant and its subsidiaries, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and other similar expressions. "MetLife" or the "Company" refers to MetLife, Inc., a Delaware corporation (the "Holding Company"), and its subsidiaries, including Metropolitan Life Insurance Company ("Metropolitan Life"). Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects on the Company. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties including, but not limited to, the following: (i) changes in general economic conditions, including the performance of financial markets and interest rates; (ii) heightened competition, including with respect to pricing, entry of new competitors and the development of new products by new and existing competitors; (iii) unanticipated changes in industry trends; (iv) MetLife, Inc.'s primary reliance, as a holding company, on dividends from its subsidiaries to meet debt payment obligations and the applicable regulatory restrictions on the ability of the subsidiaries to pay such dividends; (v) deterioration in the experience of the "closed block" established in connection with the reorganization of Metropolitan Life; (vi) catastrophe losses; (vii) adverse results or other consequences from litigation, arbitration or regulatory investigations; (viii) regulatory, accounting or tax changes that may affect the cost of, or demand for, the Company's products or services; (ix) downgrades in the Company's and its affiliates' claims paying ability, financial strength or credit ratings; (x) changes in rating agency policies or practices; (xi) discrepancies between actual claims experience and assumptions used in setting prices for the Company's products and establishing the liabilities for the Company's obligations for future policy benefits and claims; (xii) discrepancies between actual experience and assumptions used in establishing liabilities related to other contingencies or obligations; (xiii) the effects of business disruption or economic contraction due to terrorism or other hostilities; (xiv) the Company's ability to identify and consummate on successful terms any future acquisitions, and to successfully integrate acquired businesses with minimal disruption; and (xv) other risks and uncertainties described from time to time in MetLife, Inc.'s filings with the U.S. Securities and Exchange Commission, including its S-1 and S-3 registration statements. The Company specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. 2 PART I ITEM 1. BUSINESS 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"). MetLife, Inc., through its affiliates and subsidiaries, is a leading provider of insurance and other financial services to a broad spectrum of individual and institutional customers. The Company offers life insurance, annuities, automobile and homeowners insurance and mutual funds to individuals, as well as group insurance, reinsurance, and retirement and savings products and services to corporations and other institutions. The MetLife companies serve approximately 13 million households in the U.S. and provide benefits to approximately 37 million employees and family members through their plan sponsors, including 88 of the FORTUNE 100 largest companies. MetLife, Inc. also has direct international insurance operations in 10 countries serving approximately 8 million customers. MetLife is one of the largest insurance and financial services companies in the U.S. The Company's unparalleled franchises and brand names uniquely position it to be the preeminent provider of protection and savings and investment products in the U.S. In addition, MetLife's international operations are focused on emerging markets where the demand for insurance and savings and investment products is expected to grow rapidly in the future. MetLife's well-recognized brand names, leading market positions, competitive and innovative product offerings and financial strength and expertise should help drive future growth and enhance shareholder value, building on a long history of fairness, honesty and integrity. Over the course of the next several years, MetLife will pursue the following specific strategies to achieve its goals: - Build on widely recognized brand names - Capitalize on large customer base - Enhance capital efficiency - Expand multiple distribution channels - Continue to introduce innovative and competitive products - Focus international operations on emerging markets - Maintain balanced focus on asset accumulation and protection products - Manage operating expenses commensurate with revenue growth - Strengthen performance-oriented culture - Further commitment to a diverse workplace - Optimize operating returns from the Company's investment portfolio MetLife is organized into six business segments: Institutional, Individual, Auto & Home, International, Reinsurance and Asset Management. Financial information, including revenues, expenses, income and loss, and total assets by segment, is provided in Note 18 of Notes to Consolidated Financial Statements. INSTITUTIONAL The Company's Institutional segment offers a broad range of group insurance and retirement and savings products and services to corporations and other institutions. 3 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 Auto & Home segment and prepaid legal services plans. The Company offers these products either as an employer-paid benefit or as a voluntary benefit in which the premiums are paid by the employee. Revenues applicable to these group insurance products and services were $10.3 billion in 2003, representing 72.5% of total Institutional revenues of $14.2 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. MetLife serves companies and institutions with approximately 37 million employees and family members through their plan sponsors, including 88 of the FORTUNE 100 largest companies. MetLife's retirement and savings products and services include an array of annuity and investment products, as well as bundled administrative and investment services sold to sponsors of small- and mid-sized 401(k) and other defined contribution plans, guaranteed interest products and other stable value products, accumulation and income annuities, and separate account contracts for the investment of defined benefit and defined contribution plan assets. Revenues applicable to MetLife's retirement and savings products were $3.9 billion in 2003, representing 27.5% of total Institutional revenues. The employee benefit market served by Institutional is a dynamic one. Employers continue to seek ways to reduce costs and improve the productivity of their workforces. The continued high annual increases in the cost of providing employee medical care benefits have resulted in many employers reviewing all of their employee benefit programs. Such reviews are designed to identify ways to reduce costs while continuing to provide desirable benefit programs to attract and retain valuable employees. The employee benefit 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 and increasing employer support of "voluntary" products, such as supplemental group life, long-term care insurance, annuities, auto and homeowners insurance, and certain critical care products, as well as leading more employers to adopt defined contribution pension arrangements, such as 401(k) plans. MARKETING AND DISTRIBUTION Institutional 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, 2003, the group insurance sales channels had approximately 795 marketing representatives. MetLife group insurance products and services are distributed through the following channels: - The National Accounts unit focuses exclusively on MetLife's largest customers, generally those having more than 25,000 employees. This unit assigns account executives and other administrative 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 30 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, 27 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 4 intermediaries by providing an array of products and services designed for smaller businesses, generally those with fewer than 1,000 employees. MetLife's retirement and savings organization markets retirement, savings, investment and payout products and services to sponsors and advisors of benefit plans of all sizes. These products and services are offered to private and public plans, collective bargaining units, nonprofit organizations, recipients of structured settlements and the current and retired members of these and other institutions. MetLife distributes retirement and savings products and services through dedicated sales teams and relationship managers located in 27 offices around the country. In addition, the retirement and savings organization works with the distribution channels in the Individual segment, group insurance and State Street Research & Management Company, a subsidiary of MetLife, Inc., to better reach and service customers, brokers, consultants and other intermediaries. The Company has entered into several joint ventures and other arrangements with third parties to expand the marketing and distribution opportunities of institutional products and services. The Company also seeks to sell its institutional products and services through sponsoring organizations and affinity groups. For example, the Company is a preferred provider of long-term care products for the American Association of Retired Persons and the National Long-Term Care Coalition, a group of some of the nation's largest employers. In addition, the Company, together with John Hancock Financial Services, Inc., is a provider for the Federal Long-Term Care Insurance program. The program, available to most federal employees and their families, is the largest employer-sponsored long-term care insurance program in the country based on enrollees. GROUP INSURANCE PRODUCTS AND SERVICES MetLife's group insurance products and services include: Group life. Group life insurance products and services include group term life, 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 specialized life insurance products designed specifically to provide solutions for non-qualified benefit and retiree 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. 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: Guaranteed interest and stable value products. MetLife offers guaranteed interest contracts ("GICs"), including separate account and synthetic (trust) GICs, funding agreements and similar products. Accumulation and income products. MetLife also sells fixed and variable annuity products, generally in connection with defined contribution plans, the termination of pension plans or the funding of structured settlements. Defined contribution plan services. MetLife provides full service defined contribution programs to small- and mid-size companies. Other retirement and savings products and services. Other retirement and savings products and services include separate account contracts for the investment management of defined benefit and defined contribution plans on behalf of corporations and other institutions. 5 INDIVIDUAL MetLife's Individual segment offers a wide variety of protection and asset accumulation products aimed at serving the financial needs of its customers throughout their entire life cycle. Products offered by Individual include insurance products, such as traditional, universal and variable life insurance and variable and fixed annuities. In addition, Individual sales representatives distribute disability insurance and long-term care insurance products offered through the Institutional segment, investment products such as mutual funds, as well as other products offered by the Company's other businesses. Individual's principal distribution channels are 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. Individual distributes its products through several additional distribution channels, including Walnut Street Securities, MetLife Resources and Texas Life. In total, Individual had approximately 11,200 active sales representatives at December 31, 2003. MetLife's broadly recognized brand names and strong distribution channels have allowed it to become the third largest provider of individual life insurance and annuities in the U.S., with $12.7 billion of total statutory individual life and annuity premiums and deposits through September 30, 2003, the latest period for which OneSource, a database that aggregates U.S. insurance company statutory financial statements, is available. According to research performed by the Life Insurance Marketing and Research Association ("LIMRA"), based on sales through September 30, 2003, MetLife was the second largest issuer of individual variable life insurance in the U.S. and the fifth largest issuer of all individual life insurance products in the U.S. In addition, according to research done by LIMRA and based on new annuity deposits through September 30, 2003, MetLife was the fourth largest annuity writer in the U.S. Reflecting overall trends in the insurance industry, sales of MetLife's traditional life insurance products have declined in recent years. However, during the period from 1999 to 2003, the statutory deposits for annuity products increased at a compound annual growth rate of approximately 23%. Annuity deposits represented approximately 58% of total statutory premiums and deposits for Individual in 2003. Individual had $12.4 billion of total revenues, or 34.7% of MetLife's total revenues in 2003. 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. The Company 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. MetLife Financial Services career agency system. The MetLife Financial Services career agency system had 5,531 agents under contract in 129 agencies at December 31, 2003. The career agency sales force focuses on the large middle-income and affluent markets, including multicultural markets. The Company supports its efforts in multicultural markets through targeted advertising, specially trained agents and sales literature written in various languages. Multicultural markets represented approximately 26% of MetLife Financial Services' individual life sales in 2003. The average face amount of a life insurance policy sold through the career agency system in 2003 was approximately $250,000. 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 are not authorized to sell other insurers' products without MetLife's approval. At December 31, 2003, approximately 95% of the agents in the career agency system were licensed to sell one or more of the following products: variable life insurance, variable annuities and mutual funds. From 1999 through 2003, the number of agents under contract in the MetLife Financial Services career agency system declined from 6,766 to 5,531. This decline was primarily the result of MetLife Financial Services' more stringent standards for recruiting and retaining agents, the consolidation of sales offices and 6 modifications in compensation practices for its sales force. 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 3%. New England Financial general agency system. New England Financial's general agency system targets high net-worth 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 2003 was approximately $410,000. At December 31, 2003, New England Financial's sales force included 71 general agencies providing support to 2,845 agents and a network of independent brokers throughout the U.S. The compensation of 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, 2003, approximately 90% of New England Financial's agents were licensed to sell one or more of the following products: variable life insurance, variable annuities and mutual funds. GenAmerica Financial independent general agency system. GenAmerica Financial markets a portfolio of individual life insurance, annuity contracts, securities, and related financial services to high net-worth individuals and small- to medium-sized businesses through multiple distribution channels. These distribution channels include independent general agents, financial advisors, consultants, brokerage general agencies and other independent marketing organizations. The average face amount of a life insurance policy sold through the GenAmerica Financial independent general agency system in 2003 was approximately $610,000. The GenAmerica Financial distribution channel sells universal life, variable universal life, and traditional life insurance products through approximately 1,500 independent general agencies with which it has contractual arrangements. This reflects a 47% increase in independent general agencies from 2002 to 2003. There are 429 independent general agents who produced at least $25,000 in first-year insurance sales in 2003. These agents market GenAmerica Financial products and are independent contractors who 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 agencies. Recruiting and wholesaling efforts are directed from a nationwide network of regional offices. GenAmerica Financial is actively developing and implementing programs designed to increase the scale and productivity of its distribution channels. In 2003, MetLife Investors Group's management became responsible for the GenAmerica Financial distribution channel, building on its success in third party distribution and taking advantage of its scale and established systems. MetLife Investors Group. MetLife Investors Group is a wholesale distribution channel dedicated to the distribution of variable and fixed annuities and insurance products through financial intermediaries, including regional broker/dealers, New York Stock Exchange brokerage firms, financial planners and banks. For the year ended December 31, 2003, MetLife Investors Group had 472 selling agreements, 411 for regional broker/ dealers and financial planners, four for brokerage firms, 56 for banks and one for a third party administrator. As of December 31, 2003, MetLife Investors Group's sales force consisted of 86 regional vice presidents, or wholesalers. MetLife Investors Group plans to continue growing existing distribution relationships and acquiring new relationships by capitalizing on an experienced management team, leveraging the MetLife brand and resources, and developing high service, low-cost operations while also adding distribution of other MetLife products. Additional distribution channels: The Company distributes its individual insurance and investment products through several additional distribution channels, including Walnut Street Securities, MetLife Resources and Texas Life. 7 Walnut Street Securities. Walnut Street Securities, Inc., a MetLife, Inc. subsidiary, is a broker/ dealer that markets mutual funds and other securities, as well as variable life insurance and variable annuity products, through 1,462 independent registered representatives. MetLife Resources. MetLife Resources, a division of MetLife, markets retirement, annuity and other financial products on a national basis through 401 agents and independent brokers. MetLife Resources targets the nonprofit, educational and healthcare markets. Texas Life. Texas Life Insurance Company, a MetLife, Inc. subsidiary, markets whole life and universal life insurance products under the Texas Life name through approximately 1,300 active independent insurance brokers. These brokers are independent contractors who sell insurance for Texas Life on a nonexclusive basis. A number of MetLife career agents also market Texas Life products. Texas Life sells universal 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, as well as annuities and investment-type 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 life, and other individual products, including individual disability and long-term care insurance. 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, life-cycle protection and distribution needs of its customers. Some of these updates have included new universal life policies, updated variable universal life products, an improved term insurance portfolio, and enhancements to one of MetLife's whole life products. 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 accounts or directed to the Company's general account. In the separate 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 advantage of various 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 premiums, and the resulting accumulated balances, are 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 the owner to adjust the frequency and amount of premium payments. The Company credits premiums to an account maintained for the policyholder. Premiums are credited net of specified expenses and interest, at interest rates it determines, subject to specified minimums. Specific charges are made against the policyholder's account for the cost of insurance protection and for expenses. With some products, by maintaining a certain premium level, policyholders may have the advantage of various guarantees that may protect the death benefit from adverse investment experience. Whole life. Whole life 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 entire life of the contract period, to a specified age or period, and may be level or change in accordance with a predetermined schedule. Whole life insurance includes policies that provide a participation feature in 8 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 life. Term life provides a guaranteed benefit upon the death of the insured for 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 typically no savings or investment elements. Term contracts expire without value at the end of the coverage period when the insured party is still living. Other individual 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's long-term care insurance provides a fixed benefit for certain costs associated with nursing home care and other services that may be provided to individuals unable to perform the activities of daily living. In addition to these products, MetLife's Individual segment supports a group of low face amount life insurance policies, known as industrial policies, that its agents sold until 1964. ANNUITIES AND INVESTMENT PRODUCTS The Company offers a variety of individual annuities and investment products, including variable and fixed annuities, mutual funds, and securities. 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 contractholder. In certain variable annuity products, 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 minimum death benefit and minimum living benefit guarantees for which additional premium and fees are charged. 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 the preservation of principal and interest credited. 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, ranging from one to ten years. Mutual funds and securities. MetLife offers both proprietary and non-proprietary mutual funds. Proprietary funds include those offered by State Street Research & Management Company. MetLife also offers investment accounts for mutual funds and 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 2003, approximately $200 million of the deposited assets were managed by State Street Research & Management Company and $3.5 billion by third parties. 9 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, Auto & Home specialists and direct response marketing. Auto & Home primarily sells auto insurance, which represented 74.1% of Auto & Home's total net premiums earned in 2003, and homeowners insurance, which represented 24.1% of Auto & Home's total net premiums earned in 2003. 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, the Auto & Home segment acquired the standard personal lines property and casualty insurance operations of The St. Paul Companies, which, at the time of the acquisition, had in-force premiums of approximately $1.1 billion and approximately 3,000 independent agents and brokers. The conversion of St. Paul's approximately one million policies to MetLife Auto & Home policies was completed in 2002. PRODUCTS Auto & Home's insurance products include: - auto, including both standard and non-standard private passenger; - homeowners, renters, condominium and dwelling; 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 approximately $96 million in net premiums earned in 2003. This represents approximately 4% of total auto net premiums earned in 2003. 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, 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, property and casualty specialists and through a direct response channel. EMPLOYER-SPONSORED PROGRAMS Auto & Home is a leading provider of employer-sponsored auto and homeowners products. Net premiums earned through Auto & Home's employer-sponsored distribution channel grew at a compound annual rate of 12.9%, from $562 million in 1999 to $913 million in 2003. At December 31, 2003, approximately 1,700 employers offered MetLife Auto & Home products to their employees. 10 Institutional 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 in most states 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 property and casualty specialists. In recent years, MetLife has increased its use of independent agents and property and casualty specialists to sell these products. Independent agencies. At December 31, 2003, Auto & Home maintained contracts with more than 4,000 agencies and brokers. Property and casualty specialists. Auto & Home has 437 specialists that sell products in 28 states. Auto & Home's strategy is to utilize property and casualty specialists, who are MetLife employees, in geographic markets that are underserved by its career agents. MetLife Financial Services career agency system. The MetLife Financial Services career agency system has 1,500 agents that sell Auto & Home insurance products. Sales of Auto & Home products by these 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 -- Marketing and Distribution." Other distribution channels. The Company also utilizes a direct response marketing channel which permits sales to be generated through sources such as target mailings, career agent referrals and the Internet. In 2003, Auto & Home's business was concentrated in the following states, as measured by net premiums earned: New York $390 million or 13.4%, Massachusetts $348 million or 12.0%, Illinois $219 million or 7.5%, Connecticut $143 million or 4.9%, and Minnesota $140 million or 4.8%. CLAIMS Auto & Home's claims department includes approximately 2,160 employees located in Auto & Home's Warwick, Rhode Island home office, 12 field claim offices, six 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 775,000 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 emerging markets in the geographic regions primarily within Latin America and Asia/Pacific. The Company operates in international markets through subsidiaries and joint ventures. LATIN AMERICA The Company operates in the Latin America region in the following countries: Mexico, Chile, Brazil, Argentina and Uruguay. The operations in Mexico and Chile represent approximately 94% of the total premiums and fees in this region for the year ended December 31, 2003. The Mexican operation is the leading life insurance company in both the individual and group businesses in Mexico. The Chilean operation is the largest annuity company in Chile, based on market share. The Chilean operation also offers individual life insurance and group insurance products. 11 ASIA/PACIFIC The Company operates in the Asia/Pacific region in the following countries: South Korea, Taiwan, Hong Kong, Indonesia and India. The operations in South Korea and Taiwan represent approximately 96% of the total premiums and fees in this region for the year ended December 31, 2003. 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 group accident and health insurance products. During 2003, the Company signed an agreement with a joint venture partner in China and anticipates commencing operations during the first quarter of 2004. REINSURANCE MetLife's Reinsurance segment is comprised of the life reinsurance business of Reinsurance Group of America, Incorporated ("RGA"), a publicly traded company (NYSE: RGA), and MetLife's ancillary life reinsurance business. MetLife owns approximately 52% of RGA's outstanding common shares at December 31, 2003 as compared to approximately 59% at December 31, 2002. This reduction is primarily due to RGA's issuance of additional common shares in a public offering during 2003. MetLife purchased approximately 25% of these newly issued shares. RGA's operations in North America are its largest and include operations of its Canadian and U.S. subsidiaries. In addition to its North American operations, RGA has subsidiary companies, branch offices, or representative offices in Australia, Barbados, Hong Kong, India, Ireland, Japan, Mexico, South Africa, South Korea, Spain, Taiwan and the United Kingdom. In addition to its life reinsurance business, RGA provides reinsurance of asset-intensive products and financial reinsurance. RGA and its predecessor, the reinsurance division of General American Life Insurance Company ("General American"), have been engaged in the business of life reinsurance since 1973. As of December 31, 2003, RGA had approximately $12.1 billion in consolidated assets and worldwide life reinsurance in-force of approximately $1,252 billion. RGA'S PRODUCTS AND SERVICES RGA's operational segments are segregated primarily by geographic region: U.S., Canada, Asia/Pacific, Europe and South Africa, and Corporate and Other. The U.S. operations, which represented 68% of RGA's 2003 net premiums, provide traditional life, asset-intensive and financial reinsurance to domestic clients. Traditional life reinsurance involves RGA indemnifying another insurance company for all or a portion of the insurance risk, primarily mortality risk, it has written. Asset-intensive products primarily include the reinsurance of corporate-owned life insurance ("COLI") and annuities. Financial reinsurance involves assisting RGA's clients (other insurance companies) in managing their regulatory capital or in achieving other financial goals. The Canadian operations, which represented 8% of RGA's 2003 net premiums, primarily provide insurers with traditional life reinsurance. The Asia/Pacific and Europe and South Africa operations, which represented 24% of RGA's 2003 net premiums, provide primarily traditional life and critical illness reinsurance and, to a lesser extent, financial reinsurance. Traditional life reinsurance pays upon the death of the insured and critical illness coverage pays on the earlier of death or diagnosis of a pre-defined illness. The Corporate and Other segment results include RGA's corporate investment activity, general corporate expenses, interest expense, and the income tax provision. Results related to certain accident and health business, Argentine privatized pension business, and direct insurance operations in Argentina are also reported in RGA's Corporate and Other segment. ASSET MANAGEMENT Asset Management, through SSRM Holdings, Inc. ("State Street Research"), provides a broad variety of asset management products and services to MetLife, third-party institutions and individuals. State Street Research conducts its operations through two subsidiaries, State Street Research & Management Company, a full-service investment management firm, and SSR Realty Advisors, Inc., a full-service real estate investment 12 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, 2003, State Street Research had assets under management of $47.5 billion which consisted of fixed income investments, equities, real estate and money market investments, representing 54%, 34%, 11% and 1%, respectively, of State Street Research's total assets under management. Assets under management from MetLife of $24 billion are included in the total assets under management of $47.5 billion referred to above. State Street Research has been an investment manager for many of the largest U.S. corporate pension plans for over 30 years. 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, endowments and union programs. In addition, State Street Research serves as an advisor for 19 mutual funds with assets totaling $9.4 billion at December 31, 2003, as well as seven portfolios with assets totaling $7.4 billion at December 31, 2003, underlying MetLife's variable life and variable annuity products. State Street Research distributes its investment products to institutions through its own institutional sales force and pension consultants. State Street Research's mutual fund products are distributed primarily through retail brokerage firms (76% of mutual fund sales) and by the MetLife career agency sales force (21% of mutual fund sales). State Street Research offers its products to the defined contribution market directly, as well as through Institutional's defined contribution group. POLICYHOLDER LIABILITIES MetLife establishes, and carries as liabilities, actuarially determined amounts that are calculated to meet its policy obligations when an annuitant takes income, a policy matures or surrenders or an insured dies or becomes disabled. MetLife computes the amounts for actuarial liabilities reported in its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"). In establishing these actuarial liabilities, MetLife distinguishes between short duration and long duration contracts. Short duration contracts arise from the group life, group dental and short-term disability businesses. The actuarial liability for short duration contracts consists of gross unearned premiums as of the valuation date and the discounted amount of the future payments on pending and approved claims as of the valuation date. Long duration contracts consist of traditional life, guaranteed renewable term life, non-participating whole life, individual disability, group long-term disability and long-term care contracts. MetLife determines actuarial liabilities 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 ("DAC"), including value of business acquired ("VOBA"), in relation to the associated gross margins, profits or premium. MetLife also distinguishes between investment contracts, limited pay contracts and universal life-type contracts. The actuarial liabilities for these products primarily consist of policyholders' account balances. The Company also establishes actuarial 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 DAC 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 DAC for limited pay and universal life-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. 13 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 DAC in relation to the product's estimated gross margins. The Auto & Home segment establishes actuarial 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. 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. For the Auto & Home segment, MetLife deducts estimated amounts of salvage and subrogation from unpaid losses and loss adjustment expenses. Implicit in all these estimates are underlying assumptions about rates of inflation because MetLife 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 claims development for each line of business. Similarly, MetLife derives estimates of unpaid loss adjustment expenses principally from actuarial analyses of historical development patterns of the relationship of loss adjustment expenses to losses for each line of business. MetLife 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, reported 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 actuarial 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 or other state insurance departments, 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. See "-- Regulation -- Insurance Regulation -- Policy and contract reserve sufficiency analysis." Due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of its actuarial liabilities, MetLife cannot precisely determine the amounts that it will ultimately pay with respect to these actuarial 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 and possibly acts of terrorism 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, the Company cannot predict the incidence, timing and severity of catastrophes and acts of terrorism, but the Company makes broad use of catastrophic and non-catastrophic reinsurance to manage risk from these perils. However, MetLife believes its actuarial liabilities for future benefits are adequate to cover the ultimate benefits. MetLife periodically reviews its estimates of actuarial 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 actuarial liabilities. 14 UNDERWRITING AND PRICING INSTITUTIONAL AND INDIVIDUAL The Company's underwriting for the Institutional and Individual segments 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 the Company 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 policies 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, vocations 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 by the Company's employees, although some policies are reviewed 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 the underwriting process that facilitates quality sales and serving the needs of its customers, while supporting its financial strength and business objectives. The Company's 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 agent and the Company. Pricing for the Institutional and Individual segments reflects the Company's insurance underwriting standards. Product pricing of 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 mitigate the risks of 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, persistency, and optionality. Unique to the Institutional segment's pricing is experience rating. 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 period of time 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 MetLife's underwriting and pricing guidelines are appropriate. 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 considered 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 15 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. 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 Auto & Home's distribution channels, as well as in MetLife's Institutional segment, 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 database, 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. 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 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 the characteristics of coverages. The Company also reinsures low mortality risk reinsurance treaties with other reinsurance companies. It also obtains reinsurance when capital requirements and the economic terms of the reinsurance make it appropriate to do so. 16 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 MetLife currently reinsures up to 90% of the mortality risk for all new individual life insurance policies that it writes through its various insurance companies. This practice was initiated for different products starting at various points in time between 1992 and 2000. In addition, in 1998, MetLife reinsured most of the mortality risk on its universal life policies issued since 1983. In addition to reinsuring mortality risk, MetLife reinsures other risks and specific coverages. The Company routinely reinsures certain classes of risks in order to limit its exposure to particular travel, vocation and lifestyle hazards. MetLife's retention limits per life vary by franchise and according to the characteristics of the particular risks. MetLife reinsures its business through a diversified group of reinsurers. Placement of reinsurance is done primarily on an automatic basis and also on a facultative basis for risks with specific characteristics. AUTO & HOME Auto & Home purchases reinsurance to control the Company's exposure to large losses (primarily catastrophe losses) 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. 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 and 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 17 they are licensed, in addition to any examinations conducted by their domiciliary states. The New York Insurance Department (the "Department"), Metropolitan Life's principal insurance regulator, has not received its accreditation as a result of the New York legislature's failure to adopt certain model NAIC laws. The Company does not believe that this will 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 MetLife's insurance subsidiaries are 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 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, the aggregate assessments levied against MetLife's insurance subsidiaries have not 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Insolvency Assessments." Statutory insurance 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. On March 1, 2000, the Department completed an examination of Metropolitan Life for each of the five years in the period ended December 31, 1998 which included recommendations for certain changes in recordkeeping processes, but did not result in a fine. For the three-year period ended December 31, 2003, MetLife, Inc. has not received any material adverse findings resulting from state insurance department examinations of its insurance subsidiaries. Regulatory authorities in a small number of states have conducted investigations or inquiries relating to Metropolitan Life's, New England Life Insurance Company's ("New England Life") or General American's sales of individual life insurance policies or annuities. Over the past several years, these and other investigations by various regulatory authorities were resolved by monetary payments and certain other relief. The Company may continue to resolve investigations in a similar manner. 18 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. Additionally, other life insurance affiliates are subject to similar requirements in their states of domicile. In each case, 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 inception of this requirement, Metropolitan Life and all other insurance subsidiaries required by other jurisdictions to provide similar opinions have 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, 2003, Metropolitan Life's capital was in excess of such required minimum. Since its 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. Since the demutualization, the impact of these restrictions on net income has not been, and Metropolitan Life believes that in the future it 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 ("RBC"). The New York Insurance Law requires that New York domestic life insurers report their RBC based on a formula calculated by applying factors to various asset, premium and statutory reserve items; similar rules apply to each of the Holding Company's U.S. insurance subsidiaries domiciled in other jurisdictions. 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 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. The New York Insurance Law 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. The New York Insurance Law 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, 2003, Metropolitan Life's total adjusted capital was in excess of each of those RBC levels. Each of the U.S. insurance subsidiaries of the Holding Company is also subject to certain RBC requirements. At December 31, 2003, the total adjusted capital of each of these insurance subsidiaries also was in excess of each of those RBC levels. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- The Holding Company -- Liquidity Uses -- Support Agreements." The NAIC adopted the Codification of Statutory Accounting Principles (the "Codification") which is intended to standardize regulatory accounting and reporting to state insurance departments and became effective January 1, 2001. However, statutory accounting principles continue to be established by individual state laws and permitted practices. The Department required adoption of the Codification, with certain modifications, for the preparation of statutory financial statements effective January 1, 2001. Effective December 31, 2002, the Department adopted a modification to its regulations to be consistent with the Codification with respect to the admissibility of deferred income taxes by New York insurers, subject to certain limitations. The adoption of the Codification as modified by the Department, did not adversely affect Metropolitan Life's statutory capital and surplus. Further modifications by state insurance departments may impact the effect of the Codification on the statutory capital and surplus of Metropolitan Life and the Holding Company's other insurance subsidiaries. 19 Regulation of investments. Each of the Holding Company's insurance subsidiaries is subject to state laws and regulations that require diversification of its 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 each of its insurance subsidiaries complied with such regulations at December 31, 2003. 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 the repeal of the federal estate tax, tax benefits associated with COLI, and the creation of tax advantaged or tax exempt savings accounts that would favor short-term savings over long-term savings. In addition, a bill reforming asbestos litigation may be voted on by the Senate in 2004. The Company cannot predict whether these initiatives will be adopted as proposed, or what impact, if any, such proposals may have on the Company's business, results of operation or financial condition. Legislative Developments. On May 28, 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003, which includes a major reduction in rates for long term capital gains and cash dividends on equity securities. It is unclear what the effect of this tax rate reduction may have on the demand for products which do not benefit from such measures. In 2001, President Bush signed into law the Economic Growth and Taxpayer Relief Reconciliation Act, which includes the repeal of the federal estate tax over a 10-year period. The Company believes that the repeal of the federal estate tax has resulted in reduced sales and could continue to impact sales of some of the Company's estate planning products, including survivorship/second to die life insurance policies; however, the Company does not expect the repeal to have a material adverse impact on its overall business. 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. BROKER/DEALER AND SECURITIES REGULATION Some of MetLife, Inc.'s 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. Some of MetLife, Inc.'s 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 the Company are funded by separate accounts, the interests in which are registered under the Securities Act of 1933, as amended. Some of MetLife, Inc.'s 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. ("NASD"). These broker/dealers may also be registered under various state securities laws. Some of MetLife, Inc.'s 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 MetLife, Inc. 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 20 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 an owner and operator 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. The Company 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 or financial condition. ERISA CONSIDERATIONS The Company provides 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 (the "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 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. In John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank (1993), the U.S. Supreme Court held that certain assets in excess of amounts necessary to satisfy guaranteed obligations under a participating group annuity general account contract are "plan assets." Therefore, these assets are subject to certain fiduciary obligations under ERISA, which requires fiduciaries to perform their duties solely in the interest of ERISA plan participants and beneficiaries. On January 5, 2000, the Secretary of Labor issued final regulations indicating, in cases where an insurer has issued a policy backed by the insurer's general account to or for 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"). No person will generally be liable under ERISA or the Code for conduct occurring prior to July 5, 2001, where the basis of a claim is that insurance company general account assets constitute plan assets. An insurer issuing a new policy that is backed by its general account and is issued to or for an employee benefit plan after December 31, 1998 will generally be subject to fiduciary obligations under ERISA, unless the policy is a guaranteed benefit policy. 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 day notice and receive without penalty, at the policyholder's option, either (i) the unallocated accumulated fund balance (which may be subject to market value adjustment) or (ii) 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 subject to regulation under the Bank Holding Company Act of 1956, as 21 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 subsidiary is 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. 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 of the GLB Act, financial holding companies are authorized 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 subsidiary, MetLife Bank, N.A. ("MetLife Bank"), a national bank, are subject to risk-based and leverage capital guidelines issued by the federal banking regulatory agencies for banks and financial holding companies. The federal banking regulatory agencies are required by law to take specific prompt corrective actions with respect to institutions that do not meet minimum capital standards. At December 31, 2003, MetLife, Inc. and MetLife Bank were in compliance with the aforementioned guidelines. 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's and MetLife Bank's 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. In addition, these provisions permit states to adopt more extensive privacy protections through legislation or regulation. Other Restrictions and Limitations on Bank Holding Companies and Financial Holding Companies -- Change of Control. Because MetLife, Inc. is a "financial holding company" and "bank holding company" under the federal banking laws, no person may acquire control of MetLife, Inc. without the prior approval of the FRB. A change of control is conclusively presumed upon acquisitions of 25% or more of any class of voting securities and rebuttably presumed upon acquisitions of 10% or more of any class of voting securities. Further, as a result of MetLife, Inc.'s ownership of MetLife Bank, approval from the OCC would be required in connection with a change of control (generally presumed upon the acquisition of 10% or more of any class of voting securities) of MetLife, Inc. COMPETITION The Company believes that competition with its business segments is based on a number of factors, including service, product features, scale, price, commission structure, financial strength, claims-paying ratings, credit ratings, ebusiness capabilities 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, which may sell annuity products of life insurers in some circumstances, also have pre-existing customer bases for financial services products. In 1999, the GLB Act was adopted, implementing fundamental changes in the regulation of the financial services industry in the U.S. With the passage of this Act, among other things, bank holding companies may acquire insurers, and insurance holding companies may acquire banks. The ability of banks to affiliate with 22 insurers may materially adversely affect all of the Company's product lines by substantially increasing the number, size and financial strength of potential competitors. 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 -- Marketing and Distribution." MetLife continues to undertake several initiatives to grow the MetLife Financial Services career agency force while continuing to enhance the efficiency and production of the existing sales force. 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 the Company's 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 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 periodically considers 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. Increasing healthcare costs are causing consumers to seek alternative financial protection products. As a result, the Company is entering the fixed benefit critical care marketplace. Changes to the health care system may make this market more or less attractive in the future. 23 COMPANY RATINGS Insurer financial strength ratings represent the opinions of rating agencies regarding the financial ability of an insurance company to meet its obligations under an insurance policy. Credit ratings represent the opinions of rating agencies regarding an entity's ability to repay its indebtedness. The Company's insurer financial strength ratings and credit ratings as of the date of this filing are listed in the table below: INSURER FINANCIAL STRENGTH RATINGS
MOODY'S A.M. BEST FITCH INVESTORS STANDARD & COMPANY(1) RATINGS(2) SERVICE(3) POOR'S(4) ---------- ---------- ---------- ---------- First MetLife Investors Insurance Co. A+ n/a n/a AA General American Life Insurance Company A+ AA Aa2* AA MetLife Investors Insurance Company A+ AA Aa2* AA MetLife Investors Insurance Company of California A+ n/a n/a AA MetLife Investors USA Insurance Company A+ AA Aa3 AA Metropolitan Casualty Insurance Company A n/a n/a n/a Metropolitan Direct Property and Casualty Insurance Co. A n/a n/a n/a Metropolitan General Insurance Company A n/a n/a n/a Metropolitan Group Property & Casualty Insurance Co. A n/a n/a n/a Metropolitan Insurance and Annuity Company A n/a Aa3 n/a Metropolitan Tower Life Insurance Company A+ n/a n/a n/a Metropolitan Life Insurance Company A+ AA Aa2* AA Metropolitan Life Insurance Company (Short-term rating) n/a n/a P-1* A-1+ Metropolitan Lloyds Insurance Company of Texas A n/a n/a n/a Metropolitan Property and Casualty Insurance Company A n/a Aa3* n/a New England Life Insurance Company A+ AA Aa2* AA Paragon Life Insurance Company A+ AA n/a AA RGA Reinsurance Company A+ AA- A1 AA- RGA Life Reinsurance Company of Canada A+ n/a n/a AA- Texas Life Insurance Company A n/a n/a n/a
CREDIT RATINGS
MOODY'S A.M. BEST FITCH INVESTORS STANDARD & COMPANY(1) RATINGS(2) SERVICE(3) POOR'S(4) ---------- ---------- ---------- ---------- GenAmerica Capital I (Preferred Stock) n/a A- A3* BBB+ General American Life Insurance Company (Surplus Notes) a+ n/a A1* A+ MetLife Funding, Inc. (Commercial Paper) AMB-1+ F1+ P-1 A-1+ MetLife, Inc. (Commercial Paper) AMB-1+ F1 P-1* A-1 MetLife, Inc. (Senior Unsecured) a A A2* A Metropolitan Life Insurance Company (Surplus Notes) a+ A+ A1* A+ Reinsurance Group of America, Incorporated (Senior Unsecured) a- A- Baa1 A- RGA Capital Trust I (Preferred Stock) bbb+ BBB+ Baa2 BBB
24 - --------------- * The outlook for these ratings is negative. (1) A.M. Best Company ("A.M. Best") insurer financial strength ratings range from "A++ (superior)" to "F (in liquidation)." Ratings of "A+" and "A" are in the "superior" and "excellent" categories, respectively. A.M. Best long-term credit ratings range from "aaa (exceptional)" to "d (in default)." A "+" or "-" may be appended to ratings from "aa" to "ccc" to indicate relative position within a category. Ratings of "a" and "bbb" are in the "strong" and "adequate" categories, respectively. A.M. Best short-term credit ratings range from "AMB-1+ (strongest)" to "d (in default)." (2) Fitch Ratings ("Fitch") insurer financial strength ratings range from "AAA (exceptionally strong)" to "D (distressed)." A "+" or "-" may be appended to a rating to indicate relative position within a category. A rating of "AA" is in the "very strong" category. Fitch long-term credit ratings range from "AAA (highest credit quality)," to "D (default)." A "+" or "-" may be appended to a rating to indicate relative position within a category. Ratings of "A" and "BBB" are in the "high" and "good" categories, respectively. Fitch short-term credit ratings range from "F1+ (exceptionally strong credit quality)" to "D (in default)." A rating of "F1" is in the "highest credit quality" category. (3) Moody's Investors Service ("Moody's") long-term insurer financial strength ratings range from "Aaa (exceptional)" to "C (extremely poor)." A numeric modifier may be appended to a rating to indicate relative position within a category, with 1 being the highest and 3 being the lowest. A rating of "Aa" is in the "excellent" category. Moody's short-term insurer financial strength ratings range from "P-1 (superior)" to "NP (not prime)." Moody's long-term credit ratings range from "Aaa (highest quality)" to "C (typically in default)." A numeric modifier may be appended to a rating to indicate relative position within a category, with 1 being the highest and 3 being the lowest. Ratings of "A" and "Baa" are in the "upper-medium grade" and "medium-grade" categories, respectively. Moody's short-term credit ratings range from "P-1 (superior)" to "NP (not prime)." (4) Standard & Poor's ("S&P") insurer financial strength ratings range from "AAA (extremely strong)" to "R (regulatory supervision)." A "+" or "-" may be appended to ratings from "AA" to "CCC" to indicate relative position within a category. A rating of "AA" is in the "very strong" category. S&P short-term insurer financial strength ratings range from "A-1+ (extremely strong)" to "R (regulatory supervision)." S&P long-term credit ratings range from "AAA (extremely strong)" to "D (in default)." A "+" or "-" may be appended to ratings from "AA" to "CCC" to indicate relative position within a category. A rating of "A" is in the "strong" category. S&P short-term credit ratings range from "A-1+ (extremely strong)" to "D (in default)." A rating of "A-1" is in the "strong" category. The foregoing ratings reflect each rating agency's opinion of Metropolitan Life and the Company's other insurance subsidiaries' financial strength, operating performance and ability to meet policyholder obligations, and are not evaluations directed toward the protection of MetLife, Inc.'s securityholders. 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. 25 EMPLOYEES At December 31, 2003, the Company employed approximately 49,000 employees. The Company believes that its relations with its employees are satisfactory. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information regarding the executive officers of MetLife, Inc. and Metropolitan Life: ROBERT H. BENMOSCHE, age 59, has been a Director of MetLife, Inc. since August 1999 and Chairman of the Board, President and Chief Executive Officer of MetLife, Inc. since September 1999. He has been a Director of Metropolitan Life since 1997 and Chairman of the Board, President and Chief Executive Officer of Metropolitan Life since July 1998, was President and Chief Operating Officer from November 1997 to June 1998, and was Executive Vice President from September 1995 to October 1997. Previously, he was Executive Vice President of PaineWebber Group Incorporated, a full service securities and commodities firm, from 1989 to 1995. DANIEL J. CAVANAGH, age 64, has been Executive Vice President of Operations and Technology of MetLife, Inc. since March 1999. He was Senior Vice President in charge of information systems from 1983 to 1991, Vice President from 1975 to 1983, Assistant Vice President from 1973 to 1975, a manager in electronic development from 1972 to 1975, and joined the Company as an insurance trainee in the industrial insurance department in 1957. He was appointed president of Metropolitan Property and Casualty Insurance Company in 1991, its Chief Executive Officer from 1993 to March 1999 and has been a director since 1986. C. ROBERT HENRIKSON, age 56, has been President of the U.S. Insurance and Financial Services businesses of MetLife, Inc. since July 2002. He served as President of Institutional Business of MetLife, Inc. since September 1999 and President of Institutional Business of Metropolitan Life since May 1999. He was Senior Executive Vice President, Institutional Business, of Metropolitan Life from December 1997 to May 1999, Executive Vice President, Institutional Business, from January 1996 to December 1997, and Senior Vice President, Pensions, from January 1991 to January 1995. He is a director of a number of subsidiaries of Metropolitan Property and Casualty Insurance Company. LELAND C. LAUNER, JR., age 48, has been Executive Vice President and Chief Investment Officer of MetLife, Inc. and Metropolitan Life since July 2003 prior to which he was a Senior Vice President of Metropolitan Life for more than five years. Mr. Launer is a director of Reinsurance Group of America, Incorporated. JAMES L. LIPSCOMB, age 57, has been Executive Vice President and General Counsel of MetLife, Inc. and Metropolitan Life since July 2003. Mr. Lipscomb was Senior Vice President and Deputy General Counsel from July 2001 to July 2003. Mr. Lipscomb was President and Chief Executive Officer of Conning Corporation, a former subsidiary of Metropolitan Life, from March 2000 to July 2001, prior to which he served in various senior management positions with Metropolitan Life for more than five years. STEWART G. NAGLER, age 61, has been a Director and Vice Chairman of the Board of MetLife, Inc. since September 1999 and served as Chief Financial Officer of MetLife, Inc. from September 1999 to December 2003. He has been a Director of Metropolitan Life since 1997 and Vice Chairman of the Board of Metropolitan Life since July 1998 and he served as Chief Financial Officer of that company from April 1993 to December 2003. Mr. Nagler also serves as a director and Chairman of the Board of Reinsurance Group of America, Incorporated. CATHERINE A. REIN, age 61, has been Senior Executive Vice President of MetLife, Inc. since September 1999 and President and Chief Executive Officer of Metropolitan Property and Casualty Insurance Company since March 1999. She has been Senior Executive Vice President of Metropolitan Life since February 1998 and was Executive Vice President from October 1989 to February 1998. WILLIAM J. TOPPETA, age 55, has been President of International of MetLife, Inc. since June 2001. He was President of Client Services and Chief Administrative Officer of MetLife, Inc. from September 26 1999 to June 2001 and President of Client Services and Chief Administrative Officer of Metropolitan Life from May 1999 to June 2001. He was Senior Executive Vice President, Head of Client Services, of Metropolitan Life from March 1999 to May 1999, Senior Executive Vice President, Individual, from February 1998 to March 1999, Executive Vice President, Individual Business, from July 1996 to February 1998, Senior Vice President from October 1995 to July 1996 and its President and Chief Executive Officer, Canadian Operations, from July 1993 to October 1995. LISA M. WEBER, age 41, has been Senior Executive Vice President and Chief Administrative Officer of MetLife, Inc. and Metropolitan Life since June 2001. She was Executive Vice President of MetLife, Inc. and Metropolitan Life from December 1999 to June 2001 and was head of Human Resources of Metropolitan Life from March 1998 to December 2003. She was Senior Vice President of MetLife, Inc. from September 1999 to November 1999 and Senior Vice President of Metropolitan Life from March 1998 to November 1999. Previously, she was Senior Vice President of Human Resources of PaineWebber Group Incorporated, where she was employed for ten years. Ms. Weber is a director of Reinsurance Group of America, Incorporated. WILLIAM J. WHEELER, age 42, has been Executive Vice President and Chief Financial Officer of MetLife, Inc. and Metropolitan Life since December 2003, prior to which he was a Senior Vice President of Metropolitan Life from 1997 to December 2003. Previously, he was a Senior Vice President of Donaldson, Lufkin & Jenrette for more than five years. 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(R) characters. MetLife has the exclusive right to use the Peanuts(R) characters in the area of financial services and health care benefit 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, 2012. The Company believes that its rights in its trademarks are well protected. AVAILABLE INFORMATION MetLife, Inc. files periodic reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington D.C. 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website (www.sec.gov) that contains reports, proxy statements, and other information regarding issuers that file electronically with the SEC, including MetLife, Inc. MetLife makes available, free of charge, on its website (www.metlife.com) through the Investor Relations page, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to all those reports, as soon as reasonably practicable after filing (furnishing) such reports to the SEC. The information found on our website is not part of this or any other report we file with or furnish to the SEC. ITEM 2. PROPERTIES One Madison Avenue in New York, New York currently serves as the Company's headquarters, and it contains approximately 1.4 million rentable square feet of space. The Company has leased approximately 1.1 million square feet of space at One Madison Avenue to Credit Suisse First Boston (USA), Inc., under a long-term lease. MetLife occupies the balance of the space, approximately 270,000 rentable square feet as of December 31, 2003, which is expected to decline through 2004. At December 31, 2003, the Company leased approximately 686,082 rentable square feet in Long Island City, New York under a long-term lease arrangement. Currently, approximately 1,250 associates are located in Long Island City with the expectation that number will be increasing to in excess of 1,500 associates in 2004. 27 The Company continues to own 16 other buildings in the U.S. that it uses in the operation of its business. These buildings contain approximately 3.1 million rentable square feet and are located in the following states: Florida, Illinois, Massachusetts, Missouri, New Jersey, New York, 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 692 other locations throughout the U.S., and these leased facilities consist of approximately 8.1 million rentable square feet. Approximately 52% of these leases are occupied as sales offices for the Individual segment, and the Company uses the balance for its other business activities. It also owns six buildings outside the U.S., comprising more than 448,000 rentable square feet. The Company leases approximately 1.8 million 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. The Company arranges for property and casualty coverage on its properties, taking into consideration its risk exposures and the cost and availability of commercial coverages, including deductible loss levels. In connection with its renewal of those coverages, the Company has arranged $850 million of annual terrorist coverage on its real estate portfolio, effective January 1, 2004. ITEM 3. LEGAL PROCEEDINGS Sales Practices Claims Over the past several years, Metropolitan Life, New England Mutual Life Insurance Company ("New England Mutual") and General American Life Insurance Company ("General American") have faced numerous claims, including class action lawsuits, alleging improper marketing and sales of individual life insurance policies or annuities. These lawsuits are generally referred to as "sales practices claims." In December 1999, a federal court approved a settlement resolving sales practices claims on behalf of a class of owners of permanent life insurance policies and annuity contracts or certificates issued pursuant to individual sales in the United States by Metropolitan Life, Metropolitan Insurance and Annuity Company or Metropolitan Tower Life Insurance Company between January 1, 1982 and December 31, 1997. The class includes owners of approximately six million in-force or terminated insurance policies and approximately one million in-force or terminated annuity contracts or certificates. Similar sales practices class actions against New England Mutual, with which Metropolitan Life merged in 1996, and General American, which was acquired in 2000, have been settled. In October 2000, a federal court approved a settlement resolving sales practices claims on behalf of a class of owners of permanent life insurance policies issued by New England Mutual between January 1, 1983 through August 31, 1996. The class includes owners of approximately 600,000 in-force or terminated policies. A federal court has approved a settlement resolving sales practices claims on behalf of a class of owners of permanent life insurance policies issued by General American between January 1, 1982 through December 31, 1996. An appellate court has affirmed the order approving the settlement. The class includes owners of approximately 250,000 in-force or terminated policies. Certain class members have opted out of the class action settlements noted above and have brought or continued non-class action sales practices lawsuits. In addition, other sales practices lawsuits have been brought. As of December 31, 2003, there are approximately 366 sales practices lawsuits pending against Metropolitan Life, approximately 40 sales practices lawsuits pending against New England Mutual and approximately 25 sales practices lawsuits pending against General American. Metropolitan Life, New England Mutual and General American continue to defend themselves vigorously against these lawsuits. Some individual sales practices claims have been resolved through settlement, won by dispositive motions, or, in a few instances, have gone to trial. Most of the current cases seek substantial damages, including in some cases punitive and treble damages and attorneys' fees. Additional litigation relating to the Company's marketing and sales of individual life insurance may be commenced in the future. The Metropolitan Life class action settlement did not resolve two putative class actions involving sales practices claims filed against Metropolitan Life in Canada, and these actions remain pending. 28 The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for sales practices claims against Metropolitan Life, New England Mutual and General American. Regulatory authorities in a small number of states have had investigations or inquiries relating to Metropolitan Life's, New England Mutual's or General American's sales of individual life insurance policies or annuities. Over the past several years, these and a number of investigations by other regulatory authorities were resolved for monetary payments and certain other relief. The Company may continue to resolve investigations in a similar manner. Asbestos-Related Claims Metropolitan Life is also a defendant in thousands of lawsuits seeking compensatory and punitive damages for personal injuries allegedly caused by exposure to asbestos or asbestos-containing products. Metropolitan Life has never engaged in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products nor has Metropolitan Life issued liability or workers' compensation insurance to companies in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products. Rather, these lawsuits have principally been based upon allegations relating to certain research, publication and other activities of one or more of Metropolitan Life's employees during the period from the 1920's through approximately the 1950's and have alleged that Metropolitan Life learned or should have learned of certain health risks posed by asbestos and, among other things, improperly publicized or failed to disclose those health risks. Metropolitan Life believes that it should not have legal liability in such cases. Legal theories asserted against Metropolitan Life have included negligence, intentional tort claims and conspiracy claims concerning the health risks associated with asbestos. Although Metropolitan Life believes it has meritorious defenses to these claims, and has not suffered any adverse monetary judgments in respect of these claims, due to the risks and expenses of litigation, almost all past cases have been resolved by settlements. Metropolitan Life's defenses (beyond denial of certain factual allegations) to plaintiffs' claims include that: (i) Metropolitan Life owed no duty to the plaintiffs -- it had no special relationship with the plaintiffs and did not manufacture, produce, distribute or sell the asbestos products that allegedly injured plaintiffs; (ii) plaintiffs cannot demonstrate justifiable detrimental reliance; and (iii) plaintiffs cannot demonstrate proximate causation. In defending asbestos cases, Metropolitan Life selects various strategies depending upon the jurisdictions in which such cases are brought and other factors which, in Metropolitan Life's judgment, best protect Metropolitan Life's interests. Strategies include seeking to settle or compromise claims, motions challenging the legal or factual basis for such claims or defending on the merits at trial. In 2002 and 2003, trial courts in California, Utah and Georgia granted motions dismissing claims against Metropolitan Life on some or all of the above grounds. Other courts have denied motions brought by Metropolitan Life to dismiss cases without the necessity of trial. There can be no assurance that Metropolitan Life will receive favorable decisions on motions in the future. Metropolitan Life intends to continue to exercise its best judgment regarding settlement or defense of such cases, including when trials of these cases are appropriate. 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 years ended on those dates and the total settlement payments made to resolve asbestos personal injury claims during those years:
AT OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------- 2003 2002 2001 -------- ------- ------- (DOLLARS IN MILLIONS) Asbestos personal injury claims at year-end (approximate)........................................ 111,700 106,500 89,000 Number of new claims during the year (approximate)..... 60,300 66,000 59,500 Settlement payments during the year (1)................ $84.2 $95.1 $90.7
29 - --------------- (1) Settlement payments represent payments made by Metropolitan Life during the year in connection with settlements made in that year and in prior years. Amounts do not include Metropolitan Life's attorneys' fees and expenses and do not reflect amounts received from insurance carriers. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for asbestos-related claims. The ability of Metropolitan Life to estimate its ultimate asbestos exposure is subject to considerable uncertainty due to numerous factors. The availability of data is limited and it is difficult to predict with any certainty numerous variables that can affect liability estimates, including the number of future claims, the cost to resolve claims, the disease mix and severity of disease, the jurisdiction of claims filed, tort reform efforts and the impact of any possible future adverse verdicts and their amounts. Recent bankruptcies of other companies involved in asbestos litigation, as well as advertising by plaintiffs' asbestos lawyers, may result in an increase in the number of claims and the cost of resolving claims, as well as the number of trials and possible adverse verdicts Metropolitan Life may experience. Plaintiffs are seeking additional funds from defendants, including Metropolitan Life, in light of such recent bankruptcies by certain other defendants. In addition, publicity regarding legislative reform efforts may result in an increase in the number of claims. Metropolitan Life will continue to study its claims experience, review external literature regarding asbestos claims experience in the United States and consider numerous variables that can affect its asbestos liability exposure, including bankruptcies of other companies involved in asbestos litigation and legislative and judicial developments, to identify trends and to assess their impact on the recorded asbestos liability. The number of asbestos cases that may be brought or the aggregate amount of any liability that Metropolitan Life may ultimately incur is uncertain. Accordingly, it is reasonably possible that the Company's total exposure to asbestos claims may be greater than the liability recorded by the Company in its consolidated financial statements and that future charges to income may be necessary. While the potential future charges could be material in particular quarterly or annual periods in which they are recorded, based on information currently known by management, it does not believe any such charges are likely to have a material adverse effect on the Company's consolidated financial position. During the fourth quarter of 2002, Metropolitan Life analyzed its claims experience and reviewed external publications and numerous variables to identify trends and assessed their impact on its recorded asbestos liability. Certain publications suggested a trend towards more asbestos-related claims and a greater awareness of asbestos litigation generally by potential plaintiffs and plaintiffs' lawyers. Plaintiffs' lawyers continue to advertise heavily with respect to asbestos litigation. Bankruptcies and reorganizations of other defendants in asbestos litigation may increase the pressures on remaining defendants, including Metropolitan Life. Through the first nine months of 2002, the number of new claims received by Metropolitan Life was lower than those received during the comparable 2001 period. However, the number of new claims received by Metropolitan Life during the fourth quarter of 2002 was significantly higher than those received in the prior year quarter, resulting in more new claims being received by Metropolitan Life in 2002 than in 2001. Factors considered also included expected trends in filing cases, the dates of initial exposure of plaintiffs to asbestos, the likely percentage of total asbestos claims which included Metropolitan Life as a defendant and experience in claims settlement negotiations. Metropolitan Life also considered views derived from actuarial calculations it made in the fourth quarter of 2002. These calculations were made using, among other things, then current information regarding Metropolitan Life's claims and settlement experience, information available in public reports, as well as a study regarding the possible future incidence of mesothelioma. Based on all of the above information, including greater than expected claims experience in 2000, 2001 and 2002, Metropolitan Life expected to receive more claims in the future than it had previously expected. Previously, Metropolitan Life's liability reflected that the increase in asbestos-related claims was a result of an acceleration in the reporting of such 30 claims; the liability now reflects that such an increase is also the result of an increase in the total number of asbestos-related claims expected to be received by Metropolitan Life. Accordingly, Metropolitan Life increased its recorded liability for asbestos-related claims by $402 million from approximately $820 million to $1,225 million at December 31, 2002. This total recorded asbestos-related liability (after the self-insured retention) is within the coverage of the excess insurance policies discussed below. The aforementioned analysis was updated through December 31, 2003. During 1998, Metropolitan Life paid $878 million in premiums for excess insurance policies for asbestos-related claims. The excess insurance policies for asbestos-related claims provide for recovery of losses up to $1,500 million, which is in excess of a $400 million self-insured retention. The asbestos-related policies are also subject to annual and per-claim sublimits. Amounts are recoverable under the policies annually with respect to claims paid during the prior calendar year. Although amounts paid by Metropolitan Life in any given year that may be recoverable in the next calendar year under the policies will be reflected as a reduction in the Company's operating cash flows for the year in which they are paid, management believes that the payments will not have a material adverse effect on the Company's liquidity. Each asbestos-related policy contains an experience fund and a reference fund that provides for payments to Metropolitan Life at the commutation date if the reference fund is greater than zero at commutation or pro rata reductions from time to time in the loss reimbursements to Metropolitan Life if the cumulative return on the reference fund is less than the return specified in the experience fund. The return in the reference fund is tied to performance of the Standard & Poor's 500 Index and the Lehman Brothers Aggregate Bond Index. A claim was made under the excess insurance policies in 2003 for the amounts paid with respect to asbestos litigation in excess of the retention. Based on performance of the reference fund, at December 31, 2002, the loss reimbursements to Metropolitan Life in 2003 and the recoverable with respect to later periods was $42 million less than the amount of the recorded losses. Such foregone loss reimbursements may be recovered upon commutation depending upon future performance of the reference fund. The foregone loss reimbursements were estimated to be $9 million with respect to 2002 claims and estimated to be $42 million in the aggregate. The $402 million increase in the recorded liability for asbestos claims less the foregone loss reimbursement adjustment of $42 million ($27 million, net of income tax) resulted in an increase in the recoverable of $360 million. At December 31, 2002, a portion ($136 million) of the $360 million recoverable was recognized in income while the remainder ($224 million) was recorded as a deferred gain which is expected to be recognized in income in the future over the estimated settlement period of the excess insurance policies. The $402 million increase in the recorded liability, less the portion of the recoverable recognized in income, resulted in a net expense of $266 million ($169 million, net of income tax). The $360 million recoverable may change depending on the future performance of the Standard & Poor's 500 Index and the Lehman Brothers Aggregate Bond Index. As a result of the excess insurance policies, $1,237 million is recorded as a recoverable at December 31, 2002 ($224 million of which is recorded as a deferred gain as mentioned above); the amount includes recoveries for amounts paid in 2002. If at some point in the future, the Company believes the liability for probable and estimable losses for asbestos-related claims should be increased, an expense would be recorded and the insurance recoverable would be adjusted subject to the terms, conditions and limits of the excess insurance policies. Portions of the change in the insurance recoverable would be recorded as a deferred gain and amortized into income over the estimated remaining settlement period of the insurance policies. In 2003, Metropolitan Life also has been named as a defendant in a small number of silicosis, welding and mixed dust cases. The cases are pending in Mississippi, Texas, Ohio, Pennsylvania, West Virginia, Louisiana, Kentucky, Georgia, Alabama, Illinois and Arkansas. The Company intends to defend itself vigorously against these cases. Property and Casualty Actions A purported class action has been filed against Metropolitan Property and Casualty Insurance Company's subsidiary, Metropolitan Casualty Insurance Company, in Florida alleging breach of contract and unfair trade 31 practices with respect to allowing the use of parts not made by the original manufacturer to repair damaged automobiles. Discovery is ongoing and a motion for class certification is pending. Two purported nationwide class actions have been filed against Metropolitan Property and Casualty Insurance Company in Illinois. One suit claims breach of contract and fraud due to the alleged underpayment of medical claims arising from the use of a purportedly biased provider fee pricing system. A motion for class certification has been filed and discovery is ongoing. The second suit claims breach of contract and fraud arising from the alleged use of preferred provider organizations to reduce medical provider fees covered by the medical claims portion of the insurance policy. A motion to dismiss has been filed. A purported class action has been filed against Metropolitan Property and Casualty Insurance Company in Montana. This suit alleges breach of contract and bad faith for not aggregating medical payment and uninsured coverages provided in connection with the several vehicles identified in insureds' motor vehicle policies. Metropolitan Property and Casualty Insurance Company is vigorously defending itself against this lawsuit. Certain plaintiffs' lawyers have alleged that the use of certain automated databases to provide total loss vehicle valuation methods was improper. Metropolitan Property and Casualty Insurance Company, along with a number of other insurers, has tentatively agreed in January 2004 to resolve this issue in a class action format. The amount to be paid in resolution of this matter will not be material to Metropolitan Property and Casualty Insurance Company. Demutualization Actions Several lawsuits were brought in 2000 challenging the fairness of Metropolitan Life's plan of reorganization, as amended (the "plan") and the adequacy and accuracy of Metropolitan Life's disclosure to policyholders regarding the plan. These actions name as defendants some or all of Metropolitan Life, the Holding Company, the individual directors, the New York Superintendent of Insurance (the "Superintendent") and the underwriters for MetLife, Inc.'s initial public offering, Goldman Sachs & Company and Credit Suisse First Boston. Five purported class actions pending in the New York state court in New York County were consolidated within the commercial part. In addition, there remained a separate purported class action in New York state court in New York County. On February 21, 2003, the defendants' motions to dismiss both the consolidated action and separate action were granted; leave to replead as a proceeding under Article 78 of New York's Civil Practice Law and Rules has been granted in the separate action. Plaintiffs in the consolidated action and separate action have filed notices of appeal. Another purported class action in New York state court in Kings County has been voluntarily held in abeyance by plaintiffs. The plaintiffs in the state court class actions seek injunctive, declaratory and compensatory relief, as well as an accounting and, in some instances, punitive damages. Some of the plaintiffs in the above described actions also have brought a proceeding under Article 78 of New York's Civil Practice Law and Rules challenging the Opinion and Decision of the Superintendent who approved the plan. In this proceeding, petitioners seek to vacate the Superintendent's Opinion and Decision and enjoin him from granting final approval of the plan. This case also is being held in abeyance by plaintiffs. Three purported class actions were filed in the United States District Court for the Eastern District of New York claiming violation of the Securities Act of 1933. The plaintiffs in these actions, which have been consolidated, claim that the Policyholder Information Booklets relating to the plan failed to disclose certain material facts and seek rescission and compensatory damages. Metropolitan Life's motion to dismiss these three cases was denied in 2001. On February 4, 2003, plaintiffs filed a consolidated amended complaint adding a fraud claim under the Securities Exchange Act of 1934. Metropolitan Life has served a motion to dismiss the consolidated amended complaint and a motion for summary judgment in this action. Metropolitan Life, the Holding Company and the individual defendants believe they have meritorious defenses to the plaintiffs' claims and are contesting vigorously all of the plaintiffs' claims in these actions. In 2001, a lawsuit was filed in the Superior Court of Justice, Ontario, Canada on behalf of a proposed class of certain former Canadian policyholders against the Holding Company, Metropolitan Life, and Metropolitan Life Insurance Company of Canada. Plaintiffs' allegations concern the way that their policies were treated in connection with the demutualization of Metropolitan Life; they seek damages, declarations, and other non-pecuniary relief. The defendants believe they have meritorious defenses to the plaintiffs' claims and will contest vigorously all of plaintiffs' claims in this matter. 32 In July 2002, a lawsuit was filed in the United States District Court for the Eastern District of Texas on behalf of a proposed class comprised of the settlement class in the Metropolitan Life sales practices class action settlement approved in December 1999 by the United States District Court for the Western District of Pennsylvania. After the defendants' motion to transfer the lawsuit to the Western District of Pennsylvania was granted, plaintiffs filed an amended complaint alleging that the treatment of the cost of the sales practices settlement in connection with the demutualization of Metropolitan Life breached the terms of the settlement. Plaintiffs sought compensatory and punitive damages, as well as attorneys' fees and costs. In October 2003, the court granted defendants' motion to dismiss the action. Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Third Circuit. In January 2004, the appeal was dismissed. Race-Conscious Underwriting Claims Insurance departments in a number of states initiated inquiries in 2000 about possible race-conscious underwriting of life insurance. These inquiries generally have been directed to all life insurers licensed in their respective states, including Metropolitan Life and certain of its affiliates. The New York Insurance Department has concluded its examination of Metropolitan Life concerning possible past race-conscious underwriting practices. Four purported class action lawsuits filed against Metropolitan Life in 2000 and 2001 alleging racial discrimination in the marketing, sale, and administration of life insurance policies have been consolidated in the United States District Court for the Southern District of New York. On April 28, 2003, the United States District Court approved a class-action settlement of the consolidated actions. Several persons filed notices of appeal from the order approving the settlement, but subsequently the appeals were dismissed. Metropolitan Life also has entered into settlement agreements to resolve the regulatory examination. Metropolitan Life recorded a charge in the fourth quarter of 2001 in connection with the anticipated resolution of these matters. The Company believes the remaining portion of the previously recorded charge is adequate to cover the costs associated with the resolution of these matters. Sixteen lawsuits involving approximately 130 plaintiffs have been filed in federal and state court in Alabama, Mississippi and Tennessee alleging federal and/or state law claims of racial discrimination in connection with the sale, formation, administration or servicing of life insurance policies. Metropolitan Life is contesting vigorously plaintiffs' claims in these actions. Other In 2001, a putative class action was filed against Metropolitan Life in the United States District Court for the Southern District of New York alleging gender discrimination and retaliation in the MetLife Financial Services unit of the Individual segment. The plaintiffs were seeking unspecified compensatory damages, punitive damages, a declaration that the alleged practices were discriminatory and illegal, injunctive relief requiring Metropolitan Life to discontinue the alleged discriminatory practices, an order restoring class members to their rightful positions (or appropriate compensation in lieu thereof), and other relief. Plaintiffs filed a motion for class certification. Opposition papers were filed by Metropolitan Life. In August 2003, the court granted preliminary approval to a settlement of the lawsuit. At the fairness hearing held on November 6, 2003, the court approved the settlement of the lawsuit. Implementation of the settlement has commenced in 2004. A putative class action lawsuit is pending in the United States District Court for the District of Columbia, in which plaintiffs allege that they were denied certain ad hoc pension increases awarded to retirees under the Metropolitan Life retirement plan. The ad hoc pension increases were awarded only to retirees (i.e., individuals who were entitled to an immediate retirement benefit upon their termination of employment) and not available to individuals like these plaintiffs whose employment, or whose spouses' employment, had terminated before they became eligible for an immediate retirement benefit. The plaintiffs seek to represent a class consisting of former Metropolitan Life employees, or their surviving spouses, who are receiving deferred vested annuity payments under the retirement plan and who were allegedly eligible to receive the ad hoc pension increases awarded in 1977, 1980, 1989, 1992, 1996 and 2001, as well as increases awarded in earlier years. Metropolitan Life is vigorously defending itself against these allegations. 33 A lawsuit was filed against Metropolitan Life in Ontario, Canada by Clarica Life Insurance Company regarding the sale of the majority of Metropolitan Life's Canadian operation to Clarica in 1998. Clarica alleged that Metropolitan Life breached certain representations and warranties contained in the sale agreement, that Metropolitan Life made misrepresentations upon which Clarica relied during the negotiations and that Metropolitan Life was negligent in the performance of certain of its obligations and duties under the sale agreement. The parties settled the matter in January 2004. The settlement will have no material impact on the Company's consolidated financial results in 2004. A reinsurer of universal life policy liabilities of Metropolitan Life and certain of its affiliates commenced an arbitration proceeding and sought rescission, claiming that, during underwriting, material misrepresentations or omissions were made to the reinsurer. The reinsurer also sent a notice purporting to increase reinsurance premium rates. In December 2003, the arbitration panel denied the reinsurer's attempt to rescind the contract and granted the reinsurer's request to raise rates. As a result of the panel's rulings, liabilities ceded to the reinsurer were recaptured effective May 5, 2003. The recapture had no material impact on the Company's consolidated financial results in 2003. As previously reported, the SEC is conducting a formal investigation of New England Securities Corporation ("NES"), an indirect subsidiary of New England Life Insurance Company ("NELICO"), in response to NES informing the SEC that certain systems and controls relating to one NES advisory program were not operating effectively. NES is cooperating fully with the SEC. Prior to filing the Company's June 30, 2003 Form 10-Q, MetLife announced a $31 million after-tax charge resulting from certain improperly deferred expenses at an affiliate, New England Financial. MetLife notified the SEC about the nature of this charge prior to its announcement. The SEC is pursuing a formal investigation of the matter and MetLife is fully cooperating with the investigation. The American Dental Association and two individual providers have sued MetLife, Mutual of Omaha and Cigna in a purported class action lawsuit brought in a Florida federal district court. The plaintiffs purport to represent a nationwide class of in-network providers who allege that their claims are being wrongfully reduced by downcoding, bundling, and the improper use and programming of software. The complaint alleges federal racketeering and various state law theories of liability. MetLife is vigorously defending the case and a motion to dismiss has been filed. A purported class action in which a policyholder seeks to represent a class of owners of participating life insurance policies is pending in state court in New York. Plaintiff asserts that Metropolitan Life breached her policy in the manner in which it allocated investment income across lines of business during a period ending with the 2000 demutualization. In August 2003, an appellate court affirmed the dismissal of fraud claims in this action. MetLife is vigorously defending the case. Regulatory bodies have contacted the Company and have requested information relating to market timing and late trading of mutual funds and variable insurance products. The Company believes that these inquiries are similar to those made to many financial services companies as part of an industry-wide investigation by various regulatory agencies into the practices, policies and procedures relating to trading in mutual fund shares. State Street Research Investment Services, one of the Company's indirect broker/dealer subsidiaries, has entered into a settlement with the NASD resolving all outstanding issues relating to its investigation. The SEC has commenced an investigation with respect to market timing and late trading in a limited number of privately-placed variable insurance contracts that were sold through General American. The Company is in the process of responding and is fully cooperating with regard to these information requests and investigations. The Company at the present time is not aware of any systemic problems with respect to such matters that may have a material adverse effect on the Company's consolidated financial position. 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 34 state authorities regularly make inquiries and conduct investigations concerning the Company's compliance with applicable insurance and other laws and regulations. Summary It is not feasible to predict or determine the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses, except as noted above in connection with specific matters. In some of the matters referred to above, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company's consolidated financial position, based on information currently known by the Company's management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's consolidated net income 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 2003. 35 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:
2003 ----------------------------------------------------- 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- Common Stock Price High.................................. $29.34 $29.20 $29.58 $33.92 Low................................... $24.01 $26.61 $27.35 $28.96 Dividends Declared...................... $ -- $ -- $ -- $ 0.23
2002 ----------------------------------------------------- 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- Common Stock Price High.................................. $33.30 $34.58 $29.58 $28.41 Low................................... $28.67 $28.00 $22.76 $20.75 Dividends Declared...................... $ -- $ -- $ -- $ 0.21
As of March 1, 2004, there were 39,368 shareholders of record of Common Stock. On October 21, 2003, the Holding Company's Board of Directors approved an annual dividend for 2003 of $0.23 per share. The dividend was paid on December 15, 2003 to shareholders of record on November 7, 2003. On October 22, 2002, the Holding Company's Board of Directors approved an annual dividend for 2002 of $0.21 per share. The dividend was paid on December 13, 2002 to shareholders of record on November 8, 2002. Future dividend decisions will be determined by the Holding Company's Board of Directors after taking into consideration factors such as the Holding Company's current earnings, expected medium- and long-term earnings, financial condition, regulatory capital position, and applicable governmental regulations and policies. See "Business -- Regulation", "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 14 to Notes to Consolidated Financial Statements. 36 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial information for the Company. The selected consolidated financial information for the years ended December 31, 2003, 2002, and 2001 and at December 31, 2003 and 2002 has been derived from the Company's audited consolidated financial statements included elsewhere herein. The selected consolidated financial information for the years ended December 31, 2000 and 1999 and at December 31, 2001, 2000 and 1999 has been derived from the Company's audited consolidated financial statements not included elsewhere herein. 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. Some previously reported amounts have been reclassified to conform with the presentation at and for the year ended December 31, 2003.
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- (DOLLARS IN MILLIONS) STATEMENTS OF INCOME DATA Revenues: Premiums................................... $20,673 $19,077 $17,212 $16,317 $12,084 Universal life and investment-type product policy fees............................. 2,496 2,147 1,889 1,820 1,437 Net investment income(1)................... 11,636 11,261 11,187 10,986 9,436 Other revenues............................. 1,342 1,332 1,507 2,229 1,861 Net investment gains (losses)(1)(2)(3)(7).................... (358) (751) (579) (390) (70) ------- ------- ------- ------- ------- Total revenues(4)(6)............... 35,789 33,066 31,216 30,962 24,748 ------- ------- ------- ------- ------- Expenses: Policyholder benefits and claims(2)(7)..... 20,848 19,523 18,454 16,893 13,100 Interest credited to policyholder account balances................................ 3,035 2,950 3,084 2,935 2,441 Policyholder dividends..................... 1,975 1,942 2,086 1,919 1,690 Payments to former Canadian policyholders(5)........................ -- -- -- 327 -- Demutualization costs...................... -- -- -- 230 260 Other expenses(1)(2)(8).................... 7,301 7,015 7,022 7,401 6,210 ------- ------- ------- ------- ------- Total expenses(4)(6)............... 33,159 31,430 30,646 29,705 23,701 ------- ------- ------- ------- ------- Income from continuing operations before provision for income taxes................. 2,630 1,636 570 1,257 1,047 Provision for income taxes(1)(9)............. 687 502 204 405 511 ------- ------- ------- ------- ------- Income from continuing operations............ 1,943 1,134 366 852 536 Income from discontinued operations, net of income taxes(1)............................ 300 471 107 101 81 ------- ------- ------- ------- ------- Income before cumulative effect of change in accounting................................. 2,243 1,605 473 953 617 Cumulative effect of change in accounting, net of income taxes........................ (26) -- -- -- -- ------- ------- ------- ------- ------- Net income................................... $ 2,217 $ 1,605 $ 473 $ 953 $ 617 ======= ======= ======= ======= ======= Net income after April 7, 2000 (date of demutualization)........................... $ 1,173 =======
37
AT DECEMBER 31, ---------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS) BALANCE SHEET DATA Assets: General account assets................ $251,085 $217,733 $194,256 $183,912 $160,291 Separate account assets............... 75,756 59,693 62,714 70,250 64,941 -------- -------- -------- -------- -------- Total assets....................... $326,841 $277,426 $256,970 $254,162 $225,232 ======== ======== ======== ======== ======== Liabilities: Life and health policyholder liabilities(10).................... $176,628 $162,569 $148,395 $140,040 $122,637 Property and casualty policyholder liabilities(10).................... 2,943 2,673 2,610 2,559 2,318 Short-term debt....................... 3,642 1,161 355 1,085 4,180 Long-term debt........................ 5,703 4,425 3,628 2,400 2,494 Other liabilities..................... 41,020 28,255 21,950 20,349 14,972 Separate account liabilities.......... 75,756 59,693 62,714 70,250 64,941 -------- -------- -------- -------- -------- Total liabilities.................. 305,692 258,776 239,652 236,683 211,542 -------- -------- -------- -------- -------- Company-obligated mandatorily redeemable securities of subsidiary trusts............................. -- 1,265 1,256 1,090 -- -------- -------- -------- -------- -------- Stockholders' Equity: Common stock, at par value(11)........ 8 8 8 8 -- Additional paid-in capital(11)........ 14,991 14,968 14,966 14,926 -- Retained earnings(11)................. 4,193 2,807 1,349 1,021 14,100 Treasury stock, at cost(11)........... (835) (2,405) (1,934) (613) -- Accumulated other comprehensive income (loss)............................. 2,792 2,007 1,673 1,047 (410) -------- -------- -------- -------- -------- Total stockholders' equity......... 21,149 17,385 16,062 16,389 13,690 -------- -------- -------- -------- -------- Total liabilities and stockholders' equity........................... $326,841 $277,426 $256,970 $254,162 $225,232 ======== ======== ======== ======== ========
38
AT OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) OTHER DATA Net income............................ $ 2,217 $ 1,605 $ 473 $ 953 $ 617 Return on equity(12).................. 13.1% 10.8% 3.2% 6.5% 4.5% Total assets under management(13)..... $350,235 $299,187 $282,486 $301,325 $373,612 INCOME FROM CONTINUING OPERATIONS AVAILABLE TO COMMON SHAREHOLDERS PER SHARE DATA(14) Basic earnings per share.............. $ 2.60 $ 1.61 $ 0.49 $ 1.42 N/A Diluted earnings per share............ $ 2.57 $ 1.56 $ 0.48 $ 1.40 N/A INCOME FROM DISCONTINUED OPERATIONS PER SHARE DATA(14) Basic earnings per share.............. $ 0.41 $ 0.67 $ 0.14 $ 0.10 N/A Diluted earnings per share............ $ 0.40 $ 0.65 $ 0.14 $ 0.09 N/A CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PER SHARE DATA(14) Basic earnings per share.............. $ (0.04) $ -- $ -- $ -- N/A Diluted earnings per share............ $ (0.03) $ -- $ -- $ -- N/A NET INCOME AVAILABLE TO COMMON SHAREHOLDERS PER SHARE DATA(14) Basic earnings per share.............. $ 2.98 $ 2.28 $ 0.64 $ 1.52 N/A Diluted earnings per share............ $ 2.94 $ 2.20 $ 0.62 $ 1.49 N/A DIVIDENDS DECLARED PER SHARE............ $ 0.23 $ 0.21 $ 0.20 $ 0.20 N/A
- --------------- (1) In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, income related to real estate sold or classified as held-for-sale for transactions initiated on or after January 1, 2002 is presented as discontinued operations. The following table presents the components of income from discontinued operations:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) Net investment income..................... $ 52 $160 $169 $159 $128 Net investment gains (losses)............. 421 582 -- -- -- ---- ---- ---- ---- ---- Total revenues.......................... 473 742 169 159 128 Interest expense.......................... 1 1 -- -- -- Provision for income taxes................ 172 270 62 58 47 ---- ---- ---- ---- ---- Income from discontinued operations, net of income taxes...................... $300 $471 $107 $101 $ 81 ==== ==== ==== ==== ====
39 (2) 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, ------------------------------------- 2003 2002 2001 2000 1999 ----- ----- ----- ----- ----- (DOLLARS IN MILLIONS) Gross investment gains (losses)...... $(573) $(896) $(713) $(444) $(137) ----- ----- ----- ----- ----- Less amounts allocated from: Deferred policy acquisition costs........................... 31 (5) (25) 95 46 Participating contracts............ 40 (7) -- (126) 21 Policyholder dividend obligation... 144 157 159 85 -- ----- ----- ----- ----- ----- Total.............................. 215 145 134 54 67 ----- ----- ----- ----- ----- Net investment gains (losses)........ $(358) $(751) $(579) $(390) $ (70) ===== ===== ===== ===== =====
Investment gains and losses have been reduced by (i) amortization of DAC, to the extent that such amortization results from investment gains and losses, (ii) adjustments to participating contractholder accounts when amounts equal to such investment gains and losses are applied to the contractholder's accounts, and (iii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. This presentation may not be comparable to presentations made by other insurers. (3) Net investment gains and losses presented include scheduled periodic settlement payments on derivative instruments that do not qualify for hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, of $84 million, $32 million and $24 million for the years ended December 31, 2003, 2002 and 2001, respectively. (4) Includes the following combined financial statement data of Conning Corporation ("Conning"), which was sold in 2001 and the Company's controlling interest in Nvest Companies, L.P. and its affiliates ("Nvest"), which was sold in 2000:
FOR THE YEARS ENDED DECEMBER 31, --------------------- 2001 2000 1999 ----- ----- ----- (DOLLARS IN MILLIONS) Total revenues.......................................... $32 $605 $655 === ==== ==== Total expenses.......................................... $33 $580 $603 === ==== ====
As a result of these sales, investment gains of $25 million and $663 million were recorded for the years ended December 31, 2001 and 2000, respectively. (5) In July 1998, Metropolitan Life sold a substantial portion of its Canadian operations to Clarica Life Insurance Company ("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 were 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, in 2000, 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. (6) Included in total revenues and total expenses for the year ended December 31, 2002 are $421 million and $358 million, respectively, related to Aseguradora Hidalgo S.A., which was acquired in June 2002. Included in total revenues and total expenses for the year ended December 31, 2000 are $3,739 million and $3,561 million, respectively, related to GenAmerica, which was acquired in January 2000. 40 (7) Policyholder benefits and claims exclude ($184) million, ($150) million, ($159) million, $41 million, and ($21) million for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, respectively, of adjustments to participating contractholder accounts and changes in the policyholder dividend obligation that have been netted 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) Other expenses exclude ($31) million, $5 million, $25 million, ($95) million, and ($46) million for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 respectively, of amortization of DAC that have been netted 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. (9) Provision for income taxes includes ($145) million and $125 million for surplus tax (credited) accrued by Metropolitan Life for the years ended December 31, 2000 and 1999, 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. (10) Policyholder liabilities include future policy benefits and other policyholder funds. Life and health policyholder liabilities also include policyholder account balances, policyholder dividends payable and the policyholder dividend obligation. (11) For additional information regarding these items, see Notes 1 and 14 of Notes to Consolidated Financial Statements. (12) Return on equity is defined as net income divided by average total equity, excluding accumulated other comprehensive income (loss). (13) Includes MetLife's general account and separate account assets managed on behalf of third parties. Includes $21 billion of assets under management managed by Conning at December 31, 2000, which was sold in 2001. Includes $133 billion of assets under management managed by Nvest at December 31, 1999 which was sold in 2000. (14) Based on earnings subsequent to the date of demutualization. For additional information regarding net income per share data, see Note 16 of Notes to Consolidated Financial Statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For purposes of this discussion, the terms "MetLife" or the "Company" refers to MetLife, Inc., a Delaware corporation (the "Holding Company"), and its subsidiaries, including Metropolitan Life Insurance Company ("Metropolitan Life"). Following this summary is a discussion addressing the consolidated results of operations and financial condition of the Company for the periods indicated. This discussion should be read in conjunction with the Company's consolidated financial statements included elsewhere herein. ECONOMIC CAPITAL Beginning in 2003, the Company changed its methodology of allocating capital to its business segments from Risk-Based Capital ("RBC") to Economic Capital. Prior to 2003, the Company's business segments' allocated equity was primarily based on RBC, an internally developed formula based on applying a multiple to the National Association of Insurance Commissioners Statutory Risk-Based Capital and included certain adjustments in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Economic Capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The Economic Capital model accounts for the unique and specific nature of the risks inherent in MetLife's businesses. This is in contrast to the standardized regulatory RBC formula, which is not as refined in its risk calculations with respect to the nuances of the Company's businesses. The change in methodology is being applied prospectively. This change has and will continue to impact the level of net investment income and net income of each of the Company's business segments. A portion of net investment income is credited to the segments based on the level of allocated equity. This change in 41 methodology of allocating equity does not impact the Company's consolidated net investment income or net income. The following table presents actual and pro forma net investment income with respect to the Company's segments for the years ended December 31, 2002 and 2001. The amounts shown as pro forma reflect net investment income that would have been reported in these years had the Company allocated capital based on Economic Capital rather than on the basis of RBC.
NET INVESTMENT INCOME FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------- 2002 2001 ------------------- ------------------- ACTUAL PRO FORMA ACTUAL PRO FORMA ------- --------- ------- --------- (DOLLARS IN MILLIONS) Institutional................................. $ 3,918 $ 3,980 $ 3,967 $ 4,040 Individual.................................... 6,244 6,155 6,165 6,078 Auto & Home................................... 177 160 200 184 International................................. 461 424 267 251 Reinsurance................................... 421 382 390 354 Asset Management.............................. 59 71 71 89 Corporate & Other............................. (19) 89 127 191 ------- ------- ------- ------- Total....................................... $11,261 $11,261 $11,187 $11,187 ======= ======= ======= =======
ACQUISITIONS AND DISPOSITIONS In September 2003, a subsidiary of the Company, Reinsurance Group of America, Incorporated ("RGA"), announced a coinsurance agreement under which it assumed the traditional U.S. life reinsurance business of Allianz Life Insurance Company of North America. The transaction closed during the fourth quarter of 2003 with an effective date retroactive to July 1, 2003. The transaction added approximately $278 billion of life reinsurance in-force, $246 million of premium and $11 million of income before income tax expense, excluding minority interest expense, to the fourth quarter of 2003. In June 2002, the Company acquired Aseguradora Hidalgo S.A. ("Hidalgo"), an insurance company based in Mexico with approximately $2.5 billion in assets as of the date of acquisition. The Company's existing Mexico subsidiary and Hidalgo now operate as a combined entity under the name MetLife Mexico. In November 2001, the Company acquired Compania de Seguros de Vida Santander S.A. and Compania de Reaseguros de Vida Soince Re S.A., wholly-owned subsidiaries of Santander Central Hispano in Chile. These acquisitions marked MetLife's entrance into the Chilean insurance market. In July 2001, the Company completed its sale of Conning Corporation ("Conning"), an affiliate acquired in the acquisition of GenAmerica Financial Corporation ("GenAmerica") in 2000. Conning specialized in asset management for insurance company investment portfolios and investment research. SUMMARY OF CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The critical accounting policies, estimates and related judgments underlying the Company's consolidated financial statements are summarized below. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company's businesses and operations. 42 INVESTMENTS The Company's principal investments are in fixed maturities, mortgage loans and real estate, all of which are exposed to three primary sources of investment risk: credit, interest rate and market valuation. The financial statement risks are those associated with the recognition of impairments and income, as well as the determination of fair values. The assessment of whether impairments have occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the market value has been below cost; (ii) the potential for impairments of securities when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; (vi) unfavorable changes in forecasted cash flows on asset-backed securities; and (vii) other subjective factors, including concentrations and information obtained from regulators and rating agencies. In addition, the earnings on certain investments are dependent upon market conditions, which could result in prepayments and changes in amounts to be earned due to changing interest rates or equity markets. The determination of fair values in the absence of quoted market values is based on: (i) valuation methodologies; (ii) securities the Company deems to be comparable; and (iii) assumptions deemed appropriate given the circumstances. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts. In addition, the Company enters into certain structured investment transactions, real estate joint ventures and limited partnerships for which the Company may be deemed to be the primary beneficiary and, therefore, may be required to consolidate such investments. The accounting rules for the determination of the primary beneficiary are complex and require evaluation of the contractual rights and obligations associated with each party involved in the entity, an estimate of the entity's expected losses and expected residual returns and the allocation of such estimates to each party. DERIVATIVES The Company enters into freestanding derivative transactions primarily to manage the risk associated with variability in cash flows or changes in fair values related to the Company's financial assets and liabilities or to changing fair values. The Company also uses derivative instruments to hedge its currency exposure associated with net investments in certain foreign operations. The Company also purchases investment securities, issues certain insurance policies and engages in certain reinsurance contracts that embed derivatives. The associated financial statement risk is the volatility in net income which can result from (i) changes in fair value of derivatives not qualifying as accounting hedges; (ii) ineffectiveness of designated hedges; and (iii) counterparty default. In addition, there is a risk that embedded derivatives requiring bifurcation are not identified and reported at fair value in the consolidated financial statements. Accounting for derivatives is complex, as evidenced by significant authoritative interpretations of the primary accounting standards which continue to evolve, as well as the significant judgments and estimates involved in determining fair value in the absence of quoted market values. These estimates are based on valuation methodologies and assumptions deemed appropriate in the circumstances. Such assumptions include estimated volatility and interest rates used in the determination of fair value where quoted market values are not available. The use of different assumptions may have a material effect on the estimated fair value amounts. DEFERRED POLICY ACQUISITION COSTS The Company incurs significant costs in connection with acquiring new and renewal insurance business. These costs, which vary with and are primarily related to the production of that business, are deferred. The recovery of such costs is dependent upon the future profitability of the related business. The amount of future profit is dependent principally on investment returns in excess of the amounts credited to policyholders, 43 mortality, morbidity, persistency, interest crediting rates, expenses to administer the business, creditworthiness of reinsurance counterparties and certain economic variables, such as inflation. Of these factors, the Company anticipates that investment returns are most likely to impact the rate of amortization of such costs. The aforementioned factors enter into management's estimates of gross margins and profits, which generally are used to amortize such costs. Revisions to estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in the impairment of the asset and a charge to income if estimated future gross margins and profits are less than amounts deferred. In addition, the Company utilizes the reversion to the mean assumption, a standard industry practice, in its determination of the amortization of deferred policy acquisition costs ("DAC"), including value of business acquired ("VOBA"). This practice assumes that the expectation for long-term appreciation in equity markets is not changed by minor short-term market fluctuations, but that it does change when large interim deviations have occurred. FUTURE POLICY BENEFITS The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, annuities and disability insurance. Generally, amounts are payable over an extended period of time and liabilities are established based on methods and underlying assumptions in accordance with GAAP and applicable actuarial standards. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, expenses, persistency, investment returns and inflation. The Company also establishes liabilities for unpaid claims and claims expenses for property and casualty insurance. Liabilities for property and casualty insurance are dependent on estimates of amounts payable for claims reported but not settled and claims incurred but not reported. These estimates are influenced by historical experience and actuarial assumptions with respect to current developments, anticipated trends and risk management strategies. Differences between the actual experience and assumptions used in pricing these policies and in the establishment of liabilities result in variances in profit and could result in losses. REINSURANCE The Company enters into reinsurance transactions as both a provider and a purchaser of reinsurance. Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risks. The Company periodically reviews actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluates the financial strength of counterparties to its reinsurance agreements using criteria similar to that evaluated in the security impairment process discussed previously. Additionally, for each of its reinsurance contracts, the Company must determine if the contract provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. The Company must review all contractual features, particularly those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. If the Company determines that a reinsurance contract does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the contract using the deposit method of accounting. LITIGATION The Company is a party to a number of legal actions. Given the inherent unpredictability of litigation, it is difficult to estimate the impact of litigation on the Company's consolidated financial position. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities related to certain lawsuits, including the Company's asbestos-related liability, are especially difficult to estimate due to the limitation of available data and uncertainty regarding numerous variables used to determine amounts recorded. The data and variables that impact the assumption used to estimate the Company's asbestos-related liability include the number of future claims, the cost to resolve claims, the disease mix and severity of disease, the jurisdiction of claims filed, tort reform efforts and the 44 impact of any possible future adverse verdicts and their amounts. It is possible that an adverse outcome in certain of the Company's litigation, including asbestos-related cases, or the use of different assumptions in the determination of amounts recorded could have a material effect upon the Company's consolidated net income or cash flows in particular quarterly or annual periods. EMPLOYEE BENEFIT PLANS The Company sponsors pension and other retirement plans in various forms covering employees who meet specified eligibility requirements. The reported expense and liability associated with these plans requires an extensive use of assumptions which include the discount rate, expected return on plan assets and rate of future compensation increases as determined by the Company. Management determines these assumptions based upon currently available market and industry data, historical performance of the plan and its assets, and consultation with an independent consulting actuarial firm to aid it in selecting appropriate assumptions and valuing its related liabilities. The actuarial assumptions used in the calculation of the Company's aggregate projected benefit obligation may vary and include an expectation of long-term market appreciation in equity markets which is not changed by minor short-term market fluctuations, but does change when large interim deviations occur. These assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of the participants. These differences may have a significant effect on the Company's consolidated financial statements and liquidity. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2002 -- THE COMPANY EXECUTIVE SUMMARY MetLife, Inc., through its affiliates and subsidiaries, is a leading provider of insurance and other financial services to a broad spectrum of individual and institutional customers. The Company offers life insurance, annuities, automobile and homeowners insurance and mutual funds to individuals, as well as group insurance, reinsurance, and retirement and savings products and services to corporations and other institutions. The MetLife companies serve approximately 13 million households in the U.S. and provide benefits to approximately 37 million employees and family members through their plan sponsors including 88 of the FORTUNE 100 largest companies. MetLife, Inc. also has direct international insurance operations in 10 countries serving approximately 8 million customers. MetLife is organized into six business segments: Institutional, Individual, Auto & Home, International, Reinsurance and Asset Management. The marketplace for financial services is extremely competitive. MetLife, the largest life insurer in the United States, reported $2.2 billion in net income and diluted earnings per share of $2.94 for the year ended December 31, 2003. In 2003, after a three-year economic slowdown, there were improvements in both the credit and equity markets. At the same time, interest rates remained at historic lows and the S&P 500 Index was up 26% for the year. Total premiums and fees increased to $23.2 billion, up 9% over the prior year, which primarily stems from continued sales growth across most of the Company's segments, as well as the positive impact of the U.S. financial markets on policy fees. Assets under management grew to $350.2 billion, up 17% over the prior year, and Individual annuity deposits grew to $11.2 billion, up 42% over the prior year. MetLife generated over $11 billion of net investment income while adhering to rigorous asset-liability management principles and portfolio diversification. An increase in expenses year over year is primarily attributable to employee-related expenses, including pension and postretirement benefit expense and severance, expenses associated with strengthening the Company's distribution systems and taking action in consolidating office space and reducing redundancies, while continuing to invest heavily in infrastructure. In addition, regulatory capital increased and the Company repurchased stock through its buyback program. 45 INDUSTRY TRENDS The Company's segments continue to be influenced by a variety of industry trends and it is the Company's belief that each of its businesses is well positioned to capitalize on those trends. In general, the Company is seeing more employers, both large and small, outsourcing their benefits functions. Further, companies are offering broader new arrays of voluntary benefits to help retain employees while adding little to their overall benefits costs. These trends will likely continue and in fact expand across companies of all sizes. Employers are also demanding substantial online access for their employees for various self-service functions. This functionality requires substantial information technology investment that smaller companies will find difficult to absorb. This will put pressure on those smaller and mid-size companies to gain scale quickly or exit the business. In addition, alternative benefit structures, such as simple fixed benefit products, are becoming more popular as the traditional medical indemnity products costs have continued to increase rapidly. These low cost fixed benefit products can provide effective catastrophic protection for high cost illnesses to supplement the basic health coverage provided by medical indemnity insurance. From a demographics standpoint, the bulk of the U.S. population is moving from an asset accumulation phase to an asset distribution phase. People within ten years of retirement hold significant assets. With continually lengthening lifespans and unstructured asset distribution, the Company believes many of these people may outlive their retirement savings and/or require long-term care. As a result, the Company expects that the demand for retirement payout solutions with guarantees will increase dramatically over the next decade. The combination of these trends will favor those with scale, breadth of distribution and product, ability to provide advice and financial strength to support the long-term guarantees. DISCUSSION OF RESULTS
YEAR ENDED DECEMBER 31, ---------------------------- 2003 2002 % CHANGE ------- ------- -------- (DOLLARS IN MILLIONS) REVENUES Premiums.................................................... $20,673 $19,077 8% Universal life and investment-type product policy fees...... 2,496 2,147 16% Net investment income....................................... 11,636 11,261 3% Other revenues.............................................. 1,342 1,332 1% Net investment gains (losses) (net of amounts allocable from other accounts of ($215) and ($145), respectively)........ (358) (751) 52% ------- ------- Total revenues......................................... 35,789 33,066 8% ------- -------
46
YEAR ENDED DECEMBER 31, ---------------------------- 2003 2002 % CHANGE ------- ------- -------- (DOLLARS IN MILLIONS) EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment gains (losses) of ($184) and ($150), respectively)..................................... 20,848 19,523 7% Interest credited to policyholder account balances.......... 3,035 2,950 3% Policyholder dividends...................................... 1,975 1,942 2% Other expenses (excludes amounts directly related to net investment gains (losses) of ($31) and $5, respectively)............................................. 7,301 7,015 4% ------- ------- Total expenses......................................... 33,159 31,430 6% ------- ------- Income from continuing operations before provision for income taxes.............................................. 2,630 1,636 61% Provision for income taxes.................................. 687 502 37% ------- ------- Income from continuing operations........................... 1,943 1,134 71% Income from discontinued operations, net of income taxes.... 300 471 (36)% ------- ------- Income before cumulative effect of change in accounting..... 2,243 1,605 40% Cumulative effect of change in accounting, net of income taxes..................................................... (26) -- ------- ------- Net income.................................................. $ 2,217 $ 1,605 38% ======= =======
Income from continuing operations increased by $809 million, or 71%, to $1,943 million for the year ended December 31, 2003 from $1,134 million in the comparable 2002 period. Income from continuing operations for the years 2003 and 2002 includes the impact of certain transactions or events that result in net income not being indicative of future earnings, which are described in the applicable segment's results of operations discussions. These items contributed an after-tax benefit of $159 million in 2003 and an after-tax charge of $150 million in 2002. Excluding the impact of these items, income from continuing operations increased by $500 million in 2003 compared to the prior year. Declines in after-tax net investment losses account for $220 million of this increase with the balance being contributed by the Company's operations. The decline in net investment losses is largely attributable to less credit-related losses, which is consistent with the U.S. financial market environment. The Company anticipates net investment losses in 2004 to be comparable with 2003 levels and continues to reflect a concentration of interest-related losses rather than credit-related losses. Premiums, fees and other revenues increased 9% over the prior year primarily as a result of growth in the annuities, retirement and savings and variable and universal life product lines. This increase stems in part from policy fee income earned on annuity deposits, which were $11.2 billion in 2003, increasing 42% from the prior year. In addition, the annuity separate account balance was $28.7 billion at December 31, 2003, up 57% versus the prior year end. Growth in retirement & savings is primarily attributable to higher sales in structured settlement products. Fee income from variable and universal life products increased 12% over the prior year primarily as a result of a 25% growth in separate account balances. In addition, the coinsurance agreement with Allianz Life in the Reinsurance segment contributed approximately 1% to the year over year increase. Partially offsetting these increases is a decline in traditional life premiums, which is largely attributable to run off in the Company's closed block of business. Investment margins, which represent the spread between net investment income and interest credited to policyholder account balances, remained favorable in 2003 as the Company took appropriate crediting rate reductions in most products in an effort to keep pace with the market environment. In several product lines, where investment margins are a substantial part of earnings, the Company still has a reasonable amount of flexibility to reduce crediting rates further if portfolio yields were to decline from year-end 2003 levels. Investment margins in 2003 did benefit from higher than expected levels of prepayments, a trend that is not expected to continue in 2004. 47 Underwriting results varied in 2003. The group life mortality ratio continues to be favorable at 92%. The Individual life mortality ratio was also solid at 88%, which includes the impact of several large claims in the variable and universal product line, some of which had lower levels of reinsurance. Group disability's morbidity ratio increased to 98.5%, from 97.9% in the prior year but is still within management's expected range. The Auto & Home combined ratio, which is a measure of both the loss and loss adjustment expense ratio, as well as the expense ratio, remained favorable at 97.1% excluding catastrophes. The Company's International segment increased its loss recognition reserve in Taiwan as a result of low interest rates relative to product guarantees. This action resulted in a $19 million after-tax charge. Other expenses increased 4% over the prior year period primarily as a result of an increase of $133 million in pension and postretirement expenses. As a result of contributions made to the pension plan in late 2003 and early 2004, which totaled approximately $750 million, and the stronger performance of the pension plan assets in 2003, the Company anticipates the pension and postretirement expenses to moderate in 2004. Other expenses in 2003 also include the impact of several actions taken by management in the fourth quarter, including lease terminations, office consolidations and closures, and asset impairments. In addition, severance costs and expenses associated with strategic initiatives at New England Financial contributed to the increase in expenses year over year. Also, there was an increase in many of the product lines' volume-related expenses, which are in line with 2003 business growth. Net investment losses decreased by $393 million, or 52%, to $358 million for the year ended December 31, 2003 from $751 million for the comparable 2002 period. This decrease reflects total investment losses, before offsets, of $573 million. The Company's investment gains and losses are net of related policyholder amounts. The amounts netted against investment gains and losses are (i) amortization of DAC, to the extent that such amortization results from investment gains and losses, (ii) adjustments to participating contractholder accounts when amounts equal to such investment gains and losses are applied to the contractholder's accounts, and (iii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. Offsets include the amortization of DAC of $31 million and ($5) million in 2003 and 2002, respectively, and changes in the policyholder dividend obligation of $144 million and $157 million in 2003 and 2002, respectively, and adjustments to participating contracts of $40 million and ($7) million in 2003 and 2002, respectively. The dollar amount of the offsets may vary disproportionately with net investment gains and losses based on the relationship of the underlying sold securities to certain insurance products. The Company believes its policy of netting related policyholder amounts against investment gains and losses provides important information in evaluating its performance. Investment gains and losses are often excluded by investors when evaluating the overall financial performance of insurers. The Company believes its presentation enables readers to easily exclude investment gains and losses and the related effects on the consolidated statements of income when evaluating its performance. The Company's presentation of investment gains and losses, net of policyholder amounts, may be different from the presentation used by other insurance companies and, therefore, amounts in its consolidated statements of income may not be comparable to amounts reported by other insurers. Income tax expense for the year ended December 31, 2003 was $687 million, or 26% of income from continuing operations before provision for income taxes and cumulative effect of change in accounting, compared with $502 million, or 31%, for the comparable 2002 period. The 2003 effective tax rate differs from the corporate tax rate of 35% primarily due to the impact of non-taxable investment income, tax credits for investments in low income housing, a recovery of prior year tax overpayments on tax-exempt bonds, and an adjustment consisting primarily of a revision in the estimate of income taxes for 2002. In addition, the 2003 effective tax rate includes a reduction of the deferred tax valuation allowance related to certain foreign net operating loss carryforwards, and tax benefits related to the sale and merger of foreign subsidiaries reflected in the International segment. The 2002 effective tax rate differs from the corporate tax rate of 35% primarily due to the impact of non-taxable investment income, partially offset by the inability to utilize tax benefits on certain foreign capital losses. Income from discontinued operations declined $171 million, or 36%, to $300 million for the year ended December 31, 2003 from $471 million in the comparable prior year period. The decrease is primarily due to 48 lower recognized net investment gains from real estate properties sold in 2003 as compared to the prior year. The income from discontinued operations is comprised of net investment income and net investment gains related to properties that the Company began marketing for sale on or after January 1, 2002. For the years ended December 31, 2003 and 2002, the Company recognized $421 million and $582 million of net investment gains, respectively, from discontinued operations related to real estate properties sold or held-for- sale. The Company changed its method of accounting for embedded derivatives in certain insurance products as required by new accounting guidance which became effective on October 1, 2003, and recorded the impact as a cumulative effect of a change in accounting principle. 49 INSTITUTIONAL The following table presents consolidated financial information for the Institutional segment for the years indicated:
YEAR ENDED DECEMBER 31, ---------------------------- 2003 2002 % CHANGE ------- ------- -------- (DOLLARS IN MILLIONS) REVENUES Premiums.................................................... $ 9,093 $ 8,245 10% Universal life and investment-type product policy fees...... 635 624 2% Net investment income....................................... 4,038 3,918 3% Other revenues.............................................. 592 609 (3)% Net investment gains (losses) (net of amounts allocable from other accounts of ($89) and $6, respectively)............. (204) (494) 59% ------- ------- Total revenues............................................ 14,154 12,902 10% ------- ------- EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment gains (losses) of ($89) and $6, respectively)............................................. 9,932 9,339 6% Interest credited to policyholder account balances.......... 915 932 (2)% Policyholder dividends...................................... 198 115 72% Other expenses.............................................. 1,784 1,531 17% ------- ------- Total expenses............................................ 12,829 11,917 8% ------- ------- Income from continuing operations before provision for income taxes.............................................. 1,325 985 35% Provision for income taxes.................................. 480 347 38% ------- ------- Income from continuing operations........................... 845 638 32% Income from discontinued operations, net of income taxes.... 30 121 (75)% ------- ------- Income before cumulative effect of change in accounting..... 875 759 15% Cumulative effect of change in accounting, net of income taxes..................................................... (26) -- ------- ------- Net income.................................................. $ 849 $ 759 12% ======= =======
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2002 -- INSTITUTIONAL The Company's Institutional segment offers a broad range of group insurance and retirement and savings products and services to corporations and other institutions. Group insurance products are offered as either an employer-paid benefit, or as a voluntary benefit with premiums paid by the employee. Retirement and savings products and services include an array of annuity and investment products, as well as bundled administrative and investment services sold to sponsors of small- and mid-sized 401(k) and other defined contribution plans. Income from continuing operations increased by $207 million, or 32%, to $845 million for the year ended December 31, 2003 from $638 million for the comparable 2002 period. Revenue growth combined with favorable underwriting results and interest margins contributed to the year over year increase. Lower net investment losses in 2003 versus 2002 contributed $185 million after-tax to the year over year increase. Favorable underwriting experience was partially offset by an increase in expenses associated with office closures and other consolidations, as well as an increase in pension and postretirement benefit costs. In addition, the prior year period includes a $20 million after-tax benefit from the release of a previously established liability for the Company's 2001 business realignment initiatives and a $17 million after-tax benefit from the release of a previously established liability for disability insurance-related losses from the September 11, 2001 tragedies. 50 Total revenues, excluding net investment gains and losses, increased by $962 million, or 7%, to $14,358 million for the year ended December 31, 2003 from $13,396 million for the comparable 2002 period. The increase is attributable to both the group insurance and the retirement and savings product lines. Within group insurance, life insurance premiums and fees increased by $238 million, or 5%, which is in line with management's expectations. This increase is attributable primarily to higher sales and favorable persistency. The late 2003 acquisition of the John Hancock block of group life business contributed $72 million to this increase. In addition, the long-term care, dental, and disability products experienced continued growth at a combined rate of approximately 14%, which is in line with management's expectations. Retirement and savings revenues increased approximately 12% primarily due to higher sales in the structured settlement products partially offset by the impact of a sale of a significant, single premium contract in the second quarter of 2002. Premiums and fees from retirement and saving products are significantly influenced by large transactions and, as a result, can fluctuate from period to period. These increases were partially offset by a decrease in revenues primarily due to a decline in retirement and savings administrative fees from the Company's 401(k) business. This decline resulted from the exit from the large market 401(k) business in late 2001. Consequently, revenue decreased as business was transferred to other carriers throughout 2002. Total expenses increased by $912 million, or 8%, to $12,829 million for the year ended December 31, 2003 from $11,917 million for the comparable 2002 period. Policyholder-related expenses increased $659 million primarily as a function of the growth in business. The increase in expenses is offset by favorable underwriting results in the term life insurance, dental, long-term care, and retirement and savings products. The term life mortality incurred loss ratio, which represents actual life claims as a percentage of assumed claims incurred used in the determination of future policy benefits, was 92% for 2003 as compared to 93.6% in 2002. Underwriting results declined in disability as the morbidity incurred loss ratio, which represents actual disability claims as a percentage of assumed claims incurred used in the determination of future policy benefits, increased to 98.5% in 2003 from 97.9% in the prior year. The 2003 ratio was within management's expected range. In addition, the 2002 period includes a $28 million release of a previously established liability for disability insurance-related losses from the September 11, 2001 tragedies. Other expenses increased by $253 million over the prior year period. Group insurance and retirement and savings expenses increased $115 million primarily due to an increase in non-deferrable expenses associated with the aforementioned revenue growth, $77 million from an increase in pension and postretirement benefit expense, and a $33 million increase in expenses associated with office closures and other consolidations. In addition, the prior year period includes a $30 million release of a previously established liability for the Company's 2001 business realignment initiatives. 51 INDIVIDUAL The following table presents consolidated financial information for the Individual segment for the years indicated:
YEAR ENDED DECEMBER 31, ---------------------------- 2003 2002 % CHANGE ------- ------- -------- (DOLLARS IN MILLIONS) REVENUES Premiums................................................ $ 4,344 $ 4,507 (4)% Universal life and investment-type product policy fees.................................................. 1,589 1,379 15% Net investment income................................... 6,201 6,244 (1)% Other revenues.......................................... 407 418 (3)% Net investment gains (losses) (net of amounts allocable from other accounts of ($177) and ($147), respectively)......................................... (130) (144) (10)% ------- ------- Total revenues........................................ 12,411 12,404 0% ------- ------- EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment gains (losses) of ($144) and ($157), respectively)...................... 5,183 5,220 (1)% Interest credited to policyholder account balances...... 1,793 1,793 0% Policyholder dividends.................................. 1,700 1,770 (4)% Other expenses (excludes amounts directly related to net investment gains (losses) of ($33) and $10, respectively)......................................... 2,880 2,629 10% ------- ------- Total expenses........................................ 11,556 11,412 1% ------- ------- Income from continuing operations before provision for income taxes.......................................... 855 992 (14)% Provision for income taxes.............................. 284 365 (22)% ------- ------- Income from continuing operations....................... 571 627 (9)% Income from discontinued operations, net of income taxes................................................. 30 199 (85)% ------- ------- Net income.............................................. $ 601 $ 826 (27)% ======= =======
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2002 -- INDIVIDUAL MetLife's Individual segment offers a wide variety of protection and asset accumulation products aimed at serving the financial needs of its customers throughout their entire life cycle. Products offered by Individual include insurance products, such as traditional, universal and variable life insurance and variable and fixed annuities. In addition, Individual sales representatives distribute disability insurance and long-term care insurance products offered through the Institutional segment, investment products, such as mutual funds, as well as other products offered by the Company's other businesses. Income from continuing operations decreased by $56 million, or 9%, to $571 million for the year ended December 31, 2003 from $627 million for the comparable 2002 period. The decrease year over year is primarily driven by an increase in expenses of $144 million, or 1%, which is largely attributable to an increase in expenses associated with office closures and other consolidations, pension and postretirement benefit costs, an increase in legal-related costs and an adjustment related to certain improperly deferred expenses at New England Financial. Although revenues are essentially flat year over year, policy fees from variable life and annuity and investment-type products grew 15% year over year. In addition, there is a slight increase in premiums related to other traditional life products. These increases are offset by a 5% decline in premiums from the Company's closed block business, which consists of participating policies issued prior to the 52 Company's demutualization. Premiums on the closed block represent approximately 80% of this segment's premiums for the year ended December 31, 2003. Total revenues, excluding net investment gains and losses, decreased by $7 million, or less than 1%, to $12,541 million for the year ended December 31, 2003 from $12,548 million for the comparable 2002 period. Policy fees from variable life and annuity and investment-type products grew by 15% over the prior year period. This growth is primarily a result of an 18% increase in the average separate account balances, which is largely attributable to improvements in the U.S. financial markets. Additionally, this increase is associated with the aging of the in-force policies, as well as an increase in the sales of the enterprise variable annuity product through non-traditional distribution channels. Policy fees from variable life and annuity and investment-type products are typically calculated as a percentage of average assets. The value of these assets can fluctuate depending on equity market performance. This increase in policy fee income was almost entirely offset by declines in premiums and net investment income. Premiums associated with the Company's closed block of business declined by $186 million, or 5%, which is in line with management's expectations, as this business continues to run-off. Partially offsetting this decline is a slight increase in the other traditional life products. The decline in net investment income is mainly due to the change in capital allocation methodology and lower investment yields year over year. Total expenses increased by $144 million, or 1%, to $11,556 million for the year ended December 31, 2003 from $11,412 million for the comparable 2002 period. Other expenses increased by $251 million over the prior year period primarily as a result of expenses associated with certain efficiency initiatives and events. The most significant items include an increase of $67 million from pension and postretirement benefit expense, a $48 million expense recorded in the second quarter of 2003 for an adjustment related to certain improperly deferred expenses at New England Financial, $42 million in expenses associated with office closures and other consolidations, $42 million increase in legal-related costs, and other expenses associated with strategic initiatives at New England Financial. Offsetting these expense increases are a decline in policyholder benefits consistent with the aforementioned decline in the closed block and a decrease in dividends due to the reduction of the dividend scale in the fourth quarter of 2002, reflecting the impact of the low U.S. interest rate environment on the asset portfolios supporting these policies. 53 AUTO & HOME The following table presents consolidated financial information for the Auto & Home segment for the years indicated:
YEAR ENDED DECEMBER 31, -------------------------- 2003 2002 % CHANGE ------ ------ -------- (DOLLARS IN MILLIONS) REVENUES Premiums.................................................. $2,908 $2,828 3% Net investment income..................................... 158 177 (11)% Other revenues............................................ 32 26 23% Net investment gains (losses)............................. (15) (46) (67)% ------ ------ Total revenues.......................................... 3,083 2,985 3% ------ ------ EXPENSES Policyholder benefits and claims.......................... 2,139 2,019 6% Policyholder dividends.................................... 1 -- 0% Other expenses............................................ 756 793 (5)% ------ ------ Total expenses.......................................... 2,896 2,812 3% ------ ------ Income before provision for income taxes.................. 187 173 8% Provision for income taxes................................ 30 41 (27)% ------ ------ Net income................................................ $ 157 $ 132 19% ====== ======
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2002 -- 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. Auto & Home primarily sells auto and homeowners insurance. Net income increased by $25 million, or 19%, to $157 million for the year ended December 31, 2003 from $132 million for the comparable 2002 period. The increase in earnings year over year is mainly due to premium growth, lower investment losses and a reduction in expenses, partially offset by adverse claims development. Total revenues, excluding net investment gains and losses, increased by $67 million, or 2%, to $3,098 million for the year ended December 31, 2003 from $3,031 million for the comparable 2002 period. This variance is mainly due to increases in the average earned premium due to rate increases, partially offset by lower investment income primarily resulting from the change in capital allocation methodology. Total expenses increased by $84 million, or 3%, to $2,896 million for the year ended December 31, 2003 from $2,812 million for the comparable 2002 period. Adverse claims development related to prior accident years, resulting mostly from bodily injury and uninsured motorists claims, accounted for $46 million of the increase in policyholder benefits. Also contributing to this increase are higher catastrophe losses of $22 million. Partially offsetting these increases are improved non-catastrophe homeowners claims frequencies, a reduction in the number of auto and homeowners policies in-force, and underwriting and agency management actions. In addition, there was a $23 million reduction in expenses resulting from the completion of the St. Paul integration and a $35 million reduction in the cost associated with the New York assigned risk plan. The combined ratio, excluding catastrophes, which represents losses and total expenses including claims as a percentage of premiums, declined to 97.1% for the year ended December 31, 2003 versus 97.4% for the comparable 2002 period. 54 INTERNATIONAL The following table presents consolidated financial information for the International segment for the years indicated:
YEAR ENDED DECEMBER 31, -------------------------- 2003 2002 % CHANGE ------ ------ -------- (DOLLARS IN MILLIONS) REVENUES Premiums.................................................. $1,678 $1,511 11% Universal life and investment-type product policy fees.... 272 144 89% Net investment income..................................... 502 461 9% Other revenues............................................ 80 14 471% Net investment gains (losses) (net of amounts allocable from other accounts of $3 and $0, respectively)......... 4 (9) 144% ------ ------ Total revenues.......................................... 2,536 2,121 20% ------ ------ EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment gains (losses) of $3 and $0, respectively)................................... 1,454 1,388 5% Interest credited to policyholder account balances........ 143 79 81% Policyholder dividends.................................... 55 35 57% Other expenses............................................ 659 507 30% ------ ------ Total expenses.......................................... 2,311 2,009 15% ------ ------ Income from continuing operations before provision for income taxes............................................ 225 112 101% Provision for income taxes................................ 17 28 (39)% ------ ------ Net income................................................ $ 208 $ 84 148% ====== ======
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2002 -- 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 emerging markets in the Latin America and Asia/Pacific regions. Net income increased by $124 million, or 148%, to $208 million for the year ended December 31, 2003 from $84 million for the comparable 2002 period. The acquisition of Hidalgo accounted for $48 million of this increase. Also contributing to the increase in earnings during 2003 is a $62 million after-tax benefit from the merger of the Mexican operations and a reduction in policyholder liabilities resulting from a change in reserve methodology, a $12 million tax benefit in Chile and an $8 million after-tax benefit related to reinsurance treaties. These increases are partially offset by a $19 million after-tax charge in Taiwan related to an increased loss recognition reserve due to low interest rates relative to product guarantees. Total revenues, excluding net investment gains and losses, increased by $402 million, or 19%, to $2,532 million for the year ended December 31, 2003 from $2,130 million for the comparable 2002 period. This increase is primarily due to the acquisition of Hidalgo, which accounted for $469 million of the variance, partially offset by decreases in Canada of $106 million attributable to a non-recurring sale of an annuity contract and $28 million relating to the restructuring of a pension contract from an investment-type product to a long-term annuity, both of which occurred in 2002. In addition, South Korea's, Chile's and Taiwan's revenues increased by $102 million, $60 million and $36 million, respectively, primarily due to business growth. These increases are partially offset by a $161 million decrease in Mexico, excluding Hidalgo. Anticipated actions taken by the Mexican government adversely impacted the insurance and annuities market 55 and resulted in a decline in premiums in Mexico's group and individual life businesses. In addition, the cancellation of a large broker-sponsored case at the end of 2002 and the weakening of the peso also contributed to the 2003 decline in Mexico. Total expenses increased by $302 million, or 15%, to $2,311 million for the year ended December 31, 2003 from $2,009 million for the comparable 2002 period. The acquisition of Hidalgo contributed $394 million to this increase. Partially offsetting this is a decrease of $106 million for the aforementioned non-recurring sale of an annuity contract and a decrease of $28 million for the restructuring of a pension contract, both of which occurred in 2002. In addition, South Korea's, Chile's and Taiwan's expenses increased by $95 million, $65 million and $64 million, respectively, commensurate with the revenue increases in each country. Additionally, Taiwan's expenses include a $30 million pre-tax charge due to an increased loss recognition reserve as a result of low interest rates relative to product guarantees. These increases are partially offset by a $251 million decrease in Mexico, other than Hidalgo, primarily as a result of the impact on expenses from the aforementioned revenue decline in Mexico and a reduction in policyholder liabilities related to a change in reserve methodology. REINSURANCE The following table presents consolidated financial information for the Reinsurance segment for the years indicated:
YEAR ENDED DECEMBER 31, -------------------------- 2003 2002 % CHANGE ------ ------ -------- (DOLLARS IN MILLIONS) REVENUES Premiums.................................................. $2,668 $2,005 33% Net investment income..................................... 473 421 12% Other revenues............................................ 49 43 14% Net investment gains (losses)............................. 31 2 1,450% ------ ------ Total revenues....................................... 3,221 2,471 30% ------ ------ EXPENSES Policyholder benefits and claims.......................... 2,136 1,554 37% Interest credited to policyholder account balances........ 184 146 26% Policyholder dividends.................................... 21 22 (5)% Other expenses............................................ 740 622 19% ------ ------ Total expenses....................................... 3,081 2,344 31% ------ ------ Income before provision for income taxes.................. 140 127 10% Provision for income taxes................................ 48 43 12% ------ ------ Net income................................................ $ 92 $ 84 10% ====== ======
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2002 -- REINSURANCE MetLife's Reinsurance segment is comprised of the life reinsurance business of Reinsurance Group of America, Incorporated ("RGA"), a publicly traded company, and MetLife's ancillary life reinsurance business. RGA has operations in North America and has subsidiary companies, branch offices, or representative offices in Australia, Barbados, Hong Kong, India, Ireland, Japan, Mexico, South Africa, South Korea, Spain, Taiwan and the United Kingdom. Net income increased by $8 million, or 10%, to $92 million for the year ended December 31, 2003 from $84 million for the comparable 2002 period. The increase in earnings year over year is primarily attributable to new business growth, additional renewal premiums, as well as a large coinsurance agreement with Allianz Life Insurance Company of North America ("Allianz Life") under which RGA assumed 100% of Allianz Life's U.S. traditional life reinsurance business. 56 Total revenues, excluding net investment gains and losses, increased by $721 million, or 29%, to $3,190 million for the year ended December 31, 2003 from $2,469 million for the comparable 2002 period. This increase is primarily due to new premiums from facultative and automatic treaties and renewal premiums on existing blocks of business, particularly in the U.S. and United Kingdom reinsurance operations. In addition, there was a $252 million increase in revenues due to the transaction with Allianz Life in late 2003. Total expenses increased by $737 million, or 31%, to $3,081 million for the year ended December 31, 2003 from $2,344 million for the comparable 2002 period. This increase is consistent with the growth in revenues and is primarily attributable to policyholder benefits and claims and allowances paid on assumed reinsurance, particularly on certain higher commission business in the United Kingdom. The aforementioned transaction with Allianz Life contributed $242 million to this increase. ASSET MANAGEMENT The following table presents consolidated financial information for the Asset Management segment for the years indicated:
YEAR ENDED DECEMBER 31, ------------------------- 2003 2002 % CHANGE ----- ----- --------- (DOLLARS IN MILLIONS) REVENUES Net investment income....................................... $ 66 $ 59 12% Other revenues.............................................. 143 166 (14)% Net investment gains (losses)............................... 9 (4) 325% ---- ---- Total revenues......................................... 218 221 (1)% ---- ---- OTHER EXPENSES.............................................. 182 211 (14)% ---- ---- Income before provision for income taxes.................... 36 10 260% Provision for income taxes.................................. 14 4 250% ---- ---- Net income.................................................. $ 22 $ 6 267% ==== ====
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2002 -- ASSET MANAGEMENT Asset Management, through SSRM Holdings, Inc. ("State Street Research"), provides a broad variety of asset management products and services to MetLife, third-party institutions and individuals. State Street Research offers investment management services in all major investment disciplines through multiple channels of distribution in both the retail and institutional marketplaces. Net income increased by $16 million, or 267%, to $22 million for the year ended December 31, 2003 from $6 million for the comparable 2002 period. The increase year over year is mainly due to expense reductions and an increase in net investment gains in 2003. These improvements were partially offset by lower revenues earned as a result of a reduction in average assets under management. Total revenues, excluding net investment gains and losses, decreased by $16 million, or 7%, to $209 million for the year ended December 31, 2003 from $225 million for the comparable 2002 period. This decrease is primarily attributable to a decline in revenues earned on lower average assets under management, despite an increase in ending assets under management of 7% to $47.5 billion for the year ended December 31, 2003 from $44.6 billion for the comparable 2002 period. In addition, performance fees of $10 million earned during 2003 on certain investment products, were lower than the $14 million earned during the comparable 2002 period. Other expenses decreased by $29 million, or 14%, to $182 million for the year ended December 31, 2003 from $211 million for the comparable 2002 period. Compensation-related expenses declined $17 million primarily as a result of staff reductions undertaken in the third and fourth quarters of 2002. Additionally, 57 variable expenses declined $6 million largely as a result of lower average assets under management. General and administrative expenses declined $6 million due to lower spending. CORPORATE & OTHER YEAR ENDED DECEMBER 31, 2003 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2002 -- CORPORATE & OTHER Corporate & Other contains the excess capital not allocated to the business segments, as well as expenses associated with the resolution of proceedings alleging race-conscious underwriting practices, sales practices and asbestos related claims, and interest expense related to the majority of the Company's outstanding debt. Income and loss from continuing operations increased by $485 million, or 111%, to $48 million for the year ended December 31, 2003 from a loss of $437 million for the comparable 2002 period. The 2003 period includes a $92 million after-tax benefit from a reduction of a previously established liability related to the Company's race conscious underwriting settlement and a $36 million benefit from a revision of the estimate of income tax for 2002. The 2002 period includes a $169 million after-tax charge to cover costs associated with asbestos-related claims, a $48 million after-tax charge to cover costs associated with the resolution of a federal government investigation of General American Life Insurance Company's ("General American") former Medicare business, and a $30 million after-tax reduction of a previously established liability related to the Company's sales practice class action settlement in 1999. Excluding the impact of these items, the increase in earnings year over year is mainly due to higher investment income. Total revenues, excluding net investment gains and losses, increased by $201 million, or 1,117%, to $219 million for the year ended December 31, 2003 from $18 million for the comparable 2002 period. This variance is mainly due to higher investment income resulting from the change in capital allocation methodology, as well as increases in income from corporate joint ventures, equity-linked notes and securities lending. Total expenses decreased by $421 million, or 58%, to $304 million for the year ended December 31, 2003 from $725 million for the comparable 2002 period. The 2003 period includes a $144 million reduction of a previously established liability related to the Company's race-conscious underwriting settlement. The 2002 period includes a $266 million charge to increase the Company's asbestos-related liability and expenses to cover costs associated with the resolution of federal government investigations of General American's former Medicare business. 58 YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001 -- THE COMPANY The following table presents consolidated financial information for the years indicated:
YEAR ENDED DECEMBER 31, ---------------------------- 2002 2001 % CHANGE ------- ------- -------- (DOLLARS IN MILLIONS) REVENUES Premiums................................................ $19,077 $17,212 11% Universal life and investment-type product policy fees.................................................. 2,147 1,889 14% Net investment income................................... 11,261 11,187 1% Other revenues.......................................... 1,332 1,507 (12)% Net investment gains (losses) (net of amounts allocable to other accounts of ($145) and ($134), respectively)......................................... (751) (579) 30% ------- ------- Total revenues..................................... 33,066 31,216 6% ------- ------- EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment gains (losses) of ($150) and ($159), respectively)...................... 19,523 18,454 6% Interest credited to policyholder account balances...... 2,950 3,084 (4)% Policyholder dividends.................................. 1,942 2,086 (7)% Other expenses (excludes amounts directly related to net investment gains (losses) of $5 and $25, respectively)......................................... 7,015 7,022 (0)% ------- ------- Total expenses..................................... 31,430 30,646 3% ------- ------- Income from continuing operations before provision for income taxes.......................................... 1,636 570 187% Provision for income taxes.............................. 502 204 146% ------- ------- Income from continuing operations....................... 1,134 366 210% Income from discontinued operations, net of income taxes................................................. 471 107 340% ------- ------- Net income.............................................. $ 1,605 $ 473 239% ======= =======
Premiums increased by $1,865 million, or 11%, to $19,077 million for the year ended December 31, 2002 from $17,212 million for the comparable 2001 period. This variance is primarily attributable to increases in the Institutional, International and Reinsurance segments. A $957 million increase in Institutional is largely due to sales growth in its group life, dental, disability and long-term care businesses, a sale of a significant retirement and savings contract in the second quarter of 2002, as well as new sales throughout 2002 in this segment's structured settlements and traditional annuity products. The June 2002 acquisition of Hidalgo, the 2001 acquisitions in Chile and Brazil and the sale of an annuity contract in the first quarter of 2002 to a Canadian trust company are the primary drivers of a $665 million increase in International. A portion of the increase in International is also attributable to business growth in South Korea, Mexico (excluding Hidalgo) and Taiwan. In addition, an increase in Canada due to the restructuring of a pension contract from an investment-type product to a long-term annuity contributed to this variance. New premiums from facultative and automatic treaties, and renewal premiums on existing blocks of business contributed to a $243 million increase in the Reinsurance segment. Universal life and investment-type product policy fees increased by $258 million, or 14%, to $2,147 million for the year ended December 31, 2002 from $1,889 million for the comparable 2001 period. This variance is primarily attributable to the Individual, International and Institutional segments. A $119 million favorable variance in Individual is due to an increase in policy fees from insurance products, primarily due to higher revenue from insurance fees, which increase as the average separate account asset base supporting the underlying minimum death benefits declines. The average separate account asset base has declined in 2002 in 59 response to poor equity market performance. These increases are partially offset by lower policy fees from annuity and investment-type products generally resulting from poor equity market performance despite growth in annuity deposits. A $106 million increase in International is largely due to the acquisition of Hidalgo and the acquisitions in Chile, partially offset by the cessation of product lines offered through a joint venture with Banco Santander Central Hispano, S.A., ("Banco Santander") in 2001. A $32 million increase in Institutional is principally due to a fee related to the renegotiation of a portion of a bank-owned life insurance contract, as well as growth in existing business in the group universal life product. Net investment income increased by $74 million, or 1%, to $11,261 million for the year ended December 31, 2002 from $11,187 million for the comparable 2001 period. This variance is primarily attributable to increases of (i) $58 million, or 1%, in income from fixed maturities, (ii) $62 million, or 15%, in income from real estate and real estate joint ventures held-for-investment, net of investment expenses and depreciation, (iii) $35 million, or 2%, in income on mortgage loans on real estate, (iv) $7 million, or 1%, in interest income on policy loans, and (v) lower investment expenses of $9 million, or 4%. These variances are partially offset by decreases of (i) $47 million, or 17%, in income on cash, cash equivalents and short-term investments, (ii) $39 million, or 17%, in income on other invested assets, and (iii) $11 million, or 10%, in income from equity securities and other limited partnership interests. The increase in income from fixed maturities to $8,076 million in 2002 from $8,018 million in 2001 is largely due to a higher asset base, primarily resulting from increased cash flows from sales of insurance and the acquisitions in Mexico and Chile. In addition, securities lending income was higher due to increased activity and a more favorable cost of funds. The increases in income from fixed maturities are partially offset by decreases resulting from lower reinvestment rates and a decline in bond prepayment fees. The increase in income from real estate and real estate joint ventures held-for-investment to $477 million in 2002 from $415 million in 2001 is primarily due to the transfer of the Company's One Madison Avenue, New York property from a company use property to an investment property in 2002. The increase in income on mortgage loans on real estate to $1,883 million in 2002 from $1,848 million in 2001 is due primarily to a higher asset base from new loan production, partially offset by lower mortgage rates. The increase in interest income from policy loans to $543 million in 2002 from $536 million in 2001 is largely due to increased loans outstanding. The decrease in income from cash, cash equivalents and short-term investments to $232 million in 2002 from $279 million in 2001 is due to declining interest rates coupled with a decrease in the asset base. The decrease in net investment income from other invested assets to $186 million in 2002 from $225 million in 2001 is largely due to lower derivative income, partially offset by an increase in reinsurance contracts' funds withheld at interest. The decline in income from equity securities and other limited partnership interests to $99 million in 2002 from $110 million in 2001 primarily resulted from lower dividend income from equity securities, partially offset by higher limited corporate partnership distributions. The increase in net investment income is attributable to increases in the International, Individual and Reinsurance segments, partially offset by decreases in Corporate & Other, and the Institutional and Auto & Home segments. A $194 million increase in International is due to a higher asset base resulting from the acquisitions in Mexico and Chile. Individual increased by $79 million primarily due to higher income from securities lending and limited corporate partnership distributions, partially offset by lower bond prepayment fee income. The Reinsurance segment increased $31 million largely resulting from an increase in reinsurance contracts' funds withheld at interest. The decrease in Corporate & Other of $146 million is due to a lower asset base, resulting from funding International's acquisitions in Mexico and Chile, as well as the Company's common stock repurchases, partially offset by higher income from securities lending. Institutional decreased $49 million predominantly as a result of decreased limited partnership, equity-linked note and bond prepayment fee income. Auto & Home decreased $23 million primarily due to lower reinvestment rates. Other revenues decreased by $175 million, or 12%, to $1,332 million for the year ended December 31, 2002 from $1,507 million for the comparable 2001 period. This variance is primarily attributable to decreases in the Individual, Institutional, Asset Management segments and Corporate & Other. Individual decreased by $77 million resulting from lower commission and fee income associated with decreased volume in the broker/dealer and other subsidiaries as a result of the depressed equity markets. A $40 million decrease in Institutional is primarily due to a $73 million reduction in administrative fees as a result of the Company's exit 60 from the large market 401(k) business in late 2001, as well as lower fees earned on investments in separate accounts resulting generally from poor equity market performance. This reduction is partially offset by a $33 million increase in group insurance due to growth in the administrative service businesses and a settlement received in 2002 related to the Company's former medical business. A $32 million decrease in Asset Management is primarily due to the sale of Conning in July 2001. In addition, Corporate & Other decreased by $29 million principally due to the remeasurement of the Company's reinsurance recoverable associated with the sales practices reinsurance treaty in 2001, as well as an increase in the elimination of intersegment activity. This was partially offset from a gain on the sale of a company-occupied building, and income earned on corporate-owned life insurance ("COLI") purchased during 2002. The Company's investment gains and losses are net of related policyholder amounts. The amounts netted against investment gains and losses are (i) amortization of DAC, to the extent that such amortization results from investment gains and losses, (ii) adjustments to participating contractholder accounts when amounts equal to such investment gains and losses are applied to the contractholder's accounts, and (iii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. Net investment gains and losses increased by $172 million, or 30%, to $751 million for the year ended December 31, 2002 from $579 million for the comparable 2001 period. This increase reflects total investment gains (losses), before offsets, of $896 million (including gross gains of $1,836 million, gross losses of $1,091 million, writedowns of $1,501 million, and a net loss from derivatives of $140 million which includes scheduled periodic settlement payments on derivatives that do not qualify for hedge accounting of $32 million), an increase of $183 million, or 26%, from $713 million in 2001. Offsets include the amortization of DAC of ($5) million and ($25) million in 2002 and 2001, respectively, and changes in the policyholder dividend obligation of $157 million and $159 million in 2002 and 2001, respectively, and adjustments to participating contracts of ($7) million in 2002. Refer to "-- Investments" beginning on page 86 for a discussion of the Company's investment portfolio. The Company believes its policy of netting related policyholder amounts against investment gains and losses provides important information in evaluating its performance. Investment gains and losses are often excluded by investors when evaluating the overall financial performance of insurers. The Company believes its presentation enables readers to easily exclude investment gains and losses and the related effects on the consolidated statements of income when evaluating its performance. The Company's presentation of investment gains and losses, net of policyholder amounts, may be different from the presentation used by other insurance companies and, therefore, amounts in its consolidated statements of income may not be comparable to amounts reported by other insurers. Policyholder benefits and claims increased by $1,069 million, or 6%, to $19,523 million for the year ended December 31, 2002 from $18,454 million for the comparable 2001 period. This variance is attributable to increases in the International, Institutional and Reinsurance segments, partially offset by a decrease in the Auto & Home segment. A $699 million increase in International is primarily due to the acquisition of Hidalgo, the acquisitions in Chile and Brazil, the aforementioned sale of an annuity contract, the restructuring of a Canadian pension contract and business growth in South Korea, Mexico (excluding Hidalgo) and Taiwan. An increase in Institutional of $415 million is commensurate with the growth in premiums as discussed above, largely offset by the establishment of a liability in 2001 related to the September 11, 2001 tragedies and the 2001 fourth quarter business realignment initiatives. An increase in Reinsurance of $70 million is commensurate with the growth in premiums discussed above. These increases were partially offset by a decrease of $102 million in the Auto & Home segment. The variance in Auto & Home is largely due to improved claim frequency resulting from milder winter weather, lower catastrophe levels and fewer personal umbrella claims, partially offset by an increase in current year bodily injury and no-fault severities and costs associated with the processing of the New York assigned risk business. Interest credited to policyholder account balances decreased by $134 million, or 4%, to $2,950 million for the year ended December 31, 2002 from $3,084 million for the comparable 2001 period. This variance is attributable to decreases in the Individual and Institutional segments, partially offset by increases in the International and Reinsurance segments. A $105 million decrease in Individual is primarily due to the 61 establishment in 2001 of a policyholder liability with respect to certain group annuity contracts at New England Financial. Excluding this policyholder liability, interest credited expense increased slightly in response to an increase in policyholder account balances, which is primarily attributable to sales growth despite declines in interest crediting rates. An $81 million decrease in Institutional is primarily due to a decline in average crediting rates resulting from the current interest rate environment. These variances are partially offset by a net increase of $28 million in International. This increase is principally due to the acquisition of Hidalgo, partially offset by a reduction in the number of investment-type policies in-force in Argentina. In addition, a $24 million increase in Reinsurance is primarily due to several new annuity reinsurance agreements executed during 2002. Policyholder dividends decreased by $144 million, or 7%, to $1,942 million for the year ended December 31, 2002 from $2,086 million for the comparable 2001 period. This variance is attributable to a decrease in the Institutional segment resulting from unfavorable mortality experience of several large group clients. Institutional policyholder dividends vary from period to period based on participating contract experience, which is recorded in policyholder benefits and claims. Other expenses decreased by $7 million, or less than 1%, to $7,015 million for the year ended December 31, 2002 from $7,022 million for the comparable 2001 period. Excluding the capitalization and amortization of DAC, which are discussed below, other expenses increased by $68 million, or 1%, to $7,716 million in 2002 from $7,648 million in 2001. Excluding the capitalization and amortization of DAC and the change in accounting as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, ("SFAS 142"), which eliminates the amortization of goodwill and certain other intangibles, other expenses increased by $115 million. This variance is primarily attributable to increases in the Reinsurance and International segments, as well as in Corporate & Other, partially offset by decreases in the Institutional, Individual and Asset Management segments. A $209 million increase in Reinsurance is primarily attributable to increases in allowances paid, primarily driven by high-allowance business in the United Kingdom along with strong growth in the U.S. and Asia/Pacific regions. An increase of $166 million in International expenses is primarily due to the acquisition of Hidalgo, the acquisitions in Chile and Brazil, as well as business growth in South Korea, Mexico (excluding Hidalgo), and Hong Kong. An increase in Corporate & Other of $65 million is primarily due to increases in legal and interest expenses. The 2002 period includes a $266 million charge to increase the Company's asbestos-related liability, expenses to cover costs associated with the resolution of federal government investigations of General American's former Medicare business and a reduction of a previously established liability related to the Company's sales practices class action settlement. The 2001 period includes a $250 million charge recorded in the fourth quarter of 2001 to cover costs associated with the resolution of class action lawsuits and a regulatory inquiry pending against Metropolitan Life involving alleged race-conscious insurance underwriting practices prior to 1973. The increase in interest expenses is primarily due to increases in long-term debt resulting from the issuance of $1.25 billion and $1 billion of senior debt in November 2001 and December 2002, respectively, partially offset by a decrease in commercial paper in 2002. In addition, a decrease in the elimination of intersegment activity contributed to the variance. A decrease of $181 million in Institutional is due to higher expenses resulting from the business realignment initiatives accrual in the fourth quarter 2001 (primarily the Company's exit from the large market 401(k) business), $30 million of which was released into income in the fourth quarter of 2002. This decrease is partially offset by an increase in 2002 operational expenses for dental and disability and group insurance's non-deferrable expenses commensurate with the aforementioned premium growth, as well as higher pension and postretirement benefit expenses. A decrease of $105 million in Individual is due to continued expense management initiatives, including reduced compensation-related expenses, a decline in business realignment expenses that were incurred in 2001 and reductions in volume-related commission expenses in the broker/dealer and other subsidiaries. These declines are partially offset by higher pension and postretirement benefit expenses and an increase in expenses stemming from sales growth in new annuity and investment-type products. In addition, a decrease of $39 million in Asset Management is primarily due to the sale of Conning in July 2001. DAC is principally amortized in proportion to gross margins and profits, including investment gains or losses. The amortization is allocated to investment gains and losses to provide consolidated statement of 62 income information regarding the impact of investment gains and losses on the amount of the amortization, and other expenses to provide amounts related to gross margins and profits originating from transactions other than investment gains and losses. Capitalization of DAC increased by $301 million, or 15%, to $2,340 million for the year ended December 31, 2002 from $2,039 million for the comparable 2001 period. This variance is primarily due to increases in the Reinsurance, Individual, International and Institutional segments. A $125 million increase in Reinsurance is commensurate with the increase in allowances paid. A $111 million increase in Individual is due to higher sales of annuity and investment-type products, resulting in higher commissions and other deferrable expenses. A $51 million increase in International is primarily due to the 2002 acquisition of Hidalgo and overall business growth in South Korea, partially offset by a decrease in Argentina due to the reduction in business caused by the overall economic environment. A $22 million increase in Institutional is primarily due to growth in sales commissions and fees for disability products sold by Institutional. Total amortization of DAC increased by $206 million, or 14%, to $1,644 million in 2002 from $1,438 million in 2001. Amortization of DAC of $1,639 million and $1,413 million are allocated to other expenses in 2002 and 2001, respectively, while the remainder of the amortization in each period is allocated to investment gains and losses. The increase in amortization allocated to other expenses is attributable to increases in the Individual, International and Reinsurance segments. An increase of $111 million in Individual is due to the impact of the depressed equity markets and changes in the estimates of future gross profits. In 2002, estimates of future dividend scales, future maintenance expenses, future rider margins, and future reinsurance recoveries were revised. In 2001, estimates of future fixed account interest spreads, future gross margins and profits related to separate accounts and future mortality margins were revised. An increase in International of $64 million is primarily due to loss recognition in Argentina as a result of the economic environment, primarily the devaluation of its currency. The remaining increase was due to new business in South Korea, Taiwan, and the June 2002 acquisition of Hidalgo. An increase in Reinsurance of $55 million is due to growth in the business, commensurate with the growth in premiums described above. Income tax expense for the year ended December 31, 2002 was $502 million, or 31% of income from continuing operations before provision for income taxes, compared with $204 million, or 36%, for the comparable 2001 period. The 2002 effective tax rate differs from the federal corporate tax rate of 35% primarily due to the impact of non-taxable investment income. The 2001 effective tax rate differs from the federal corporate tax rate of 35%, due to an increase in prior year income taxes on capital gains. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), income related to the Company's real estate which was identified as held-for-sale on or after January 1, 2002 is presented as discontinued operations for the years ended December 31, 2002 and 2001. The income from discontinued operations is comprised of net investment income and net investment gains related to 47 properties that the Company began marketing for sale on or after January 1, 2002. For the year ended December 31, 2002, the Company recognized $582 million of net investment gains from discontinued operations due primarily to the sale of 36 properties. 63 INSTITUTIONAL The following table presents consolidated financial information for the Institutional segment for the years indicated:
YEAR ENDED DECEMBER 31, ---------------------------- 2002 2001 % CHANGE ------- ------- -------- (DOLLARS IN MILLIONS) REVENUES Premiums................................................ $ 8,245 $ 7,288 13% Universal life and investment-type product policy fees.................................................. 624 592 5% Net investment income................................... 3,918 3,967 (1)% Other revenues.......................................... 609 649 (6)% Net investment gains (losses) (net of amounts allocable from other accounts of $6 and ($105), respectively)... (494) (16) 2,988% ------- ------- Total revenues..................................... 12,902 12,480 3% ------- ------- EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment gains (losses) of $6 and ($105), respectively).......................... 9,339 8,924 5% Interest credited to policyholder account balances...... 932 1,013 (8)% Policyholder dividends.................................. 115 259 (56)% Other expenses.......................................... 1,531 1,746 (12)% ------- ------- Total expenses..................................... 11,917 11,942 (0)% ------- ------- Income from continuing operations before provision for income taxes.......................................... 985 538 83% Provision for income taxes.............................. 347 177 96% ------- ------- Income from continuing operations....................... 638 361 77% Income from discontinued operations, net of income taxes................................................. 121 21 476% ------- ------- Net income.............................................. $ 759 $ 382 99% ======= =======
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001 -- INSTITUTIONAL Premiums increased by $957 million, or 13%, to $8,245 million for the year ended December 31, 2002 from $7,288 million for the comparable 2001 period. Group insurance premiums increased by $496 million as a result of growth in this segment's group life, dental, disability and long-term care businesses. Retirement and savings premiums increased by $461 million primarily due to the sale of a significant contract in the second quarter of 2002, as well as new sales throughout 2002 from structured settlements and traditional annuity products. Retirement and savings premium levels are significantly influenced by large transactions and, as a result, can fluctuate from period to period. Universal life and investment-type product policy fees increased by $32 million, or 5%, to $624 million for the year ended December 31, 2002 from $592 million for the comparable 2001 period. This increase is primarily attributable to a fee resulting from the renegotiation of a portion of a bank-owned life insurance contract, as well as growth in existing business in the group universal life product line. Other revenues decreased by $40 million, or 6%, to $609 million for the year ended December 31, 2002 from $649 million for the comparable 2001 period. Retirement and savings other revenues decreased $73 million primarily due to a reduction in administrative fees as a result of the Company's exit from the large market 401(k) business in late 2001, and lower fees earned on investments in separate accounts resulting generally from poor equity market performance. This decrease is partially offset by a $33 million increase in 64 group insurance due to growth in the administrative service businesses and a settlement received in 2002 related to the Company's former medical business. Policyholder benefits and claims increased by $415 million, or 5%, to $9,339 million for the year ended December 31, 2002 from $8,924 million for the comparable 2001 period. This variance is attributable to increases of $238 million and $177 million in group insurance and retirement and savings, respectively. Excluding $291 million of 2001 claims related to the September 11, 2001 tragedies, group insurance policyholder benefits and claims increased by $529 million commensurate with the aforementioned premium growth in this segment's group life, dental, disability, and long-term care businesses. Excluding $215 million of 2001 policyholder benefits related to the fourth quarter 2001 business realignment initiatives, retirement and savings policyholder benefits increased $392 million, commensurate with the aforementioned premium growth. Interest credited to policyholders decreased by $81 million, or 8%, to $932 million for the year ended December 31, 2002 from $1,013 million for the comparable 2001 period. Decreases of $42 million and $39 million in retirement and savings and group insurance, respectively, are primarily attributable to declines in the average crediting rates in 2002 as a result of the current low interest rate environment. Policyholder dividends decreased by $144 million, or 56%, to $115 million for the year ended December 31, 2002 from $259 million for the comparable 2001 period. This decline is largely attributable to unfavorable mortality experience of several large group clients. Policyholder dividends vary from period to period based on participating contract experience, which are generally recorded in policyholder benefits and claims. Other expenses decreased by $215 million, or 12%, to $1,531 million for the year ended December 31, 2002 from $1,746 million in the comparable 2001 period. Retirement and savings decreased by $293 million, primarily attributable to $184 million of accrued expenses related to business realignment initiatives recorded in the fourth quarter of 2001 (predominantly related to the Company's exit from the large market 401(k) business), $30 million of which was released into income in the fourth quarter of 2002. In addition, ongoing expenses for the defined contribution product have steadily decreased throughout 2002. The net reduction in retirement and savings is partially offset by an increase in pension and postretirement costs. Group insurance other expenses increased by $78 million. This increase is mainly attributable to growth in operational expenses for the dental and disability products, as well as group insurance's non-deferrable expenses, including a certain portion of premium taxes and commissions. These variances are commensurate with the aforementioned premium growth. In addition, an increase in pension and postretirement costs contributed to the variance. 65 INDIVIDUAL The following table presents consolidated financial information for the Individual segment for the years indicated:
YEAR ENDED DECEMBER 31, ---------------------------- 2002 2001 % CHANGE ------- ------- -------- (DOLLARS IN MILLIONS) REVENUES Premiums................................................ $ 4,507 $ 4,563 (1)% Universal life and investment-type product policy fees.................................................. 1,379 1,260 9% Net investment income................................... 6,244 6,165 1% Other revenues.......................................... 418 495 (16)% Net investment gains (losses) (net of amounts allocable from other accounts of ($147) and ($134), respectively)......................................... (144) 853 (117)% ------- ------- Total revenues..................................... 12,404 13,336 (7)% ------- ------- EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment gains (losses) of ($157) and ($159), respectively)...................... 5,220 5,233 (0)% Interest credited to policyholder account balances...... 1,793 1,898 (6)% Policyholder dividends.................................. 1,770 1,767 0% Other expenses (excludes amounts directly related to net investment gains (losses) of $10 and $25, respectively)......................................... 2,629 2,747 (4)% ------- ------- Total expenses..................................... 11,412 11,645 (2)% ------- ------- Income from continuing operations before provision for income taxes.......................................... 992 1,691 (41)% Provision for income taxes.............................. 365 632 (42)% ------- ------- Income from continuing operations....................... 627 1,059 (41)% Income from discontinued operations, net of income taxes................................................. 199 36 453% ------- ------- Net income.............................................. $ 826 $ 1,095 (25)% ======= =======
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001 -- INDIVIDUAL Premiums decreased by $56 million, or 1%, to $4,507 million for the year ended December 31, 2002 from $4,563 million for the comparable 2001 period. Premiums from insurance products decreased by $94 million, primarily resulting from a third quarter 2002 amendment of a reinsurance agreement to increase the amount of insurance ceded from 50% to 100%. This amendment was effective January 1, 2002. The Company also believes the decline is the result of a continued shift in policyholders' preference from traditional policies to annuity and investment-type products. These decreases are partially offset by policyholders expanding their traditional life insurance coverage through the purchase of additional insurance with dividend proceeds in 2002. Premiums from annuity products increased by $38 million as a result of higher sales of fixed annuities and supplementary contracts with life contingencies. Universal life and investment-type product policy fees increased by $119 million, or 9%, to $1,379 million for the year ended December 31, 2002 from $1,260 million for the comparable 2001 period. Policy fees from insurance products increased by $144 million primarily due to higher revenue from insurance fees, which increase as the average separate account asset base supporting the underlying minimum death benefit declines. The average separate account asset base has declined in response to poor equity market performance. Additionally, this variance reflects the acceleration of the recognition of unearned fees associated with future reinsurance recoveries. Policy fees from annuity and investment-type products decreased by $25 million 66 primarily due to declines in the average separate account asset base resulting generally from poor equity market performance, partially offset by an increase in fees resulting from growth in annuity deposits. Policy fees from annuity and investment-type products are typically calculated as a percentage of average separate account assets. Such assets can fluctuate depending on equity market performance. Other revenues decreased by $77 million, or 16%, to $418 million for the year ended December 31, 2002 from $495 million for the comparable 2001 period, largely due to lower commission and fee income associated with a volume decline in the broker/dealer and other subsidiaries which is principally due to the depressed equity markets. The Company's investment gains and losses are net of related policyholder amounts. The amounts netted against investment gains and losses are (i) amortization of DAC, to the extent that such amortization results from investment gains and losses, (ii) adjustments to participating contractholder accounts when amounts equal to such investment gains and losses are applied to the contractholder's accounts, and (iii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. The Company believes its policy of netting related policyholder amounts against investment gains and losses provides important information in evaluating its performance. Investment gains and losses are often excluded by investors when evaluating the overall financial performance of insurers. The Company believes its presentation enables readers to easily exclude investment gains and losses and the related effects on the consolidated statements of income when evaluating its performance. The Company's presentation of investment gains and losses, net of policyholder amounts, may be different from the presentation used by other insurance companies and, therefore, amounts in its consolidated statements of income may not be comparable to amounts reported by other insurers. Policyholder benefits and claims decreased by $13 million, or less than 1%, to $5,220 million for the year ended December 31, 2002 from $5,233 million for the comparable 2001 period. Policyholder benefits and claims for insurance products decreased by $119 million, primarily due to the impact of the aforementioned reinsurance transaction and the establishment of liabilities for the September 11, 2001 tragedies in the previous year. Policyholder benefits and claims for annuity and investment-type products increased by $106 million primarily due to an increase in fixed and immediate annuity liabilities, resulting from business growth and an increase in the liability associated with guaranteed minimum death benefits on variable annuities. Interest credited to policyholder account balances decreased by $105 million, or 6%, to $1,793 million for the year ended December 31, 2002 compared with $1,898 for the comparable 2001 period. This decrease was primarily due to the establishment of a $118 million policyholder liability with respect to certain group annuity contracts at New England Financial in 2001. Excluding this policyholder liability, interest credited increased slightly due to an increase in policyholder account balances which is primarily attributable to sales growth partially offset by declines in interest crediting rates. Policyholder dividends increased by $3 million, or less than 1%, to $1,770 million for the year ended December 31, 2002 from $1,767 million for the comparable 2001 period due to the increase in the invested assets supporting the policies associated with this segment's large block of traditional life insurance business. This increase is partially offset by the approval by the Company's Board of Directors in the fourth quarter of 2002 of a reduction in the dividend scale to reflect the impact of the current low interest rate environment on the asset portfolios supporting these policies. Other expenses decreased by $118 million, or 4%, to $2,629 million for the year ended December 31, 2002 million from $2,747 for the comparable 2001 period. Excluding the capitalization and amortization of DAC, which are discussed below, other expenses decreased by $118 million, or 4%, to $2,922 million in 2002 from $3,040 million in 2001. Other expenses related to insurance products decreased by $129 million, which is attributable to continued expense management, reductions in volume-related commission expenses in the broker/dealer and other subsidiaries and a reduction of $62 million related to business realignment expenses incurred in 2001. These decreases are partially offset by increased pension and postretirement benefit expenses over the comparable period. Other expenses related to annuity and investment-type products increased by 67 $11 million. This increase is commensurate with the rise in sales of new annuity and investment-type products, as well as increased pension and postretirement benefit expenses. This increase is partially offset by the reduction of $37 million of business realignment expenses incurred in 2001. DAC is principally amortized in proportion to gross margins or gross profits, including investment gains or losses. The amortization is allocated to investment gains and losses to provide consolidated statement of income information regarding the impact of investment gains and losses on the amount of the amortization, and other expenses to provide amounts related to gross margins or profits originating from transactions other than investment gains and losses. Capitalization of DAC increased by $111 million, or 12%, to $1,037 million for the year ended December 31, 2002 from $926 million for the comparable 2001 period due to higher sales of annuity and investment-type products, resulting in higher commissions and other deferrable expenses. Total amortization of DAC increased by $100 million, or 15%, to $754 million in 2002 from $654 million in 2001. Amortization of DAC of $744 million and $633 million is allocated to other expenses in 2002 and 2001, respectively, while the remainder of the amortization in each year is allocated to investment gains and losses. Increases in amortization of DAC allocated to other expenses of $84 million and $27 million related to insurance products and annuity and investment-type products, respectively, are due to the impact of the depressed equity markets and changes in the estimates of future gross profits. In 2002, estimates of future dividend scales, future maintenance expenses, future rider margins, and future reinsurance recoveries were revised. In 2001, estimates of future fixed account interest spreads, future gross margins and profits related to separate accounts and future mortality margins were revised. AUTO & HOME The following table presents consolidated financial information for the Auto & Home segment for the years indicated:
YEAR ENDED DECEMBER 31, -------------------------- 2002 2001 % CHANGE ------ ------ -------- (DOLLARS IN MILLIONS) REVENUES Premiums.................................................. $2,828 $2,755 3% Net investment income..................................... 177 200 (12)% Other revenues............................................ 26 22 18% Net investment gains (losses)............................. (46) (17) 171% ------ ------ Total revenues....................................... 2,985 2,960 1% ------ ------ EXPENSES Policyholder benefits and claims.......................... 2,019 2,121 (5)% Other expenses............................................ 793 800 (1)% ------ ------ Total expenses....................................... 2,812 2,921 (4)% ------ ------ Income before provision (benefit) for income taxes........ 173 39 344% Provision (benefit) for income taxes...................... 41 (2) 2,150% ------ ------ Net income................................................ $ 132 $ 41 222% ====== ======
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001 -- AUTO & HOME Premiums increased by $73 million, or 3%, to $2,828 million for the year ended December 31, 2002 from $2,755 million for the comparable 2001 period. Auto and property premiums increased by $66 million and $1 million, respectively, primarily due to increases in average premium earned per policy resulting from rate increases. The impact on premiums from rate increases was partially offset by an expected reduction in retention and a reduction in new business sales. Premiums from other personal lines increased by $6 million. 68 Other revenues increased by $4 million, or 18%, to $26 million for the year ended December 31, 2002 from $22 million for the comparable 2001 period. This increase was primarily due to income earned on a COLI policy purchased in the second quarter of 2002, as well as higher fees on installment payments. These increases were partially offset by an adjustment to a deferred gain related to the disposition of this segment's reinsurance business in 1990. Policyholder benefits and claims decreased by $102 million, or 5%, to $2,019 million for the year ended December 31, 2002 from $2,121 million for the comparable 2001 period. Property policyholder benefits and claims decreased by $120 million due to improved claim frequency, underwriting and agency management actions, and a $41 million reduction in catastrophe losses. Property catastrophes represented 7.4% of the property loss ratio in 2002 compared to 13.5% in 2001. Other policyholder benefits and claims decreased by $10 million due to fewer personal umbrella claims. Fluctuations in these policyholder benefits and claims may not be commensurate with the change in premiums for a given period due to low premium volume and high liability limits. Auto policyholder benefits and claims increased by $28 million largely due to an increase in current year bodily injury and no-fault severities. Costs associated with the processing of the New York assigned risk business also contributed to this increase. These increases were partially offset by improved claim frequency resulting from milder winter weather, underwriting and agency management actions, as well as lower catastrophe losses. Other expenses decreased by $7 million, or 1%, to $793 million for the year ended December 31, 2002 from $800 million for the comparable 2001 period. This decrease is primarily due to reduced employee head-count and reduced expenses associated with the consolidation of The St. Paul business acquired in 1999. These declines are partially offset by an increase in expenses related to the outsourced New York assigned risk business. The effective income tax rates for the year ended December 31, 2002 and 2001 differ from the federal corporate tax rate of 35% due to the impact of non-taxable investment income. 69 INTERNATIONAL The following table presents consolidated financial information for the International segment for the years indicated:
YEAR ENDED DECEMBER 31, -------------------------- 2002 2001 % CHANGE ------ ------ -------- (DOLLARS IN MILLIONS) REVENUES Premiums.................................................. $1,511 $ 846 79% Universal life and investment-type product policy fees.... 144 38 279% Net investment income..................................... 461 267 73% Other revenues............................................ 14 16 (13)% Net investment gains (losses)............................. (9) (16) (44)% ------ ------ Total revenues....................................... 2,121 1,151 84% ------ ------ EXPENSES Policyholder benefits and claims.......................... 1,388 689 101% Interest credited to policyholder account balances........ 79 51 55% Policyholder dividends.................................... 35 36 (3)% Other expenses............................................ 507 329 54% ------ ------ Total expenses....................................... 2,009 1,105 82% ------ ------ Income from continuing operations before provision for income taxes............................................ 112 46 143% Provision for income taxes................................ 28 32 (13)% ------ ------ Net income................................................ $ 84 $ 14 500% ====== ======
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001 -- INTERNATIONAL Premiums increased by $665 million, or 79%, to $1,511 million for the year ended December 31, 2002 from $846 million for the comparable 2001 period. The June 2002 acquisition of Hidalgo and the 2001 acquisitions in Chile and Brazil increased premiums by $228 million, $102 million and $8 million, respectively. In addition, a portion of the increase in premiums is attributable to a $108 million increase due to the sale of an annuity contract in the first quarter of 2002 to a Canadian trust company. South Korea's premiums increased by $91 million primarily due to a larger professional sales force and improved agent productivity. Mexico's premiums (excluding Hidalgo), increased by $66 million, primarily due to increases in its group life, major medical and individual life businesses. Excluding the aforementioned sale of an annuity contract, Canada's premiums increased by $26 million due to the restructuring of a pension contract from an investment-type product to a long-term annuity. Taiwan's premiums increased by $13 million due primarily to continued growth in the individual life insurance business. Hong Kong's premiums increased $5 million primarily due to continued growth in the group life and traditional life businesses. These increases are partially offset by a decrease in Argentina's premiums of $9 million due to the reduction in business caused by the Argentine economic environment. The remainder of the variance is attributable to minor fluctuations in other countries. Universal life and investment type-product policy fees increased by $106 million, or 279%, to $144 million for the year ended December 31, 2002 from $38 million for the comparable 2001 period. The acquisition of Hidalgo and the acquisitions in Chile resulted in increases of $102 million and $5 million, respectively. These increases were partially offset by a $9 million decrease in Spain due to a reduction in fees caused by a decline in assets under management, as a result of the cessation of product lines offered through a joint venture with Banco Santander in 2001. The remainder of the variance is attributable to minor fluctuations in several countries. 70 Other revenues decreased by $2 million, or 13%, to $14 million for the year ended December 31, 2002 from $16 million for the comparable 2001 period. Canada's other revenues in 2001 included $1 million due primarily to the settlement of two legal cases in 2001. The remainder of the variance is attributable to minor fluctuations in several countries. The acquisition of Hidalgo and the acquisitions in Chile and Brazil had no material impact on this variance. Policyholder benefits and claims increased by $699 million, or 101%, to $1,388 million for the year ended December 31, 2002 from $689 million for the comparable 2001 period. The acquisition of Hidalgo and the acquisitions in Chile increased policyholder benefits and claims by $224 million and $169 million, respectively. In addition, $108 million of this increase in policyholder benefits and claims is attributable to the aforementioned sale of an annuity contract in Canada. South Korea's, Mexico's (excluding Hidalgo), Taiwan's and Spain's policyholder benefits and claims increased by $69 million, $67 million, $18 million and $15 million, respectively, commensurate with the overall premium increases discussed above. Excluding the aforementioned sale of an annuity contract, Canada's policyholder benefits and claims increased by $32 million primarily due to the restructuring of a pension contract from an investment-type product to a long-term annuity. The remainder of the variance is attributable to minor fluctuations in several countries. Interest credited to policyholder account balances increased by $28 million, or 55%, to $79 million for the year ended December 31, 2002 from $51 million for the comparable 2001 period. The acquisition of Hidalgo contributed $51 million. This increase was partially offset by a decrease of $17 million in Argentina. This decrease is primarily due to modifications to policy contracts as authorized by the Argentinean government and a reduction of investment-type policies in-force. In addition, Spain's interest credited decreased by $7 million primarily due to a decrease in the assets under management for life products with guarantees associated with the sale of a block of policies to Banco Santander in May 2001. The remainder of the variance is attributable to minor fluctuations in several countries. Policyholder dividends remained essentially unchanged at $35 million for the year ended December 31, 2002 versus $36 million for the comparable 2001 period. The acquisition of Hidalgo and the acquisitions in Chile and Brazil had no material impact on this variance. Other expenses increased by $178 million, or 54%, to $507 million for the year ended December 31, 2002 from $329 million for the comparable 2001 period. The acquisition of Hidalgo and the acquisitions in Chile and Brazil contributed $82 million, $21 million and $5 million, respectively. South Korea's, Mexico's (excluding Hidalgo), and Hong Kong's other expenses increased by $29 million, $19 million and $7 million, respectively. These increases are primarily due to increased non-deferrable commissions from higher sales as discussed above, particularly in South Korea where fixed sales compensation is paid to new sales management as part of the professional agency expansion. Argentina's other expenses increased by $9 million due to additional loss recognition in connection with ongoing economic circumstances in the country. Poland's other expenses increased by $5 million primarily due to costs incurred in the fourth quarter of 2002 associated with the closing of this operation. The remainder of the variance is attributable to minor fluctuations in several countries. 71 REINSURANCE The following table presents consolidated financial information for the Reinsurance segment for the years indicated:
YEAR ENDED DECEMBER 31, -------------------------- 2002 2001 % CHANGE ------ ------ -------- (DOLLARS IN MILLIONS) REVENUES Premiums.................................................. $2,005 $1,762 14% Net investment income..................................... 421 390 8% Other revenues............................................ 43 42 2% Net investment gains (losses)............................. 2 (6) 133% ------ ------ Total revenues....................................... 2,471 2,188 13% ------ ------ EXPENSES Policyholder benefits and claims.......................... 1,554 1,484 5% Interest credited to policyholder account balances........ 146 122 20% Policyholder dividends.................................... 22 24 (8)% Other expenses............................................ 622 491 27% ------ ------ Total expenses....................................... 2,344 2,121 11% ------ ------ Income before provision for income taxes.................. 127 67 90% Provision for income taxes................................ 43 27 59% ------ ------ Net income................................................ $ 84 $ 40 110% ====== ======
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001 -- REINSURANCE Premiums increased by $243 million, or 14%, to $2,005 million for the year ended December 31, 2002 from $1,762 million for the comparable 2001 period. New premiums from facultative and automatic treaties and renewal premiums on existing blocks of business, particularly in the U.S. and United Kingdom reinsurance operations, all contributed to the premium growth. Premium levels are significantly influenced by large transactions and reporting practices of ceding companies and, as a result, can fluctuate from period to period. Other revenues remained essentially unchanged at $43 million for the year ended December 31, 2002 versus $42 million for the comparable 2001 period. Policyholder benefits and claims increased by $70 million, or 5%, to $1,554 million for the year ended December 31, 2002 from $1,484 million for the comparable 2001 period. Policyholder benefits and claims were 78% of premiums for the year ended December 31, 2002 compared to 84% in the comparable 2001 period. The decrease in policyholder benefits and claims as a percentage of premiums is primarily attributable to higher than expected mortality in the U.S. reinsurance operations during the first and fourth quarters of 2001, favorable claims experience in 2002 and the 2001 impact of claims associated with the September 11, 2001 tragedies. In addition, increases in the liabilities for future policyholder benefits and adverse results on the reinsurance of Argentine pension business during 2001 contributed to the decrease. The level of claims may fluctuate from period to period, but exhibits less volatility over the long term. Interest credited to policyholder account balances increased by $24 million, or 20%, to $146 million for the year ended December 31, 2002 from $122 million for the comparable 2001 period. Contributing to this growth were several new annuity reinsurance agreements executed during 2002. The crediting rate on certain blocks of annuities is based on the performance of the underlying assets. Policyholder dividends were essentially unchanged at $22 million for the year ended December 31, 2002, versus $24 million for the 2001 comparable period. 72 Other expenses increased by $131 million, or 27%, to $622 million for the year ended December 31, 2002 from $491 million for the comparable 2001 period. The increase in other expenses is primarily attributable to an increase in reinsurance business in the United Kingdom, which is characterized by higher initial reinsurance allowances than those historically experienced in the segment. These expenses fluctuate depending on the mix of the underlying insurance products being reinsured as allowances paid and the related capitalization and amortization can vary significantly based on the type of business and the reinsurance treaty. ASSET MANAGEMENT The following table presents consolidated financial information for the Asset Management segment for the years indicated:
YEAR ENDED DECEMBER 31, ------------------------- 2002 2001 % CHANGE ----- ----- --------- (DOLLARS IN MILLIONS) REVENUES Net investment income....................................... $ 59 $ 71 (17)% Other revenues.............................................. 166 198 (16)% Net investment gains (losses)............................... (4) 25 (116)% ---- ---- Total revenues......................................... 221 294 (25)% ---- ---- OTHER EXPENSES.............................................. 211 252 (16)% ---- ---- Income before provision for income taxes.................... 10 42 (76)% Provision for income taxes.................................. 4 15 (73)% ---- ---- Net income.................................................. $ 6 $ 27 (78)% ==== ====
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001 -- ASSET MANAGEMENT Other revenues, which primarily consist of management and advisory fees from third parties, decreased by $32 million, or 16%, to $166 million for the year ended December 31, 2002 from $198 million for the comparable 2001 period. The most significant factor contributing to this decline is a $31 million decrease resulting from the sale of Conning, which occurred in July 2001. Excluding the impact of this transaction, other revenues remained essentially unchanged at $166 million for the year ended December 31, 2002 as compared to $167 million for the year ended December 31, 2001. Despite lower average assets under management, revenues remained constant due to performance and incentive fees earned on certain real estate and hedge fund products. The lower assets under management are primarily due to institutional client withdrawals, and the downturn in the equity market. In addition, fourth quarter 2002 product closings and business exits also contributed to this decline. Other expenses decreased by $41 million, or 16%, to $211 million for the year ended December 31, 2002 from $252 million for the comparable 2001 period. Excluding the impact of the sale of Conning, other expenses decreased by $6 million, or 3%, to $211 million in 2002 from $217 million in 2001. This decrease is due to reductions in marketing-related expenses and expenses related to fund reimbursements. In addition, a decrease in amortization of deferred sales commissions resulted from a reduction in sales. These decreases were partially offset by a $5 million increase in employee compensation attributable to severance-related expenses resulting from third and fourth quarter 2002 staff reductions. CORPORATE & OTHER YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001 -- CORPORATE & OTHER Other revenues decreased by $29 million, or 34%, to $56 million for the year ended December 31, 2002 from $85 million for the comparable 2001 period. This is primarily attributable to the remeasurement of the Company's reinsurance recoverable associated with the sales practices reinsurance treaty in 2001, as well as 73 an increase in the elimination of intersegment activity. This is partially offset from a gain on the sale of a company-occupied building, and income earned on COLI purchased during 2002. Other expenses increased by $65 million, or 10%, to $722 million for the year ended December 31, 2002 from $657 million for the comparable 2001 period, primarily due to increases in legal and interest expenses. The 2002 period includes a $266 million charge to increase the Company's asbestos-related liability, expenses to cover costs associated with the resolution of federal government investigations of General American's former Medicare business and a reduction of a previously established liability related to the Company's sales practices class action settlement. The 2001 period includes a $250 million charge recorded in the fourth quarter of 2001 to cover costs associated with the resolution of class action lawsuits and a regulatory inquiry pending against Metropolitan Life, involving alleged race-conscious insurance underwriting practices prior to 1973. The increase in interest expenses is primarily due to increases in long-term debt resulting from the issuance of $1.25 billion and $1 billion of senior debt in November 2001 and December 2002, respectively, partially offset by a decrease in commercial paper in 2002. In addition, a decrease in the elimination of intersegment activity contributed to the variance. BUSINESS REALIGNMENT INITIATIVES During the fourth quarter of 2001, the Company implemented several business realignment initiatives, which resulted from a strategic review of operations and an ongoing commitment to reduce expenses. The impact of these actions on a segment basis were charges of $399 million in Institutional, $97 million in Individual and $3 million in Auto & Home. The liability at December 31, 2003 and 2002 was $27 million and $40 million, in the Institutional segment and $9 million and $18 million, in the Individual segment, respectively. The remaining liability is due to certain contractual obligations. SEPTEMBER 11, 2001 TRAGEDIES On September 11, 2001, terrorist attacks occurred in New York, Washington, D.C. and Pennsylvania (the "tragedies") triggering a significant loss of life and property, which had an adverse impact on certain of the Company's businesses. The Company's original estimate of the total insurance losses related to the tragedies, which was recorded in the third quarter of 2001, was $208 million, net of income taxes of $117 million. As of December 31, 2003 and 2002, the Company's remaining liability for unpaid and future claims associated with the tragedies was $9 million and $47 million, respectively, principally related to disability coverages. This estimate has been and will continue to be subject to revision in subsequent periods, as claims are received from insureds and processed. Any revision to the estimate of losses in subsequent periods will affect net income in such periods. METLIFE CAPITAL TRUST I In connection with MetLife, Inc.'s, initial public offering in April 2000, the Holding Company and MetLife Capital Trust I (the "Trust") issued equity security units (the "units"). Each unit originally consisted of (i) a contract to purchase, for $50, shares of the Holding Company's common stock (the "purchase contracts") on May 15, 2003; and (ii) a capital security of the Trust, with a stated liquidation amount of $50. In accordance with the terms of the units, the Trust was dissolved on February 5, 2003, and $1,006 million aggregate principal amount of 8.00% debentures of the Holding Company (the "MetLife debentures"), the sole assets of the Trust, were distributed to the owners of the Trust's capital securities in exchange for their capital securities. The MetLife debentures were remarketed on behalf of the debenture owners on February 12, 2003 and the interest rate on the MetLife debentures was reset as of February 15, 2003 to 3.911% per annum for a yield to maturity of 2.876%. As a result of the remarketing, the debenture owners received $21 million ($0.03 per diluted common share) in excess of the carrying value of the capital securities. This excess was recorded by the Company as a charge to additional paid-in capital and, for the purpose of calculating earnings per share, is subtracted from net income to arrive at net income available to common shareholders. 74 On May 15, 2003, the purchase contracts associated with the units were settled. In exchange for $1,006 million, the Company issued 2.97 shares of MetLife, Inc. common stock per purchase contract, or approximately 59.8 million shares of treasury stock. The excess of the Company's cost of the treasury stock ($1,662 million) over the contract price of the stock issued to the purchase contract holders ($1,006 million) was $656 million, which was recorded as a direct reduction to retained earnings. Interest expense on the capital securities is included in other expenses and was $10 million, $81 million and $81 million for the years ended December 31, 2003, 2002 and 2001, respectively. LIQUIDITY AND CAPITAL RESOURCES THE HOLDING COMPANY Capital Restrictions and Limitations on Bank Holding Companies and Financial Holding Companies -- Capital. MetLife, Inc. and its insured depository institution subsidiary, MetLife Bank, N.A. ("MetLife Bank"), a national bank, are subject to risk-based and leverage capital guidelines issued by the federal banking regulatory agencies for banks and financial holding companies. The federal banking regulatory agencies are required by law to take specific prompt corrective actions with respect to institutions that do not meet minimum capital standards. At December 31, 2003, MetLife, Inc. and MetLife Bank were in compliance with the aforementioned guidelines. The following table contains the RBC ratios as of December 31, 2003 and 2002 and the regulatory requirements for MetLife Inc., as a bank holding company, and MetLife Bank: METLIFE, INC. RBC RATIOS -- BANK HOLDING COMPANY
AS OF DECEMBER 31, ---------------------------------------------------- REGULATORY REGULATORY REQUIREMENTS REQUIREMENTS 2003 2002 MINIMUM "WELL CAPITALIZED" ------ ----- ------------ -------------------- Total RBC Ratio........................ 11.19% 9.75% 8.00% 10.00% Tier 1 RBC Ratio....................... 9.19% 7.93% 4.00% 6.00% Tier 1 Leverage Ratio.................. 6.12% 5.59% 4.00% 5.00%
METLIFE BANK RBC RATIOS -- BANK
AS OF DECEMBER 31, ----------------------------------------------------- REGULATORY REGULATORY REQUIREMENTS REQUIREMENTS 2003 2002 MINIMUM "WELL CAPITALIZED" ------ ------ ------------ -------------------- Total RBC Ratio....................... 13.12% 25.75% 8.00% 10.00% Tier 1 RBC Ratio...................... 12.50% 25.39% 4.00% 6.00% Tier 1 Leverage Ratio................. 8.81% 18.33% 4.00% 5.00%
Liquidity Liquidity refers to a company's ability to generate adequate amounts of cash to meet its needs. It is managed to preserve stable, reliable and cost-effective sources of cash to meet all current and future financial obligations and is provided by a variety of sources, including a portfolio of liquid assets, a diversified mix of short and long-term funding sources from the wholesale financial markets and the ability to borrow through committed credit facilities. The Holding Company is an active participant in the global financial markets through which it obtains a significant amount of funding. These markets, which serve as cost-effective sources of funds, are critical components of the Holding Company's liquidity management. Decisions to access these 75 markets are based upon relative costs, prospective views of balance sheet growth, and a targeted liquidity profile. A disruption in the financial markets could limit the Holding Company's access to liquidity. The Holding Company's ability to maintain regular access to competitively priced wholesale funds is fostered by its current debt ratings from the major credit rating agencies. Management views its capital ratios, credit quality, stable and diverse earnings streams, diversity of liquidity sources and its liquidity monitoring procedures as critical to retaining high credit ratings. Liquidity is monitored through the use of internal liquidity risk metrics, including the composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, access to the financial markets for capital and term-debt transactions, and exposure to contingent draws on the Holding Company's liquidity. Liquidity Sources Dividends. The primary source of the Holding Company's liquidity is dividends it receives from Metropolitan Life. Under the New York Insurance Law, Metropolitan Life is permitted, without prior insurance regulatory clearance, to pay a cash dividend to the Holding Company as long as the aggregate amount of all such dividends in any calendar year does not exceed the lesser of (i) 10% of its statutory surplus as of the immediately preceding calendar year; and (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains). Metropolitan Life will be permitted to pay a cash dividend to the Holding Company in excess of the lesser of such two amounts only if it files notice of its intention to declare such a dividend and the amount thereof with the New York Superintendent of Insurance (the "Superintendent") and the Superintendent does not disapprove the distribution. Under the New York Insurance Law, the Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its stockholders. The New York Insurance Department (the "Department") has established informal guidelines for such determinations. The guidelines, among other things, focus on the insurer's overall financial condition and profitability under statutory accounting practices. Management of the Holding Company cannot provide assurance that Metropolitan Life will have statutory earnings to support payment of dividends to the Holding Company in an amount sufficient to fund its cash requirements and pay cash dividends or that the Superintendent will not disapprove any dividends that Metropolitan Life must submit for the Superintendent's consideration. In addition, the Holding Company receives dividends from its other subsidiaries. The Holding Company's other insurance subsidiaries are also subject to similar restrictions on the payment of dividends to their respective parent companies. The dividend limitation is based on statutory financial results. Statutory accounting practices, as prescribed by insurance regulators of various states in which the Company conducts business, differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP. The significant differences relate to the treatment of DAC, certain deferred income taxes, required investment reserves, reserve calculation assumptions, goodwill and surplus notes. As of December 31, 2003, the maximum amount of the dividend which may be paid to the Holding Company by Metropolitan Life, Metropolitan Property and Casualty Insurance Company and Metropolitan Insurance and Annuity Company in 2004, without prior regulatory approval, is $798 million, $200 million and $185 million, respectively. Liquid Assets. An integral part of the Holding Company's liquidity management is the amount of liquid assets that it holds. Liquid assets include cash, cash equivalents, short-term investments and marketable fixed maturity and equity securities. Liquid assets exclude assets relating to securities lending and dollar roll activities. At December 31, 2003 and 2002, the Holding Company had $1,320 million and $846 million in liquid assets, respectively. Global Funding Sources. Liquidity is also provided by a variety of both short and long-term instruments, including repurchase agreements, commercial paper, medium and long-term debt, capital securities 76 and stockholders' equity. The diversification of the Holding Company's funding sources enhances funding flexibility and limits dependence on any one source of funds, and generally lowers the cost of funds. At December 31, 2003 and 2002, the Holding Company had $106 million and $249 million of short-term debt outstanding, and $3.96 billion and $3.27 billion in long-term debt outstanding, respectively. The Holding Company filed a $5.0 billion shelf registration statement with the U.S. Securities and Exchange Commission ("SEC"), which became effective on March 4, 2004. The shelf registration will permit the registration and issuance of a wide range of debt and equity securities, including preferred securities of a subsidiary trust guaranteed by MetLife Inc., as described more fully therein. Approximately $44 million of registered but unissued securities remaining from the Company's 2001 $4.0 billion shelf registration statement has been carried over to this shelf registration. The Holding Company issued and remarketed senior debt and debentures in the amount of $3.96 billion under the 2001 $4.0 billion shelf registration statement. The following table summarizes the Holding Company's senior debt issuances:
INTEREST ISSUE DATE PRINCIPAL RATE MATURITY - ---------- --------------------- -------- -------- (DOLLARS IN MILLIONS) November 2003..................................... $500 5.00% 2013 November 2003..................................... $200 5.88% 2033 December 2002..................................... $400 5.38% 2012 December 2002..................................... $600 6.50% 2032 November 2001..................................... $500 5.25% 2006 November 2001..................................... $750 6.13% 2011
In addition, in February 2003, the Holding Company remarketed $1,006 million aggregate principal amount of debentures previously issued in connection with the issuance of equity security units. See "-- MetLife Capital Trust I --." Other sources of the Holding Company's liquidity include programs for short and long-term borrowing, as needed, arranged through Metropolitan Life. Credit Facilities. The Holding Company maintains a committed and unsecured credit facility, which expires in 2005, for approximately $1.25 billion which it shares with Metropolitan Life and MetLife Funding, Inc. ("MetLife Funding"). In April 2003, Metropolitan Life and MetLife Funding replaced an expiring $1 billion five-year credit facility with a $1 billion 364-day credit facility and the Holding Company was added as a borrower. Drawdowns under these facilities bear interest at varying rates stated in the agreements. These facilities are primarily used for general corporate purposes and as back-up lines of credit for the borrowers' commercial paper programs. At December 31, 2003, neither the Holding Company, Metropolitan Life nor MetLife Funding had drawn against these credit facilities. Liquidity Uses The primary uses of liquidity of the Holding Company include cash dividends on common stock, service on debt, capital contributions to subsidiaries, payment of general operating expenses and the repurchase of the Holding Company's common stock. Dividends. On October 21, 2003, the Holding Company's Board of Directors approved an annual dividend for 2003 of $0.23 per share. The dividend was paid on December 15, 2003 to shareholders of record on November 7, 2003. The 2003 dividend represents an increase of $0.02 per share from the 2002 annual dividend of $0.21 per share. Future dividend decisions will be determined by the Holding Company's Board of Directors after taking into consideration factors such as the Holding Company's current earnings, expected medium and long-term earnings, financial condition, regulatory capital position, and applicable governmental regulations and policies. 77 Capital Contributions to Subsidiaries. During the years ended December 31, 2003 and 2002, the Holding Company contributed an aggregate of $239 million and $500 million to various subsidiaries, respectively. Share Repurchase. On February 19, 2002, the Holding Company's Board of Directors authorized a $1 billion common stock repurchase program. This program began after the completion of the March 28, 2001 and June 27, 2000 repurchase programs, each of which authorized the repurchase of $1 billion of common stock. Under these authorizations, the Holding Company may purchase its common stock from the MetLife Policyholder Trust, in the open market and in privately negotiated transactions. The following table summarizes the 2003, 2002 and 2001 repurchase activity:
DECEMBER 31, -------------------------------------- 2003 2002 2001 ---------- ----------- ----------- (DOLLARS IN MILLIONS) Shares Repurchased............................. 2,997,200 15,244,492 45,242,966 Cost........................................... $ 97 $ 471 $ 1,321
At December 31, 2003, the Holding Company had approximately $709 million remaining on its existing share repurchase program. In the fourth quarter of 2003, RGA offered to the public 12,075,000 shares of its common stock at $36.65 per share. MetLife and its affiliates purchased 3,000,000 shares of the common stock being offered by RGA. As a result of this offering, MetLife's ownership percentage of outstanding shares of RGA common stock was reduced from approximately 59% at December 31, 2002 to approximately 52% at December 31, 2003. Support Agreements. In 2002, the Holding Company entered into a net worth maintenance agreement with three of its insurance subsidiaries, MetLife Investors Insurance Company, First MetLife Investors Insurance Company and MetLife Investors Insurance Company of California. Under the agreements, the Holding Company agreed, without limitation as to the amount, to cause each of these subsidiaries to have a minimum capital and surplus of $10 million (or, with respect to MetLife Investors Insurance Company of California, $5 million), total adjusted capital at a level not less than 150% of the company action level RBC, as defined by state insurance statutes, and liquidity necessary to enable it to meet its current obligations on a timely basis. At December 31, 2003, the capital and surplus of each of these subsidiaries was in excess of the minimum capital and surplus amounts referenced above, and their total adjusted capital was in excess of the most recent referenced RBC-based amount calculated at December 31, 2003. Based on management's analysis and comparison of its current and future cash inflows from the dividends it receives from subsidiaries, including Metropolitan Life, that are permitted to be paid without prior insurance regulatory approval and its portfolio of liquid assets and other anticipated cash flows, management believes there will be sufficient liquidity to enable the Holding Company to make payments on debt, make cash dividend payments on its common stock, contribute capital to its subsidiaries, pay all operating expenses and meet its other obligations. THE COMPANY Capital RBC. Section 1322 of the New York Insurance Law requires that New York domestic life insurers report their RBC based on a formula calculated by applying factors to various asset, premium and statutory reserve items; similar rules apply to each of the Company's domestic insurance subsidiaries. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. Section 1322 gives the Superintendent explicit regulatory authority to require various actions by, or to take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels. At December 31, 2003, Metropolitan Life's and each of the Holding Company's domestic insurance subsidiaries' total adjusted capital was in excess of each of the RBC levels required by each state of domicile. 78 The National Association of Insurance Commissioners ("NAIC") adopted Codification of Statutory Accounting Principles ("Codification"), which is intended to standardize regulatory accounting and reporting to state insurance departments and became effective January 1, 2001. However, statutory accounting principles continue to be established by individual state laws and permitted practices. The Department required adoption of Codification with certain modifications for the preparation of statutory financial statements of insurance companies domiciled in New York effective January 1, 2001. Effective December 31, 2002, the Department adopted a modification to its regulations to be consistent with Codification with respect to the admissibility of deferred income taxes by New York insurers, subject to certain limitations. The adoption of Codification, as modified by the Department, did not adversely affect Metropolitan Life's statutory capital and surplus. Further modifications by state insurance departments may impact the effect of Codification on the statutory capital and surplus of Metropolitan Life and the Holding Company's other insurance subsidiaries. Liquidity Sources Cash Flow from Operations. The Company's principal cash inflows from its insurance activities come from insurance premiums, annuity considerations and deposit funds. A primary liquidity concern with respect to these cash inflows is the risk of early contractholder and policyholder withdrawal. The Company seeks to include provisions limiting withdrawal rights on many of its products, including general account institutional pension products (generally group annuities, including guaranteed interest contracts and certain deposit fund liabilities) sold to employee benefit plan sponsors. The Company's principal cash inflows from its investment activities come from repayments of principal, proceeds from maturities and sales of invested assets and investment income. The primary liquidity concerns with respect to these cash inflows are the risk of default by debtors and market volatilities. The Company closely monitors and manages these risks through its credit risk management process. Liquid Assets. An integral part of the Company's liquidity management is the amount of liquid assets it holds. Liquid assets include cash, cash equivalents, short-term investments and marketable fixed maturity and equity securities. Liquid assets exclude assets relating to securities lending and dollar roll activities. At December 31, 2003 and 2002, the Company had $125 billion and $108 billion in liquid assets, respectively. Global Funding Sources. Liquidity is also provided by a variety of both short and long-term instruments, including repurchase agreements, commercial paper, medium and long-term debt, capital securities and stockholders' equity. The diversification of the Company's funding sources enhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost of funds. At December 31, 2003 and 2002, the Company had $3,642 million and $1,161 million in short-term debt outstanding, and $5,703 million and $4,425 million in long-term debt outstanding, respectively. On November 1, 2003, the Company redeemed the $300 million of 7.45% Surplus Notes outstanding scheduled to mature on November 1, 2023 at a redemption price of $311 million. See "-- The Holding Company -- Global Funding Sources." MetLife Funding serves as a centralized finance unit for Metropolitan Life. Pursuant to a support agreement, Metropolitan Life has agreed to cause MetLife Funding to have a tangible net worth of at least one dollar. At December 31, 2003 and 2002, MetLife Funding had a tangible net worth of $10.8 million and $10.7 million, respectively. MetLife Funding raises funds from various funding sources and uses the proceeds to extend loans, through MetLife Credit Corp., a subsidiary of Metropolitan Life, to the Holding Company, Metropolitan Life and other affiliates. MetLife Funding manages its funding sources to enhance the financial flexibility and liquidity of Metropolitan Life and other affiliated companies. At December 31, 2003 and 2002, MetLife Funding had total outstanding liabilities, including accrued interest payable, of $1,042 million and $400 million, respectively, consisting primarily of commercial paper. Credit Facilities. The Company maintains committed and unsecured credit facilities aggregating $2.5 billion ($1 billion expiring in 2004, $1.3 billion expiring in 2005 and $175 million expiring in 2006). If these facilities were drawn upon, they would bear interest at varying rates in accordance with the respective 79 agreements. The facilities can be used for general corporate purposes and also as back-up lines of credit for the Company's commercial paper programs. At December 31, 2003, the Company had drawn approximately $49 million under the facilities expiring in 2005 at interest rates ranging from 4.08% to 5.48% and approximately $50 million under a facility expiring in 2006 at an interest rate of 1.69%. In April 2003, the Company replaced an expiring $1 billion five-year credit facility with a $1 billion 364-day credit facility. In May 2003, the Company replaced an expiring $140 million three-year credit facility with a $175 million three-year credit facility, which expires in 2006. Liquidity Uses Insurance Liabilities. The Company's principal cash outflows primarily relate to the liabilities associated with its various life insurance, property and casualty, annuity and group pension products, operating expenses and income taxes, as well as principal and interest on its outstanding debt obligations. Liabilities arising from its insurance activities primarily relate to benefit payments under the aforementioned products, as well as payments for policy surrenders, withdrawals and loans. Investment and Other. Additional cash outflows include those related to obligations of securities lending and dollar roll activities, investments in real estate, limited partnerships and joint ventures, as well as litigation-related liabilities. The following table summarizes the Company's major contractual obligations as of December 31, 2003:
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006 2007 2008 THEREAFTER - ----------------------- ------- ------ ------ ------ ------ ------ ---------- (DOLLARS IN MILLIONS) Other long-term liabilities(1)............... $87,086 $4,391 $3,812 $3,475 $3,763 $2,934 $68,711 Long-term debt(2).............. 5,646 126 1,413 653 28 32 3,394 Partnership investments(3)..... 1,380 1,380 -- -- -- -- -- Operating leases............... 1,545 210 192 168 145 113 717 Mortgage commitments........... 679 679 -- -- -- -- -- Shares subject to mandatory redemption(2)................ 350 -- -- -- -- -- 350 Capital leases................. 74 8 9 10 11 12 24 ------- ------ ------ ------ ------ ------ ------- Total..................... $96,760 $6,794 $5,426 $4,306 $3,947 $3,091 $73,196 ======= ====== ====== ====== ====== ====== =======
- --------------- (1) Other long-term liabilities include guaranteed interest contracts, structured settlements, pension closeouts and certain annuity policies. (2) Amounts differ from the balances presented on the consolidated balance sheets. The amounts above do not include related premiums and discounts or capital leases which are presented separately. (3) The Company anticipates that these amounts could be invested in these partnerships any time over the next five years, but are presented in the current period, as the timing of the fulfillment of the obligation cannot be predicted. As of December 31, 2003, the Company had no material, individually or in the aggregate, purchase obligations and pension and other postretirement benefit obligations. On April 11, 2003, an affiliate of the Company elected not to make future payments required by the terms of a non-recourse loan obligation. The book value of this loan was $15 million at December 31, 2003. The Company's exposure under the terms of the applicable loan agreement is limited solely to its investment in certain securities held by an affiliate. Letters of Credit. At December 31, 2003 and 2002, the Company had outstanding approximately $828 million and $625 million, respectively, in letters of credit from various banks, all of which expire within one year. Since commitments associated with letters of credit and financing arrangements may expire unused, these amounts do not necessarily reflect the actual future cash funding requirements. 80 Support Agreements. In addition to the support agreements described above, Metropolitan Life entered into a net worth maintenance agreement with New England Life Insurance Company ("NELICO") at the time Metropolitan Life merged with New England Mutual Life Insurance Company. Under the agreement, Metropolitan Life agreed, without limitation as to the amount, to cause NELICO to have a minimum capital and surplus of $10 million, total adjusted capital at a level not less than the company action level RBC, as defined by state insurance statutes, and liquidity necessary to enable it to meet its current obligations on a timely basis. At December 31, 2003, the capital and surplus of NELICO was in excess of the minimum capital and surplus amount referenced above, and its total adjusted capital was in excess of the most recent referenced RBC-based amount calculated at December 31, 2003. In connection with the Company's acquisition of GenAmerica, Metropolitan Life entered into a net worth maintenance agreement with General American. Under the agreement, Metropolitan Life agreed, without limitation as to amount, to cause General American to have a minimum capital and surplus of $10 million, total adjusted capital at a level not less than 180% of the company action level RBC, as defined by state insurance statutes, and liquidity necessary to enable it to meet its current obligations on a timely basis. The agreement was subsequently amended to provide that, for the five year period from 2003 through 2007, total adjusted capital must be maintained at a level not less than 200% of the company action level RBC, as defined by state insurance statutes. At December 31, 2003, the capital and surplus of General American was in excess of the minimum capital and surplus amount referenced above, and its total adjusted capital was in excess of the most recent referenced RBC-based amount calculated at December 31, 2003. Metropolitan Life has also entered into arrangements for the benefit of some of its other subsidiaries and affiliates to assist such subsidiaries and affiliates in meeting various jurisdictions' regulatory requirements regarding capital and surplus and security deposits. In addition, Metropolitan Life has entered into a support arrangement with respect to a subsidiary under which Metropolitan Life may become responsible, in the event that the subsidiary becomes the subject of insolvency proceedings, for the payment of certain reinsurance recoverables due from the subsidiary to one or more of its cedents in accordance with the terms and conditions of the applicable reinsurance agreements. General American has agreed to guarantee the obligations of its subsidiary, Paragon Life Insurance Company, and certain obligations of its former subsidiaries, MetLife Investors Insurance Company ("MetLife Investors"), First MetLife Investors Insurance Company and MetLife Investors Insurance Company of California. In addition, General American has entered into a contingent reinsurance agreement with MetLife Investors. Under this agreement, in the event that MetLife Investors' statutory capital and surplus is less than $10 million or total adjusted capital falls below 150% of the company action level RBC, as defined by state insurance statutes, General American would assume as assumption reinsurance, subject to regulatory approvals and required consents, all of MetLife Investors' life insurance policies and annuity contract liabilities. At December 31, 2003, the capital and surplus of MetLife Investors was in excess of the minimum capital and surplus amount referenced above, and its total adjusted capital was in excess of the most recent referenced RBC-based amount calculated at December 31, 2003. Management does not anticipate that these arrangements will place any significant demands upon the Company's liquidity resources. Litigation. Various litigation claims and assessments against the Company have arisen in the course of the Company's business, including, but not limited to, in connection with its activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company's compliance with applicable insurance and other laws and regulations. It is not feasible to predict or determine the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses except with respect to certain matters. In some of the matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations, it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company's consolidated financial position, based on information currently known by the Company's management, in its opinion, the outcomes of such pending investigations and legal 81 proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's consolidated net income or cash flows in particular quarterly or annual periods. Based on management's analysis of its expected cash inflows from operating activities, the dividends it receives from subsidiaries, including Metropolitan Life, that are permitted to be paid without prior insurance regulatory approval and its portfolio of liquid assets and other anticipated cash flows, management believes there will be sufficient liquidity to enable the Company to make payments on debt, make cash dividend payments on its common stock, pay all operating expenses and meet its other obligations. The nature of the Company's diverse product portfolio and customer base lessen the likelihood that normal operations will result in any significant strain on liquidity. Consolidated cash flows. Net cash provided by operating activities was $7,363 million and $4,168 million for the years ended December 31, 2003 and 2002, respectively. The $3,195 million increase in operating cash flow in 2003 over the comparable 2002 period is primarily attributable to sales growth in the group life, dental, disability and long-term care businesses, as well as higher sales in retirement and savings' structured settlement products. The acquisition of John Hancock's group business also contributed to sales growth in the 2003 period. In addition, growth in MetLife Bank's customer deposits, accelerated prepayments of mortgage-backed securities that have been previously purchased at a premium, and an increase in funds withheld related to reinsurance activity contributed to the increase in operating cash flows. These items were partially offset by the Company's contribution to its qualified defined benefit plans in December 2003. Net cash provided by operating activities was $4,168 million and $4,258 million for the years ended December 31, 2002 and 2001, respectively. The $90 million decrease in operating cash flow in 2002 over the 2001 comparable period is primarily due to a contribution by the Company to its defined benefit pension plans and a decrease in recoverables due from reinsurance in December 2002. This was partially offset by sales growth in the group life, dental, disability and long-term care businesses, the sale of a significant retirement and savings contract in the second quarter of 2002, as well as additional sales of structured settlements and traditional annuity products. Net cash used in investing activities was $17,688 million and $16,213 million for the years ended December 31, 2003 and 2002, respectively. The $1,475 million increase in net cash used in investing activities in 2003 over the comparable 2002 period is primarily attributable to an increase in the purchase of fixed maturities and commercial mortgage loan origination, as well as an increase in the amount of securities lending cash collateral invested, which resulted from an expansion of the program. In addition, the Company invested income generated from operations and cash raised through the issuance of guaranteed investment contracts. These items were partially offset by lower income resulting from lower market rates and the June 2002 acquisition of Hidalgo. In addition, the 2003 period had less proceeds from sales of equity securities and real estate to use in investing activities. The 2002 period included proceeds from a significant sale of equity securities and cash generated by the Company's real estate sales program. Net cash used in investing activities was $16,213 million and $2,970 million for the years ended December 31, 2002 and 2001, respectively. Net cash used in investing activities increased $13,243 million in 2002 over the comparable 2001 period, primarily due to an increase in the amount of securities lending cash collateral invested in connection with the program. In addition, the Company invested income generated from operations, cash raised through the issuance of guaranteed investment contracts and cash generated by the Company's real estate sales program in various financial instruments, including fixed maturities and mortgage loans on real estate. At December 31, 2001, the Company held cash equivalents that were subsequently invested in bonds and U.S. treasury notes in the first quarter of 2002. Additionally, certain contractholders transferred investments from the separate account to the general account. Net cash used in investing activities also increased due to the acquisition of Hidalgo. Net cash provided by financing activities was $11,735 million and $6,895 million for the years ended December 31, 2003 and 2002, respectively. The $4,840 million increase in net cash provided by financing activities in 2003 over the comparable 2002 period is due to an increase in policyholder account balances 82 primarily from sales of annuity products, as well as additional short-term debt issued related to dollar roll activity. In 2003, the Company received $1,006 million on the settlement of common stock purchase contracts (see "-- The Holding Company -- Liquidity Sources -- Global Funding Sources"), issued $700 million of senior notes and had a decrease in cash used in the stock repurchase program as compared to 2002. These cash flows were partially offset by additional repayments of long-term debt and a 10% increase in cash dividends per share in 2003 as compared to 2002. Net cash provided by financing activities was $6,895 million and $2,751 million for the years ended December 31, 2002 and 2001, respectively. The $4,144 million increase in financing activities in 2002 over the comparable 2001 period was due to an increase in policyholder account balances primarily from sales of annuity products and the issuance of short-term debt. In addition, the Company had a decrease in cash used in the stock repurchase program for 2002 as compared to 2001. These cash flows were partially offset by a decrease in long-term debt issued. 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, 2001 through December 31, 2003 aggregated $7 million. The Company maintained a liability of $70 million at December 31, 2003 for future assessments in respect of currently impaired, insolvent or failed insurers. In the past five years, none of the aggregate assessments levied against MetLife's insurance subsidiaries has been material. 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. EFFECTS OF INFLATION The Company does not believe that inflation has had a material effect on its consolidated results of operations, except insofar as inflation may affect interest rates. APPLICATION OF RECENT ACCOUNTING STANDARDS Effective December 31, 2003, the Company adopted Emerging Issues Task Force ("EITF") Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, ("EITF 03-1"). EITF 03-1 provides guidance on the disclosure requirements for other-than-temporary impairments of debt and marketable equity investments that are accounted for under Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. The adoption of EITF 03-1 requires the Company to include certain quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS 115 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The initial adoption of EITF 03-1, which only required additional disclosures, did not have a material impact on the Company's consolidated financial statements. In December, 2003, the Financial Accounting Standards Board ("FASB") revised SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits -- an Amendment of FASB Statements No. 87, 88 and 106 ("SFAS 132(r)"). SFAS 132(r) retains most of the disclosure requirements of SFAS 132 and requires additional disclosure about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined postretirement plans. SFAS 132(r) is primarily effective for fiscal years ending after December 15, 2003; however, certain disclosures about foreign plans and estimated future benefit payments are effective for fiscal years ending after June 15, 2004. The Company's adoption of SFAS 132(r) on December 31, 2003 did not have a significant impact on its consolidated financial 83 statements since it only revises disclosure requirements. In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("FSP 106-1"), which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the new legislation. The Company has elected to defer the accounting until further guidance is issued by the FASB. The measurements of the Company's postretirement accumulated benefit plan obligation and net periodic benefit cost do not reflect the effects of the new legislation. The guidance, when issued, could require the Company to change previously reported information. In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts ("SOP 03-1"). SOP 03-1 provides guidance on (i) the classification and valuation of long-duration contract liabilities, (ii) the accounting for sales inducements, and (iii) separate account presentation and valuation. SOP 03-1 is effective for fiscal years beginning after December 15, 2003. As of January 1, 2004, the Company increased future policyholder benefits for various guaranteed minimum death and income benefits net of DAC and unearned revenue liability offsets under certain variable annuity and universal life contracts of approximately $40 million, net of income tax, which will be reported as a cumulative effect of a change in accounting. Industry standards and practices continue to evolve relating to the valuation of liabilities relating to these types of benefits, which may result in further adjustments to the Company's measurement of liabilities associated with such benefits in subsequent accounting periods. Effective with the adoption of SOP 03-1, costs associated with enhanced or bonus crediting rates to contractholders will be deferred and amortized over the life of the related contract using assumptions consistent with the amortization of DAC. Prior to adoption of SOP 03-1, the costs associated with these sales inducements have been deferred and amortized over the contingent sales inducement period. This provision of SOP 03-1 will be applied prospectively to contracts. Effective January 1, 2004, the Company reclassified $115 million of ownership in its own separate accounts from other assets to fixed maturities available-for-sale and equity securities. This reclassification will have no effect on net income or other comprehensive income. In accordance with SOP 03-1's revised definition of a separate account, effective January 1, 2004, the Company also reclassified $1,678 million of separate account assets to general account investments and $1,678 million of separate account liabilities to future policy benefits and policyholder account balances. The net cumulative effect of this reclassification was insignificant. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150"). SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as a liability or, in certain circumstances, an asset. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150, as of July 1, 2003, required the Company to reclassify $277 million of company-obligated mandatorily redeemable securities of subsidiary trusts from mezzanine equity to liabilities. In April 2003, the FASB cleared Statement 133 Implementation Issue No. B36, Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments ("Issue B36"). Issue B36 concluded that (i) a company's funds withheld payable and/or receivable under certain reinsurance arrangements, and (ii) a debt instrument that incorporates credit risk exposures that are unrelated or only partially related to the creditworthiness of the obligor include an embedded derivative feature that is not clearly and closely related to the host contract. Therefore, the embedded derivative feature must be measured at fair value on the balance sheet and changes in fair value reported in income. Issue B36 became effective on October 1, 2003 and required the Company to increase policyholder account balances by $40 million, to decrease other invested assets by $1 million and to increase DAC by $2 million. These amounts, net of income tax of $13 million, were recorded as a cumulative effect of a change in accounting. As a result of the adoption of Issue B36, the Company recognized investment gains of $9 million, net of income tax, for the three month period ended December 31, 2003. 84 In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies the accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Except for certain implementation guidance that is incorporated in SFAS 149 and already effective, SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The Company's adoption of SFAS 149 on July 1, 2003 did not have a significant impact on the consolidated financial statements. During 2003, the Company adopted FASB Interpretation No. 46 Consolidation of Variable Interest Entities -- An Interpretation of ARB No. 51 ("FIN 46") and its December 2003 revision ("FIN 46(r)"). Certain of the Company's asset-backed securitizations, collateralized debt obligations, structured investment transactions, and investments in real estate joint ventures and other limited partnership interests meet the definition of a variable interest entity ("VIE") and must be consolidated, in accordance with the transition rules and effective dates, if the Company is deemed to be the primary beneficiary. A VIE is defined as (i) any entity in which the equity investments at risk in such entity do not have the characteristics of a controlling financial interest, or (ii) any entity that does not have sufficient equity at risk to finance its activities without additional subordinated support from other parties. Effective February 1, 2003, the Company adopted FIN 46 for VIEs created or acquired on or after February 1, 2003 and, effective December 31, 2003, the Company adopted FIN 46(r) with respect to interests in entities formerly considered special purpose entities ("SPEs"), including interests in asset-backed securities and collateralized debt obligations. In accordance with the provisions of FIN 46(r), the Company has elected to defer until March 31, 2004 the consolidation of interests in VIEs for non SPEs acquired prior to February 1, 2003 for which it is the primary beneficiary. The adoption of FIN 46 as of February 1, 2003 did not have a significant impact on the Company's consolidated financial statements. The adoption of the provisions of FIN 46(r) at December 31, 2003 did not require the Company to consolidate any additional VIEs that were not previously consolidated. During 2003, the Company adopted or applied the following accounting standards and/or interpretations: (i) FASB Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others; (ii) SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure; (iii) SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities; and (iv) SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. None of the accounting standards and/or interpretations described in this paragraph had a significant impact on the Company's consolidated financial statements. During 2002, the Company adopted or applied the following accounting standards: (i) SFAS No. 141, Business Combinations ("SFAS 141"), (ii) SFAS No. 142, and (iii) SFAS No. 144. In accordance with SFAS 141, the elimination of $5 million of negative goodwill was reported in net income in the first quarter of 2002 as a cumulative effect of a change in accounting. On January 1, 2002, the Company adopted SFAS 142. Amortization of goodwill prior to the adoption of SFAS 142 was $47 million for the year ended December 31, 2001. Amortization of other intangible assets was not material for the years December 31, 2003, 2002 and 2001. The Company completed the required impairment tests of goodwill and indefinite-lived intangible assets in the third quarter of 2002 and recorded a $5 million charge to earnings relating to the impairment of certain goodwill assets as a cumulative effect of a change in accounting. There was no impairment of identified intangible assets or significant reclassifications between goodwill and other intangible assets at January 1, 2002. Adoption of SFAS 144 did not have a material impact on the Company's consolidated financial statements other than the presentation as discontinued operations of net investment income and net investment gains related to operations of real estate on which the Company initiated disposition activities subsequent to January 1, 2002 and the classification of such real estate as held-for-sale on the consolidated balance sheets. INVESTMENTS The Company had total cash and invested assets at December 31, 2003 and 2002 of $221.8 billion and $190.7 billion, respectively. In addition, the Company had $75.8 billion and $59.7 billion held in its separate 85 accounts, for which the Company generally does not bear investment risk, as of December 31, 2003 and 2002, respectively. The Company's primary investment objective is to maximize net investment income consistent with acceptable risk parameters. The Company is exposed to three primary sources of investment risk: - credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest; - interest rate risk, relating to the market price and cash flow variability associated with changes in market interest rates; and - market valuation risk. The Company manages risk through in-house fundamental analysis of the underlying obligors, issuers, transaction structures and real estate properties. The Company also manages credit risk and market valuation risk through industry and issuer diversification and asset allocation. For real estate and agricultural assets, the Company manages credit risk and valuation risk through geographic, property type, and product type diversification and asset allocation. The Company manages interest rate risk as part of its asset and liability management strategies, product design, such as the use of market value adjustment features and surrender charges, and proactive monitoring and management of certain non-guaranteed elements of its products, such as the resetting of credited interest and dividend rates for policies that permit such adjustments. The following table summarizes the Company's cash and invested assets at:
DECEMBER 31, ------------------------------------- 2003 2002 ----------------- ----------------- CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ------ -------- ------ (DOLLARS IN MILLIONS) Fixed maturities available-for-sale, at fair value.......................................... $167,752 75.6% $140,288 73.6% Mortgage loans on real estate.................... 26,249 11.8 25,086 13.2 Policy loans..................................... 8,749 4.0 8,580 4.5 Cash and cash equivalents........................ 3,733 1.7 2,323 1.2 Real estate and real estate joint ventures held-for-investment............................ 4,714 2.1 3,926 2.1 Other invested assets............................ 4,645 2.1 3,727 1.9 Equity securities, at fair value and other limited partnership interests.................. 4,075 1.8 4,008 2.1 Short-term investments........................... 1,826 0.8 1,921 1.0 Real estate held-for-sale........................ 89 0.1 799 0.4 -------- ------ -------- ------ Total cash and invested assets.............. $221,832 100.0% $190,658 100.0% ======== ====== ======== ======
86 INVESTMENT RESULTS Net investment income, including net investment income from discontinued operations and scheduled periodic settlement payments on derivative instruments that do not qualify for hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended ("SFAS 133"), on general account cash and invested assets totaled $11,772 million, $11,453 million and $11,380 million for the years ended December 31, 2003, 2002 and 2001, respectively. The annualized yields on general account cash and invested assets, including net investment income from discontinued operations and scheduled periodic settlement payments on derivative instruments that do not qualify for hedge accounting under SFAS No. 133, and excluding all net investment gains and losses, were 6.67%, 7.20% and 7.56% for the years ended December 31, 2003, 2002 and 2001, respectively. The decline in annualized yields is due primarily to the decline in interest rates during these years. The following table illustrates the net investment income and annualized yields on average assets for each of the components of the Company's investment portfolio for the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001 ------------------- ------------------- ------------------- YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT -------- -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS) FIXED MATURITIES:(2) Investment income................. 6.89% $ 8,502 7.46% $ 8,076 7.89% $ 8,018 Net investment gains (losses)..... (398) (917) (645) -------- -------- -------- Total......................... $ 8,104 $ 7,159 $ 7,373 -------- -------- -------- Ending assets..................... $167,752 $140,288 $115,150 -------- -------- -------- MORTGAGE LOANS ON REAL ESTATE:(3) Investment income................. 7.48% $ 1,903 7.84% $ 1,883 8.17% $ 1,848 Net investment gains (losses)..... (56) (22) (91) -------- -------- -------- Total......................... $ 1,847 $ 1,861 $ 1,757 -------- -------- -------- Ending assets..................... $ 26,249 $ 25,086 $ 23,621 -------- -------- -------- POLICY LOANS: Investment income................. 6.40% $ 554 6.49% $ 543 6.56% $ 536 -------- -------- -------- Ending assets..................... $ 8,749 $ 8,580 $ 8,272 -------- -------- -------- CASH, CASH EQUIVALENTS AND SHORT- TERM INVESTMENTS: Investment income................. 2.73% $ 165 4.17% $ 232 5.54% $ 279 Net investment gains (losses)..... 1 -- (5) -------- -------- -------- Total......................... $ 166 $ 232 $ 274 -------- -------- -------- Ending assets..................... $ 5,559 $ 4,244 $ 8,676 -------- -------- -------- REAL ESTATE AND REAL ESTATE JOINT VENTURES:(4) Investment income, net of expenses........................ 10.78% $ 518 11.41% $ 637 10.58% $ 584 Net investment gains (losses)..... 440 576 (4) -------- -------- -------- Total......................... $ 958 $ 1,213 $ 580 -------- -------- -------- Ending assets..................... $ 4,803 $ 4,725 $ 5,730 -------- -------- --------
87
2003 2002 2001 ------------------- ------------------- ------------------- YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT -------- -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS) EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS: Investment income................. 2.66% $ 106 2.47% $ 99 2.56% $ 110 Net investment gains (losses)..... (43) 222 (96) -------- -------- -------- Total......................... $ 63 $ 321 $ 14 -------- -------- -------- Ending assets..................... $ 4,075 $ 4,008 $ 4,948 -------- -------- -------- OTHER INVESTED ASSETS:(5) Investment income................. 6.84% $ 290 6.42% $ 218 7.60% $ 249 Net investment gains (losses)..... (180) (206) 79 -------- -------- -------- Total......................... $ 110 $ 12 $ 328 -------- -------- -------- Ending assets..................... $ 4,645 $ 3,727 $ 3,298 -------- -------- -------- TOTAL INVESTMENTS: Investment income before expenses and fees........................ 6.82% $ 12,038 7.35% $ 11,688 7.72% $ 11,624 Investment expenses and fees...... (0.15)% (266) (0.15)% (235) (0.16)% (244) ----- -------- ----- -------- ----- -------- Net investment income............. 6.67% $ 11,772 7.20% $ 11,453 7.56% $ 11,380 Net investment gains (losses)..... (236) (347) (762) Adjustments to investment gains (losses)(6)..................... 215 145 134 Gains from sales of subsidiaries.................... -- -- 25 -------- -------- -------- Total......................... $ 11,751 $ 11,251 $ 10,777 ======== ======== ========
- --------------- (1) Yields are based on quarterly average asset carrying values, excluding recognized and unrealized gains and losses, and for yield calculation purposes, average assets exclude collateral associated with the Company's securities lending program. (2) Included in fixed maturities are equity-linked notes of $880 million, $834 million, and $1,004 million at December 31, 2003, 2002 and 2001, respectively, which include an equity-like component as part of the notes' return. Investment income for fixed maturities includes prepayment fees and income from the securities lending program. Fixed maturity investment income has been reduced by rebates paid under the securities lending program. (3) Investment income from mortgage loans on real estate includes prepayment fees. (4) Real estate and real estate joint venture income is shown net of depreciation of $183 million, $227 million and $220 million for the years ended December 31, 2003, 2002 and 2001, respectively. Real estate and real estate joint venture income includes amounts classified as discontinued operations of $52 million, $160 million and $169 million for the years ended December 31, 2003, 2002 and 2001, respectively. These amounts are net of depreciation of $15 million, $66 million and $93 million for the years ended December 31, 2003, 2002 and 2001, respectively. Net investment gains and losses include $421 million and $582 million of gains classified as discontinued operations for the years ended December 31, 2003 and 2002, respectively. There were no net investment gains and losses classified as discontinued operations for the year ended December 31, 2001. (5) Investment income from other invested assets includes scheduled periodic settlement payments on derivative instruments that do not qualify for hedge accounting under SFAS 133 of $84 million, $32 million and $24 million for the years ended December 31, 2003, 2002 and 2001, respectively. These amounts are excluded from net investment gains and losses from other invested assets. (6) Adjustments to investment gains and losses include amortization of DAC, charges and credits to participating contracts and adjustments to the policyholder dividend obligation resulting from investment gains and losses. 88 FIXED MATURITIES Fixed maturities consist principally of publicly traded and privately placed debt securities, and represented 75.6% and 73.6% of total cash and invested assets at December 31, 2003 and 2002, respectively. Based on estimated fair value, public fixed maturities represented $147,489 million, or 87.9%, and $121,191 million, or 86.4%, of total fixed maturities at December 31, 2003 and 2002, respectively. Based on estimated fair value, private fixed maturities represented $20,263 million, or 12.1%, and $19,097 million, or 13.6%, of total fixed maturities at December 31, 2003 and 2002, respectively. The Company invests in privately placed fixed maturities to (i) obtain higher yields than can ordinarily be obtained with comparable public market securities; (ii) provide the Company with protective covenants, call protection features and, where applicable, a higher level of collateral; and (iii) increase diversification. However, the Company may not freely trade its privately placed fixed maturities because of restrictions imposed by federal and state securities laws and illiquid markets. In cases where quoted market prices are not available, fair values are estimated using present value or valuation techniques. The fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counter-party. Factors considered in estimating fair value include: coupon rate, maturity, estimated duration, call provisions, sinking fund requirements, credit rating, industry sector of the issuer and quoted market prices of comparable securities. The Securities Valuation Office of the NAIC evaluates the fixed maturity investments of insurers for regulatory reporting purposes and assigns securities to one of six investment categories called "NAIC designations." The NAIC ratings are similar to the rating agency designations of the Nationally Recognized Statistical Rating Organizations for marketable bonds. NAIC ratings 1 and 2 include bonds generally considered investment grade (rated "Baa3" or higher by Moody's Investors Services ("Moody's"), or rated "BBB-" or higher by Standard & Poor's ("S&P")) by such rating organizations. NAIC ratings 3 through 6 include bonds generally considered below investment grade (rated "Ba1" or lower by Moody's, or rated "BB+" or lower by S&P). The following table presents the Company's total fixed maturities by Nationally Recognized Statistical Rating Organizations designation and the equivalent ratings of the NAIC, as well as the percentage, based on estimated fair value, that each designation comprises at:
DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------------------ ------------------------------ NAIC RATING AGENCY AMORTIZED ESTIMATED % OF AMORTIZED ESTIMATED % OF RATING DESIGNATION(1) COST FAIR VALUE TOTAL COST FAIR VALUE TOTAL - ------ -------------- --------- ---------- ----- --------- ---------- ----- (DOLLARS IN MILLIONS) 1 Aaa/Aa/A.................... $106,779 $112,333 67.0% $ 88,201 $ 94,225 67.2% 2 Baa......................... 39,006 42,057 25.0 32,093 33,997 24.2 3 Ba.......................... 7,388 8,011 4.8 7,519 7,437 5.3 4 B........................... 3,578 3,814 2.3 3,636 3,408 2.4 5 Caa and lower............... 630 629 0.4 404 295 0.3 6 In or near default.......... 341 371 0.2 482 479 0.3 -------- -------- ----- -------- -------- ----- Subtotal.................... 157,722 167,215 99.7 132,335 139,841 99.7 Redeemable preferred 611 537 0.3 564 447 0.3 stock....................... -------- -------- ----- -------- -------- ----- Total fixed maturities...... $158,333 $167,752 100.0% $132,899 $140,288 100.0% ======== ======== ===== ======== ======== =====
- --------------- (1) Amounts presented are based on rating agency designations. Comparisons between NAIC ratings and rating agency designations are published by the NAIC. The rating agency designations are based on the availability and the lower of the applicable ratings between Moody's and S&P. The current period ratings are now presented so that the consolidated rating will be equal to the Moody's or S&P rating, whichever is more conservative. If no rating is available from a rating agency, then the MetLife rating will be used. Prior period ratings have been restated to conform with this presentation. 89 Based on estimated fair values, investment grade fixed maturities comprised 92.0% and 91.4% of total fixed maturities in the general account at December 31, 2003 and 2002, respectively. The following table shows the amortized cost and estimated fair value of fixed maturities, by contractual maturity dates (excluding scheduled sinking funds) at:
DECEMBER 31, 2003 DECEMBER 31, 2002 ---------------------- ---------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- (DOLLARS IN MILLIONS) Due in one year or less.................... $ 5,381 $ 5,542 $ 4,592 $ 4,662 Due after one year through five years...... 30,893 32,431 26,200 27,354 Due after five years through ten years..... 29,342 31,830 23,297 24,987 Due after ten years........................ 39,011 43,064 35,507 38,452 -------- -------- -------- -------- Subtotal.............................. 104,627 112,867 89,596 95,455 Mortgage-backed and other asset-backed securities............................... 53,095 54,348 42,739 44,386 -------- -------- -------- -------- Subtotal.............................. 157,722 167,215 132,335 139,841 Redeemable preferred stock................. 611 537 564 447 -------- -------- -------- -------- Total fixed maturities................ $158,333 $167,752 $132,899 $140,288 ======== ======== ======== ========
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. The fixed maturities portfolio is diversified across a broad range of asset sectors, and the asset mix did not change significantly in 2003. The following tables set forth the amortized cost, gross unrealized gain and loss, and estimated fair value of the Company's fixed maturities by sector, as well as the percentage of the total fixed maturities holdings that each sector is comprised of at:
DECEMBER 31, 2003 ------------------------------------------------- GROSS UNREALIZED AMORTIZED ---------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL --------- -------- ----- ---------- ----- (DOLLARS IN MILLIONS) U.S. corporate securities............... $ 56,757 $ 3,886 $252 $ 60,391 36.0% Mortgage-backed securities.............. 30,836 720 102 31,454 18.8 Foreign corporate securities............ 21,727 2,194 79 23,842 14.2 U.S. treasuries/agencies................ 14,707 1,264 26 15,945 9.5 Asset-backed securities................. 11,736 187 60 11,863 7.1 Commercial mortgage-backed securities... 10,523 530 22 11,031 6.6 Foreign government securities........... 7,789 1,003 28 8,764 5.2 State and political subdivisions........ 3,155 209 15 3,349 2.0 Other fixed income assets............... 492 167 83 576 0.3 -------- ------- ---- -------- ----- Total bonds........................ 157,722 10,160 667 167,215 99.7 Redeemable preferred stocks............. 611 2 76 537 0.3 -------- ------- ---- -------- ----- Total fixed maturities............. $158,333 $10,162 $743 $167,752 100.0% ======== ======= ==== ======== =====
90
DECEMBER 31, 2002 -------------------------------------------------- GROSS UNREALIZED AMORTIZED ----------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL --------- ------- ------- ---------- ----- (DOLLARS IN MILLIONS) U.S. corporate securities.............. $ 47,021 $3,193 $ 957 $ 49,257 35.1% Mortgage-backed securities............. 26,966 1,076 16 28,026 20.0 Foreign corporate securities........... 18,001 1,435 207 19,229 13.7 U.S. treasuries/agencies............... 14,373 1,565 4 15,934 11.4 Asset-backed securities................ 9,483 228 208 9,503 6.8 Commercial mortgage-backed securities........................... 6,290 573 6 6,857 4.9 Foreign government securities.......... 7,012 636 52 7,596 5.4 State and political subdivisions....... 2,580 182 20 2,742 1.9 Other fixed income assets.............. 609 191 103 697 0.5 -------- ------ ------ -------- ----- Total bonds....................... 132,335 9,079 1,573 139,841 99.7 Redeemable preferred stocks............ 564 -- 117 447 0.3 -------- ------ ------ -------- ----- Total fixed maturities............ $132,899 $9,079 $1,690 $140,288 100.0% ======== ====== ====== ======== =====
Potential Problem, Problem and Restructured Fixed Maturities. The Company monitors fixed maturities to identify investments that management considers to be potential problems or problems. The Company also monitors investments that have been restructured. 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 problem securities in the fixed maturities category as securities with principal or interest payments in default, securities to be restructured pursuant to commenced negotiations, or securities issued by a debtor that has entered into bankruptcy. The Company defines 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. 91 The following table presents the estimated fair value of the Company's total fixed maturities classified as performing, potential problem, problem and restructured at:
DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------ ------------------ ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (DOLLARS IN MILLIONS) Performing....................................... $167,125 99.6% $139,452 99.4% Potential problem................................ 282 0.2 450 0.3 Problem.......................................... 264 0.2 358 0.3 Restructured..................................... 81 0.0 28 0.0 -------- ----- -------- ----- Total....................................... $167,752 100.0% $140,288 100.0% ======== ===== ======== =====
Fixed Maturity Impairment. The Company classifies all of its fixed maturities as available-for-sale and marks them to market through other comprehensive income. All securities with gross unrealized losses at the consolidated balance sheet date are subjected to the Company's process for identifying other-than-temporary impairments. The Company writes down to fair value securities that it deems to be other-than-temporarily impaired in the period the securities are deemed to be so impaired. The assessment of whether such impairment has occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors, as described below, about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the impairment evaluation process include, but are not limited to, the following: - length of time and the extent to which the market value has been below amortized cost; - potential for impairments of securities when the issuer is experiencing significant financial difficulties, including a review of all securities of the issuer, including its known subsidiaries and affiliates, regardless of the form of the Company's ownership; - potential for impairments in an entire industry sector or sub-sector; - potential for impairments in certain economically depressed geographic locations; - potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; and - other subjective factors, including concentrations and information obtained from regulators and rating agencies. The Company's review of its fixed maturities for impairments includes an analysis of the total gross unrealized losses by three categories of securities: (i) securities where the estimated fair value had declined and remained below amortized cost by less than 20%; (ii) securities where the estimated fair value had declined and remained below amortized cost by 20% or more for less than six months; and (iii) securities where the estimated value had declined and remained below amortized cost by 20% or more for six months or greater. The first two categories have generally been adversely impacted by the downturn in the financial markets and overall economic conditions. While all of these securities are monitored for potential impairment, the Company's experience indicates that the first two categories do not present as great a risk of impairment, and often, fair values recover over time as the factors that caused the declines improve. The Company records writedowns as investment losses and adjusts the cost basis of the fixed maturities accordingly. The Company does not change the revised cost basis for subsequent recoveries in value. Writedowns of fixed maturities were $338 million and $1,264 million for the years ended December 31, 2003 and 2002, respectively. The Company's three largest writedowns totaled $125 million and $352 million for the 92 years ended December 31, 2003 and 2002, respectively. The circumstances that gave rise to these impairments were either financial restructurings or bankruptcy filings. During the years ended December 31, 2003 and 2002, the Company sold fixed maturities with a fair value of $30,714 million and $14,597 million at a loss of $486 million and $894 million, respectively. The following table presents the total gross unrealized losses for fixed maturities where the estimated fair value had declined and remained below amortized cost by:
DECEMBER 31, 2003 ---------------------- GROSS UNREALIZED % OF LOSSES TOTAL ------------ ------- (DOLLARS IN MILLIONS) Less than 20%............................................... $677 91.1% 20% or more for less than six months........................ 22 3.0 20% or more for six months or greater....................... 44 5.9 ---- ----- Total.................................................. $743 100.0% ==== =====
The gross unrealized loss related to the Company's fixed maturities at December 31, 2003 was $743 million. These fixed maturities mature as follows: 1% due in one year or less; 23% due in greater than one year to five years; 18% due in greater than five years to ten years; and 58% due in greater than ten years (calculated as a percentage of amortized cost). Additionally, such securities are concentrated by sector in U.S. corporates (34%), mortgage-backed (17%) and foreign corporates (11%); and are concentrated by industry in mortgage-backed (13%), utilities (12%) and finance (8%) (calculated as a percentage of gross unrealized loss). Non-investment grade securities represent 6% of the $30,881 million fair value and 20% of the $743 million gross unrealized loss on fixed maturities. The following table presents the amortized cost, gross unrealized losses and number of securities for fixed maturities where the estimated fair value had declined and remained below amortized cost by less than 20%, or 20% or more for:
DECEMBER 31, 2003 --------------------------------------------------------------- GROSS UNREALIZED AMORTIZED COST LOSSES NUMBER OF SECURITIES ------------------ ------------------ --------------------- LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR 20% MORE 20% MORE 20% MORE --------- ------ --------- ------ ---------- -------- (DOLLARS IN MILLIONS) Less than six months............ $24,926 $ 67 $449 $22 1,331 18 Six months or greater but less than nine months.............. 3,217 19 84 4 264 2 Nine months or greater but less than twelve months............ 266 17 7 4 45 3 Twelve months or greater........ 2,999 113 137 36 311 19 ------- ---- ---- --- ----- -- Total...................... $31,408 $216 $677 $66 1,951 42 ======= ==== ==== === ===== ==
The category of fixed maturity securities where the estimated fair value has declined and remained below amortized cost by less than 20% is comprised of 1,951 securities with an amortized cost of $31,408 million and a gross unrealized loss of $677 million at December 31, 2003. These fixed maturities mature as follows: 1% due in one year or less; 23% due in greater than one year to five years; 18% due in greater than five years to ten years; and 58% due in greater than ten years (calculated as a percentage of amortized cost). Additionally, such securities are concentrated by sector in U.S. corporates (33%) and mortgage-backed (18%); and are concentrated by industry in mortgage-backed (14%), utilities (13%) and finance (7%) (calculated as a percentage of gross unrealized loss). Non-investment grade securities represent 5% of the $30,731 million fair value and 15% of the $677 million gross unrealized loss. 93 The category of fixed maturity securities where the estimated fair value has declined and remained below amortized cost by 20% or more for less than six months is comprised of 18 securities with an amortized cost of $67 million and a gross unrealized loss of $22 million at December 31, 2003. These fixed maturities mature as follows: 1% due in greater than one year to five years; 64% due in greater than five years to ten years; and 35% due in greater than ten years (calculated as a percentage of amortized cost). Additionally, such securities are concentrated by sector in foreign governments (41%) and asset-backed (35%); and are concentrated by industry in asset-backed (35%) and finance (23%) (calculated as a percentage of gross unrealized loss). Non- investment grade securities represent 83% of the $45 million fair value and 82% of the $22 million gross unrealized loss. The total of fixed maturity securities where the estimated fair value has declined and remained below amortized cost by 20% or more for six months or greater is comprised of 24 securities with an amortized cost of $149 million and a gross unrealized loss of $44 million at December 31, 2003. These fixed maturities mature as follows: 27% due in greater than five years to ten years; and 73% due in greater than ten years (calculated as a percentage of amortized cost). Additionally, such securities are concentrated by security type in U.S. corporates (57%) and asset-backed (18%); and are concentrated by industry in transportation (53%), finance (24%) and asset-backed (18%) (calculated as a percentage of gross unrealized loss). Non-investment grade securities represent 48% of the $105 million fair value and 60% of the $44 million gross unrealized loss. The Company held two fixed maturity securities each with a gross unrealized loss at December 31, 2003 greater than $10 million. One of these securities represents 25% of the gross unrealized loss on fixed maturities where the estimated fair value had declined and remained below amortized cost by 20% or more for six months or greater. The security is in the U.S. corporate sector, and the estimated fair value and gross unrealized loss at December 31, 2003 was $14 million and $11 million, respectively. The Company analyzed this fixed maturity security as of December 31, 2003 to determine whether this security was other-than-temporarily impaired. The Company believes that the estimated fair value of this security, which is in the transportation industry, was depressed as a result of generally difficult economic and market conditions. The Company believes that the analysis of the security indicated that the financial strength, liquidity, leverage, future outlook and/or recent management actions supports the view that the security was not other-than-temporarily impaired as of December 31, 2003. Corporate Fixed Maturities. The table below shows the major industry types that comprise the corporate bond holdings at:
DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------ ------------------ ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (DOLLARS IN MILLIONS) Industrial....................................... $34,474 40.9% $29,077 42.5% Utility.......................................... 9,955 11.8 7,219 10.5 Finance.......................................... 14,287 17.0 12,596 18.4 Yankee/Foreign(1)................................ 23,842 28.3 19,229 28.1 Other............................................ 1,675 2.0 365 0.5 ------- ----- ------- ----- Total....................................... $84,233 100.0% $68,486 100.0% ======= ===== ======= =====
- --------------- (1) Includes publicly traded, U.S. dollar-denominated debt obligations of foreign obligors, known as Yankee bonds, and other foreign investments. The Company maintains a diversified corporate bond portfolio across industries and issuers. The portfolio does not have exposure to any single issuer in excess of 1% of the total invested assets of the portfolio. At December 31, 2003 and 2002, the Company's combined holdings in the ten issuers to which it had the greatest exposure totaled $4,683 million and $2,973 million, respectively, which was less than 3% and 2%, respectively, of the Company's total invested assets at such date. The exposure to the largest single issuer of corporate bonds held at December 31, 2003 and 2002 was $618 million and $385 million, respectively. 94 At December 31, 2003 and 2002, investments of $16,572 million and $14,778 million, respectively, or 69.5% and 76.9%, respectively, of the Yankee/Foreign sector, represented exposure to traditional Yankee bonds. This exposure was U.S. dollar-denominated and was concentrated by security type in industrial and financial institutions. The Company diversifies the Yankee/Foreign portfolio by country and issuer. The Company has hedged all of its material exposure to foreign currency risk in its invested assets. In the Company's international insurance operations, both its assets and liabilities are generally denominated in local currencies. Foreign currency denominated securities supporting U.S. dollar liabilities are generally swapped back into U.S. dollars. Mortgage-Backed Securities. The following table shows the types of mortgage-backed securities the Company held at:
DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------ ------------------ ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (DOLLARS IN MILLIONS) Pass-through securities.......................... $15,427 36.3% $12,515 35.9% Collateralized mortgage obligations.............. 16,027 37.7 15,511 44.5 ------- ----- ------- ----- Total mortgage-backed securities............ 31,454 74.0 28,026 80.4 Commercial mortgage-backed securities............ 11,031 26.0 6,857 19.6 ------- ----- ------- ----- Total....................................... $42,485 100.0% $34,883 100.0% ======= ===== ======= =====
At December 31, 2003 and 2002, pass-through and collateralized mortgage obligations totaled $31,454 million and $28,026 million, respectively, or 74.0% and 80.4%, respectively, of total mortgage-backed securities, and a majority of these amounts represented agency-issued pass-through and collateralized mortgage obligations guaranteed or otherwise supported by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association. At December 31, 2003 and 2002, approximately $6,992 million and $3,598 million, respectively, or 63.4% and 52.5%, respectively, of the commercial mortgage-backed securities, and $31,210 million and $27,590 million, respectively, or 99.2% and 98.4%, respectively, of the pass-through securities and collateralized mortgage obligations, were rated Aaa/AAA by Moody's or S&P. The principal risks inherent in holding residential mortgage-backed securities are prepayment and extension risks, which will affect the timing of when cash will be received and are dependent on the level of mortgage interest rates. Prepayment risk is the unexpected increase in principal payments primarily as a result of homeowner refinancing. Extension risk relates to the unexpected slowdown in principal payments. The Company's active monitoring of its residential mortgage-backed securities mitigates exposure to the cash flow uncertainties associated with these risks. The principal risks in owning commercial mortgage-backed securities are related to structural, credit and capital market risks. Structural risks include the security's priority in the issuer's capital structure and the adequacy of and ability to realize proceeds from the underlying real estate collateral. Credit risk results from potential defaults on the underlying commercial mortgages. Capital market risks include the general level of interest rates and the liquidity for these securities in the marketplace. Asset-Backed Securities. Asset-backed securities, which include home equity loans, credit card receivables, collateralized debt obligations and automobile receivables, are purchased both to diversify the overall risks of the Company's fixed maturity assets and to provide income. The Company's asset-backed securities are diversified both by sector and by issuer. Credit card and home equity loan securitizations, each accounting for about 29% of the total holdings, constitute the largest exposures in the Company's asset-backed securities portfolio. Asset-backed securities generally have limited sensitivity to changes in interest rates. Approximately $7,528 million and $4,912 million, or 63.5% and 51.7%, of total asset-backed securities were rated Aaa/AAA by Moody's or S&P at December 31, 2003 and 2002, respectively. 95 The principal risks in holding asset-backed securities are related to structural, credit and capital market risks. Structural risks include the security's priority in the issuer's capital structure, the adequacy of and ability to realize proceeds from the collateral and the potential for prepayments. Credit risks include consumer or corporate credits, such as credit card holders, equipment lessees, and corporate obligors. Capital market risks include the general level of interest rates and the liquidity for these securities in the marketplace. Structured Investment Transactions. The Company participates in structured investment transactions, primarily asset securitizations and structured notes. These transactions enhance the Company's total return of the investment portfolio principally by generating management fee income on asset securitizations and by providing equity-based returns on debt securities through structured notes and similar instruments. The Company sponsors financial asset securitizations of high yield debt securities, investment grade bonds and structured finance securities and also is the collateral manager and a beneficial interest holder in such transactions. As the collateral manager, the Company earns management fees on the outstanding securitized asset balance, which are recorded in income as earned. When the Company transfers assets to a bankruptcy-remote SPE and surrenders control over the transferred assets, the transaction is accounted for as a sale. Gains or losses on securitizations are determined with reference to the carrying amount of the financial assets transferred, which is allocated to the assets sold and the beneficial interests retained based on relative fair values at the date of transfer. Beneficial interests in securitizations are carried at fair value in fixed maturities. Income on these beneficial interests is recognized using the prospective method in accordance with EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Certain Investments ("EITF 99-20"). The SPEs used to securitize assets are not consolidated by the Company because the Company has determined that it is not the primary beneficiary of these entities based on the framework provided in FASB Interpretation No. 46 (revised December 31, 2003), Consolidation of Variable Interest Entities, An Interpretation of ARB No. 51 ("FIN 46(r)"). Prior to the adoption of FIN 46(r), such SPEs were not consolidated because they did not meet the criteria for consolidation under previous accounting guidance. The Company purchases or receives beneficial interests in SPEs, which generally acquire financial assets, including corporate equities, debt securities and purchased options. The Company has not guaranteed the performance, liquidity or obligations of the SPEs and the Company's exposure to loss is limited to its carrying value of the beneficial interests in the SPEs. The Company uses the beneficial interests as part of its risk management strategy, including asset-liability management. These SPEs are not consolidated by the Company because the Company has determined that it is not the primary beneficiary of these entities based on the framework provided in FIN 46(r). Prior to the adoption of FIN 46(r), such SPEs were not consolidated because they did not meet the criteria for consolidation under previous accounting guidance. These beneficial interests are generally structured notes, as defined by EITF Issue No. 96-12, Recognition of Interest Income and Balance Sheet Classification of Structured Notes, which are included in fixed maturities, and their income is recognized using the retrospective interest method or the level yield method, as appropriate. Impairments of these beneficial interests are included in net investment gains and losses. MORTGAGE LOANS ON REAL ESTATE The Company's mortgage loans on real estate are collateralized by commercial, agricultural and residential properties. Mortgage loans on real estate comprised 11.8% and 13.2% of the Company's total cash and invested assets at December 31, 2003 and 2002, respectively. The carrying value of mortgage loans on real estate is stated at original cost net of repayments, amortization of premiums, accretion of discounts and 96 valuation allowances. The following table shows the carrying value of the Company's mortgage loans on real estate by type at:
DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------ ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL --------- ------ --------- ------ (DOLLARS IN MILLIONS) Commercial......................................... $20,300 77.3% $19,552 78.0% Agricultural....................................... 5,327 20.3 5,146 20.5 Residential........................................ 622 2.4 388 1.5 ------- ----- ------- ----- Total......................................... $26,249 100.0% $25,086 100.0% ======= ===== ======= =====
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, 2003 DECEMBER 31, 2002 ------------------ ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL --------- ------ --------- ------ (DOLLARS IN MILLIONS) REGION South Atlantic..................................... $ 4,978 24.5% $ 5,076 26.0% Pacific............................................ 5,005 24.7 4,180 21.4 Middle Atlantic.................................... 3,455 17.0 3,441 17.6 East North Central................................. 1,821 9.0 2,147 11.0 West South Central................................. 1,370 6.8 1,097 5.6 New England........................................ 1,278 6.3 1,323 6.8 International...................................... 836 4.1 632 3.2 Mountain........................................... 740 3.6 833 4.2 West North Central................................. 619 3.0 645 3.3 East South Central................................. 198 1.0 178 0.9 ------- ----- ------- ----- Total......................................... $20,300 100.0% $19,552 100.0% ======= ===== ======= ===== PROPERTY TYPE Office............................................. $ 9,170 45.2% $ 9,340 47.8% Retail............................................. 5,006 24.7 4,320 22.1 Apartments......................................... 2,832 13.9 2,793 14.3 Industrial......................................... 1,911 9.4 1,910 9.7 Hotel.............................................. 1,032 5.1 942 4.8 Other.............................................. 349 1.7 247 1.3 ------- ----- ------- ----- Total......................................... $20,300 100.0% $19,552 100.0% ======= ===== ======= =====
97 The following table presents the scheduled maturities for the Company's commercial mortgage loans at:
DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------ ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL --------- ------ --------- ------ (DOLLARS IN MILLIONS) Due in one year or less............................ $ 708 3.5% $ 713 3.6% Due after one year through two years............... 1,065 5.2 1,204 6.2 Due after two years through three years............ 2,020 10.0 1,939 9.9 Due after three years through four years........... 2,362 11.6 2,048 10.5 Due after four years through five years............ 3,157 15.6 2,443 12.5 Due after five years............................... 10,988 54.1 11,205 57.3 ------- ----- ------- ----- Total......................................... $20,300 100.0% $19,552 100.0% ======= ===== ======= =====
Potential Problem, Problem and Restructured Mortgage Loans. The Company monitors its mortgage loan investments on an ongoing basis. Through this monitoring process, the Company reviews loans that are restructured, delinquent or under foreclosure and identifies those that management considers to be potentially delinquent. These loan classifications are consistent with those used in industry practice. The Company defines potentially delinquent loans as loans that, in management's opinion, have a high probability of becoming delinquent. The Company defines delinquent mortgage loans, consistent with industry practice, as loans in which two or more interest or principal payments are past due. The Company defines mortgage loans under foreclosure as loans in which foreclosure proceedings have formally commenced. The Company defines restructured mortgage loans as loans in which the Company, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Company reviews all mortgage loans on an ongoing basis. These reviews may include an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis and tenant creditworthiness. The Company also reviews loan-to-value ratios and debt coverage ratios for restructured loans, delinquent loans, loans under foreclosure, potentially delinquent loans, loans with an existing valuation allowance, loans maturing within two years and loans with a loan-to-value ratio greater than 90% as determined in the prior year. The principal risks in holding commercial mortgage loans are property specific, supply and demand, financial and capital market risks. Property specific risks include the geographic location of the property, the physical condition of the property, the diversification of tenants and the rollover of their leases and the ability of the property manager to attract tenants and manage expenses. Supply and demand risks include changes in the supply and/or demand for rental space, which cause changes in vacancy rates and/or rental rates. Financial risks include the overall level of debt on the property and the amount of principal repaid during the loan term. Capital market risks include the general level of interest rates, the liquidity for these securities in the marketplace and the capital available for loan refinancing. The Company establishes valuation allowances for loans that it deems impaired, as determined through its mortgage review process. The Company's valuation allowance is established both on a loan specific basis for those loans where a property or market specific risk has been identified that could likely result in a future default, as well as for pools of loans with similar high risk characteristics where a property specific or market risk has not been identified. Loans that are individually reviewed are evaluated based on the definition of impaired loans consistent with SFAS No. 114, Accounting by Creditors for Impairments of a Loan ("SFAS 114"), as loans on which it probably will not collect all amounts due according to applicable contractual terms of the agreement. The Company bases valuation allowances upon the present value of expected future cash flows discounted at the loan's original effective interest rate or the value of the loan's collateral. The Company records valuation allowances as investment losses. The Company records subsequent adjustments to allowances as investment gains or losses. The allowance for loan loss for pools of other loans with similar characteristics is established in accordance with SFAS No. 5, Accounting for Contingencies 98 ("SFAS 5"), when a loss contingency exists. A loss contingency exists when the likelihood that a future event will occur is probable based on past events. SFAS 5 works in conjunction with, but does not overlap with, SFAS 114. The Company applies SFAS 5 to groups of loans with similar characteristics based on property types and loan to value risk factors. The Company records adjustments to its loan loss allowance as investment losses. The following table presents the amortized cost and valuation allowance for commercial mortgage loans distributed by loan classification at:
DECEMBER 31, 2003 DECEMBER 31, 2002 ----------------------------------------- ----------------------------------------- % OF % OF AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST --------- ----- --------- --------- --------- ----- --------- --------- (DOLLARS IN MILLIONS) Performing.......................... $20,315 99.5% $ 95 0.5% $19,343 98.3% $ 60 0.3% Restructured........................ 77 0.4 23 29.9% 246 1.3 49 19.9% Delinquent or under foreclosure..... -- 0.0 -- 0.0% 14 0.1 -- 0.0% Potentially delinquent.............. 30 0.1 4 13.3% 68 0.3 10 14.7% ------- ----- ---- ------- ----- ---- Total........................... $20,422 100.0% $122 0.6% $19,671 100.0% $119 0.6% ======= ===== ==== ======= ===== ====
- --------------- (1) Amortized cost is equal to carrying value before valuation allowances. The following table presents the changes in valuation allowances for commercial mortgage loans for the:
YEARS ENDED DECEMBER 31, ------------------------ 2003 2002 2001 ------ ------ ------ (DOLLARS IN MILLIONS) Balance, beginning of year.................................. $119 $134 $ 76 Additions................................................... 51 38 84 Deductions.................................................. (48) (53) (26) ---- ---- ---- Balance, end of year........................................ $122 $119 $134 ==== ==== ====
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 67% of the $5,327 million of agricultural mortgage loans outstanding at December 31, 2003 were subject to rate resets prior to maturity. A substantial portion of these loans generally is successfully renegotiated and remains outstanding to maturity. The process and policies for monitoring the agricultural mortgage loans and classifying them by performance status are generally the same as those for the commercial loans. 99 The following table presents the amortized cost and valuation allowances for agricultural mortgage loans distributed by loan classification at:
DECEMBER 31, 2003 DECEMBER 31, 2002 ----------------------------------------- ----------------------------------------- % OF % OF AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST --------- ----- --------- --------- --------- ----- --------- --------- (DOLLARS IN MILLIONS) Performing.......................... $5,162 96.7% $ - 0.0% $4,980 96.7% $- 0.0% Restructured........................ 111 2.1 1 0.9% 140 2.7 5 3.6% Delinquent or under foreclosure..... 36 0.7 2 5.6% 14 0.3 - 0.0% Potentially delinquent.............. 24 0.5 3 12.5% 18 0.3 1 5.6% ------ ----- ----- ------ ----- -- Total........................... $5,333 100.0% $ 6 0.1% $5,152 100.0% $6 0.1% ====== ===== ===== ====== ===== ==
- --------------- (1) Amortized cost is equal to carrying value before valuation allowances. The following table presents the changes in valuation allowances for agricultural mortgage loans for the:
YEARS ENDED DECEMBER 31, ------------------------ 2003 2002 2001 ------ ------ ------ (DOLLARS IN MILLIONS) Balance, beginning of year.................................. $ 6 $ 9 $ 7 Additions................................................... 1 3 21 Deductions.................................................. (1) (6) (19) --- --- ---- Balance, end of year........................................ $ 6 $ 6 $ 9 === === ====
The principal risks in holding agricultural mortgage loans are property specific, supply and demand, financial and capital market risks. Property specific risks include the geographic location of the property, soil types, weather conditions and the other factors that may impact the borrower's guaranty. Supply and demand risks include the supply and demand for the commodities produced on the specific property and the related price for those commodities. Financial risks include the overall level of debt on the property and the amount of principal repaid during the loan term. Capital market risks include the general level of interest rates, the liquidity for these securities in the marketplace and the capital available for loan refinancing. REAL ESTATE AND REAL ESTATE JOINT VENTURES The Company's real estate and real estate joint venture investments consist of commercial, residential and agricultural properties located primarily throughout the U.S. The Company manages these investments through a network of regional offices overseen by its investment department. At December 31, 2003 and 2002, the carrying value of the Company's real estate, real estate joint ventures and real estate held-for-sale was $4,803 million and $4,725 million, respectively, or 2.2%, and 2.5% of total cash and invested assets, respectively. The carrying value of real estate is stated at depreciated cost net of impairments and valuation allowances. The carrying value of real estate joint ventures is stated at the Company's equity in the real estate joint ventures net of impairments and valuation allowances. The following table presents the carrying value of 100 the Company's real estate, real estate joint ventures, real estate held-for-sale and real estate acquired upon foreclosure at:
DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------ ------------------ CARRYING % OF CARRYING % OF TYPE VALUE TOTAL VALUE TOTAL - ---- --------- ------ --------- ------ (DOLLARS IN MILLIONS) Real estate held-for-investment..................... $4,274 89.0% $3,546 75.0% Real estate joint ventures held-for-investment...... 438 9.1 377 8.0 Foreclosed real estate held-for-investment.......... 2 0.1 3 0.1 ------ ----- ------ ----- 4,714 98.2 3,926 83.1 ------ ----- ------ ----- Real estate held-for-sale........................... 88 1.8 792 16.8 Foreclosed real estate held-for-sale................ 1 0.0 7 0.1 ------ ----- ------ ----- 89 1.8 799 16.9 ------ ----- ------ ----- Total real estate, real estate joint ventures and real estate held-for-sale......................... $4,803 100.0% $4,725 100.0% ====== ===== ====== =====
Office properties represent 58% of the Company's equity real estate portfolio at both December 31, 2003 and 2002. The average occupancy level of office properties was 89% and 92% at December 31, 2003 and 2002, respectively. Ongoing management of these investments includes quarterly valuations, as well as an annual market update and review of each property's budget, financial returns, lease rollover status and the Company's exit strategy. The Company adjusts the carrying value of real estate and real estate joint ventures held-for-investment for impairments whenever events or changes in circumstances indicate that the carrying value of the property may not be recoverable. The Company writes down impaired real estate to estimated fair value, when the carrying value of the real estate exceeds the sum of the undiscounted cash flow expected to result from the use and eventual disposition of the real estate. The Company records writedowns as investment losses and reduces the cost basis of the properties accordingly. The Company does not change the revised cost basis for subsequent recoveries in value. The Company's real estate equity portfolio at December 31, 2003 was mainly comprised of a core portfolio of multi-tenanted office buildings with high tenant credit quality, net leased properties and apartments. The objective is to maximize earnings by building upon and strengthening the core portfolio through selective acquisitions and dispositions. The Company took advantage of a significant demand for Class A, institutional grade properties and sold certain real estate holdings in its portfolio mostly during the fourth quarter of 2002. This sales program did not represent any fundamental change in the Company's investment strategy. Once the Company identifies a property that is expected to be sold within one year and commences a firm plan for marketing the property, in accordance with SFAS 144, the Company, if applicable, classifies the property as held-for-sale and reports the related net investment income and any resulting investment gains and losses as discontinued operations. Further, the Company establishes and periodically revises, if necessary, a valuation allowance to adjust the carrying value of the property to its expected sales value, less associated selling costs, if it is lower than the property's carrying value. The Company records valuation allowances as investment losses and subsequent adjustments as investment gains or losses. If circumstances arise that were previously considered unlikely and, as a result, the property is expected to be on the market longer than anticipated, a held-for-sale property is generally reclassified to held-for-investment and measured as such. The Company's carrying value of real estate held-for-sale, including real estate acquired upon foreclosure of commercial and agricultural mortgage loans, in the amounts of $89 million and $799 million at December 31, 2003 and 2002, respectively, are net of valuation allowances of $12 million and $11 million, 101 respectively. There were no impairments at December 31, 2003; however, the December 31, 2002 amount included a net impairment of $5 million. The Company records real estate acquired upon foreclosure of commercial and agricultural mortgage loans at the lower of estimated fair value or the carrying value of the mortgage loan at the date of foreclosure. Certain of the Company's investments in real estate joint ventures meet the definition of a VIE under FIN 46(r). See "-- Variable Interest Entities." On August 28, 2003, the Company (through one of its subsidiaries) acquired the Sears Tower building through the acquisition of a controlling interest in a partnership holding title to the building. Subsequent to December 31, 2003, MetLife entered into a marketing agreement to sell one of its real estate investments, the Sears Tower, and reclassified the property from Real Estate -- Held-for Investments to Real Estate -- Held-for Sale. The carrying value of the property as of December 31, 2003 is approximately $700 million. EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS The Company's carrying value of equity securities, which primarily consist of investments in common and preferred stocks and mutual fund interests, was $1,598 million and $1,613 million at December 31, 2003 and 2002, respectively. Substantially all of the common stock is publicly traded on major securities exchanges. The carrying value of the other limited partnership interests (which primarily represent ownership interests in pooled investment funds that make private equity investments in companies in the U.S. and overseas) was $2,477 million and $2,395 million at December 31, 2003 and 2002, respectively. The Company classifies its investments in common stocks as available-for-sale and marks them to market, except for non-marketable private equities, which are generally carried at cost. The Company uses the equity method of accounting for investments in limited partnership interests in which it has more than a minor interest, has influence over the partnership's operating and financial policies and does not have a controlling interest. The Company uses the cost method for minor interest investments and when it has virtually no influence over the partnership's operating and financial policies. The Company's investments in equity securities excluding partnerships represented 0.7% and 0.8% of cash and invested assets at December 31, 2003 and 2002, respectively. Equity securities include private equity securities with an estimated fair value of $432 million and $443 million at December 31, 2003 and 2002, respectively. The Company may not freely trade its private equity securities because of restrictions imposed by federal and state securities laws and illiquid markets. The Company makes commitments to fund partnership investments in the normal course of business. The amounts of these unfunded commitments were $1,380 million and $1,667 million at December 31, 2003 and 2002, respectively. The Company anticipates that these amounts could be invested in these partnerships any time over the next five years. Some of the Company's investments in other limited partnership interests meet the definition of a VIE under FIN 46(r). See " -- Variable Interest Entities." 102 The following tables set forth the cost, gross unrealized gain or loss and estimated fair value of the Company's equity securities, as well as the percentage of the total equity securities at:
DECEMBER 31, 2003 ----------------------------------------- GROSS UNREALIZED ----------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL ------ ---- ---- ---------- ----- (DOLLARS IN MILLIONS) Equity Securities: Common stocks.............................. $ 620 $334 $2 $ 952 59.6% Nonredeemable preferred stocks............. 602 48 4 646 40.4 ------ ---- -- ------ ----- Total equity securities................. $1,222 $382 $6 $1,598 100.0% ====== ==== == ====== =====
DECEMBER 31, 2002 ----------------------------------------- GROSS UNREALIZED ----------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL ------ ---- ---- ---------- ----- (DOLLARS IN MILLIONS) Equity Securities: Common stocks.............................. $ 877 $115 $79 $ 913 56.6% Nonredeemable preferred stocks............. 679 25 4 700 43.4 ------ ---- --- ------ ----- Total equity securities................. $1,556 $140 $83 $1,613 100.0% ====== ==== === ====== =====
Potential Problem and 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. Potential problem equity securities and other limited partnership interests are defined as securities issued by a company that is experiencing significant operating problems or difficult industry conditions. Criteria generally indicative of these problems or conditions are (i) cash flows falling below varying thresholds established for the industry and other relevant factors; (ii) significant declines in revenues and/or margins; (iii) public securities trading at a substantial discount compared to original cost as a result of specific credit concerns; and (iv) other information that becomes available. Problem equity securities and other limited partnership interests are defined as securities (i) in which significant declines in revenues and/or margins threaten the ability of the issuer to continue operating; or (ii) where the issuer has entered into bankruptcy. Equity Security Impairment. The Company classifies all of its equity securities as available-for-sale and marks them to market through other comprehensive income. All securities with gross unrealized losses at the consolidated balance sheet date are subjected to the Company's process for identifying other-than-temporary impairments. The Company writes down to fair value securities that it deems to be other-than-temporarily impaired in the period the securities are deemed to be so impaired. The assessment of whether such impairment has occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors, as described below, about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. 103 Considerations used by the Company in the impairment evaluation process include, but are not limited to, the following: - length of time and the extent to which the market value has been below cost; - potential for impairments of securities when the issuer is experiencing significant financial difficulties, including a review of all securities of the issuer, including its known subsidiaries and affiliates, regardless of the form of the Company's ownership; - potential for impairments in an entire industry sector or sub-sector; - potential for impairments in certain economically depressed geographic locations; - potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; and - other subjective factors, including concentrations and information obtained from regulators and rating agencies. Equity securities or other limited partnership interests which are deemed to be other-than-temporarily impaired are written down to fair value. The Company records writedowns as investment losses and adjusts the cost basis of the equity securities accordingly. The Company does not change the revised cost basis for subsequent recoveries in value. Writedowns of equity securities and other limited partnership interests were $108 million and $191 million years ended December 31, 2003 and 2002, respectively. During the years ended December 31, 2003 and 2002, the Company sold equity securities with an estimated fair value of $62 million and $915 million, at a loss of $13 million and $85 million, respectively. The gross unrealized loss related to the Company's equity securities at December 31, 2003 was $6 million. Such securities are concentrated by security type in common stock (36%) and preferred stock (63%); and are concentrated by industry in financial (57%) and domestic broad market mutual funds (7%) (calculated as a percentage of gross unrealized loss). The following table presents the cost, gross unrealized losses and number of securities for equity securities where the estimated fair value had declined and remained below cost by less than 20%, or 20% or more for:
DECEMBER 31, 2003 ------------------------------------------------------------ GROSS UNREALIZED NUMBER OF COST LOSSES SECURITIES ------------------ ------------------ ------------------ LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR 20% MORE 20% MORE 20% MORE --------- ------ --------- ------ --------- ------ (DOLLARS IN MILLIONS) Less than six months............ $58 $1 $6 $-- 19 1 Six months or greater but less than nine months.............. -- -- -- -- -- -- Nine months or greater but less than twelve months............ -- -- -- -- -- 2 Twelve months or greater........ 22 -- -- -- 14 -- --- -- -- --- -- ---- Total......................... $80 $1 $6 $-- 33 3 === == == === == ====
The Company's review of its equity security exposure includes the analysis of total gross unrealized losses by three categories of securities: (i) securities where the estimated fair value had declined and remained below cost by less than 20%; (ii) securities where the estimated fair value had declined and remained below cost by 20% or more for less than six months; and (iii) securities where the estimated fair value had declined and remained below cost by 20% or more for six months or greater. While all of these securities are monitored for potential impairment, the Company's experience indicates that the first two categories do not present as great a risk of impairment, and often, fair values recover over time as the factors that caused the declines improve. 104 The following table presents the total gross unrealized losses for equity securities at December 31, 2003 where the estimated fair value had declined and remained below cost by:
DECEMBER 31, 2003 ------------------------ GROSS UNREALIZED % OF LOSSES TOTAL ---------------- ----- (DOLLARS IN MILLIONS) Less than 20%............................................... $6 $ 100% 20% or more for less than six months........................ -- -- 20% or more for six months or greater....................... -- -- -- ----- Total....................................................... $6 100.0% == =====
The category of equity securities where the estimated fair value has declined and remained below cost by less than 20% is comprised of 33 equity securities with a cost of $80 million and a gross unrealized loss of $6 million. These securities are concentrated by security type in common stock (33%) and preferred stock (65%); and concentrated by industry in financial (59%) and communications (3%) (calculated as a percentage of gross unrealized loss). The significant factors considered at December 31, 2003 in the review of equity securities for other-than-temporary impairment were as a result of generally difficult economic and market conditions. The Company did not hold any equity securities with a gross unrealized loss at December 31, 2003 greater than $5 million. OTHER INVESTED ASSETS The Company's other invested assets consist principally of leveraged leases and funds withheld at interest of $3.9 billion and $3.1 billion at December 31, 2003 and 2002, respectively. The leveraged leases are recorded net of non-recourse debt. The Company participates in lease transactions, which are diversified by industry, asset type and geographic area. The Company regularly reviews residual values and writes down residuals to expected values as needed. Funds withheld represent amounts contractually withheld by ceding companies in accordance with reinsurance agreements. For agreements written on a modified coinsurance basis and certain agreements written on a coinsurance basis, assets supporting the reinsured policies equal to the net statutory reserves are withheld and continue to be legally owned by the ceding company. Other invested assets also include the fair value of embedded derivatives related to funds withheld and modified coinsurance contracts. Interest accrues to these funds withheld at rates defined by the treaty terms and may be contractually specified or directly related to the investment portfolio. The Company's other invested assets represented 2.1% and 1.9% of cash and invested assets at December 31, 2003 and 2002, respectively. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative instruments to manage risk through one of five principal risk management strategies: the hedging of (i) liabilities; (ii) invested assets; (iii) portfolios of assets or liabilities; (iv) net investment in certain foreign operations; and (v) firm commitments and forecasted transactions. Additionally, the Company enters into income generation and replication derivative transactions as permitted by its insurance subsidiaries' Derivatives Use Plans approved by the applicable state insurance departments. The Company's derivative hedging strategy employs a variety of instruments, including financial futures, financial forwards, interest rate, credit default and foreign currency swaps, foreign currency forwards and options, including caps and floors. 105 The table below provides a summary of the notional amount and fair value of derivative financial instruments held at December 31, 2003 and 2002:
2003 2002 ------------------------------- ------------------------------- CURRENT MARKET CURRENT MARKET OR FAIR VALUE OR FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- (DOLLARS IN MILLIONS) Financial futures...................... $ 1,348 $ 8 $ 30 $ 4 $ -- $ -- Interest rate swaps.................... 9,944 189 36 3,866 196 126 Floors................................. 325 5 -- 325 9 -- Caps................................... 9,345 29 -- 8,040 -- -- Financial forwards..................... 1,310 2 3 1,945 -- 12 Foreign currency swaps................. 4,710 9 796 2,371 92 181 Options................................ 6,065 7 -- 6,472 9 -- Foreign currency forwards.............. 695 5 32 54 -- 1 Credit default swaps................... 615 2 1 376 2 -- ------- ---- ---- ------- ---- ---- Total contractual commitments........ $34,357 $256 $898 $23,453 $308 $320 ======= ==== ==== ======= ==== ====
VARIABLE INTEREST ENTITIES The Company has adopted the provisions of FIN 46 and FIN 46(r). See "-- Recent Accounting Standards." At December 31, 2003, FIN 46(r) did not require the Company to consolidate any additional VIEs that were not previously consolidated. The following table presents the total assets of and maximum exposure to loss relating to VIEs for which the Company has concluded that (i) it is the primary beneficiary and which will be consolidated in the Company's financial statements beginning March 31, 2004, and (ii) it holds significant valuable interests but it is not the primary beneficiary and which will not be consolidated:
DECEMBER 31, 2003 ------------------------------------------------- PRIMARY BENEFICIARY(1) NOT PRIMARY BENEFICIARY ---------------------- ------------------------ MAXIMUM MAXIMUM TOTAL EXPOSURE TOTAL EXPOSURE ASSETS(2) TO LOSS(3) ASSETS(2) TO LOSS(3) --------- ---------- ---------- ----------- (DOLLARS IN MILLIONS) SPES: Asset-backed securitizations and Collateralized debt obligations........... $ -- $ -- $2,400 $20 NON-SPES: Real estate joint ventures(4)............... 617 238 42 59 Other limited partnerships(5)............... 29 27 459 10 ---- ---- ------ --- Total.................................. $646 $265 $2,901 $89 ==== ==== ====== ===
- --------------- (1) Had the Company consolidated these VIEs at December 31, 2003, the transition adjustments would have been $10 million, net of income tax. (2) The assets of the asset-backed securitizations and collateralized debt obligations are reflected at fair value as of December 31, 2003. The assets of the real estate joint ventures and other limited partnerships are reflected at the carrying amounts at which such assets would have been reflected on the Company's balance sheet had the Company consolidated the VIE from the date of its initial investment in the entity. 106 (3) The maximum exposure to loss of the asset-backed securitizations and collateralized debt obligations is equal to the carrying amounts of retained interests. In addition, the Company provides collateral management services for certain of these structures for which it collects a management fee. The maximum exposure to loss relating to real estate joint ventures and other limited partnerships is equal to the carrying amounts plus any unfunded commitments, reduced by amounts guaranteed by other partners. (4) Real estate joint ventures include partnerships and other ventures, which engage in the acquisition, development, management and disposal of real estate investments. (5) Other limited partnerships include partnerships established for the purpose of investing in public and private debt and equity securities, as well as limited partnerships established for the purpose of investing in low-income housing that qualifies for federal tax credits. SECURITIES LENDING The Company participates in a securities lending program whereby blocks of securities, which are included in investments, are loaned to third parties, primarily major brokerage firms. The Company requires a minimum of 102% of the fair value of the loaned securities to be separately maintained as collateral for the loans. Securities with a cost or amortized cost of $25,121 million and $16,196 million and an estimated fair value of $26,387 million and $17,625 million were on loan under the program at December 31, 2003 and 2002, respectively. The Company was liable for cash collateral under its control of $27,083 million and $17,862 million at December 31, 2003 and 2002, respectively. Security collateral on deposit from customers may not be sold or repledged and is not reflected in the consolidated financial statements. SEPARATE ACCOUNT ASSETS The Company manages each separate account's assets in accordance with the prescribed investment policy that applies to that specific separate account. The Company establishes separate accounts on a single client and multi-client commingled basis in conformity with insurance laws. Generally, separate accounts are not chargeable with liabilities that arise from any other business of the Company. Separate account assets are subject to the Company's general account claims only to the extent that the value of such assets exceeds the separate account liabilities, as defined by the account's contract. The Company reports separately as assets and liabilities investments held in separate accounts and liabilities of the separate accounts. The Company reports substantially all separate account assets at their fair market value. Investment income and gains or losses on the investments of separate accounts accrue directly to contractholders, and, accordingly, the Company does not reflect them in its consolidated statements of income and cash flows. The Company reflects in its revenues fees charged to the separate accounts by the Company, including mortality charges, risk charges, policy administration fees, investment management fees and surrender charges. Effective January 1, 2004, in accordance with new accounting guidance, approximately $1,678 million of separate account assets will be transferred to investments with a corresponding transfer of separate account liabilities to future policy benefits and policyholder account balances. 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. 107 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 currency 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 currency exchange rates. The Company's exposure to fluctuations in foreign currency 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 currency exchange rate risk in the Company's investment portfolios are Canadian dollars, Mexican pesos, Chilean pesos and British pounds. The Company mitigates the majority of its fixed maturities' foreign currency 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 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 currency exchange rate fluctuations. 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 to MetLife's Chief Financial Officer. 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 an economic capital basis; and - reporting on a periodic basis to the Governance Committee of the Holding Company's Board of Directors and various financial and non-financial senior management committees. 108 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 Executive Vice-President in charge of risk management at MetLife. 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 financial futures, financial forwards, interest rate and credit default swaps, floors, options, written covered calls and caps. MetLife also uses foreign currency swaps and foreign currency forwards to hedge its foreign currency denominated fixed income investments. Economic Capital. Beginning in 2003, the Company changed its methodology of allocating capital to its business segments from RBC to Economic Capital. Prior to 2003, the Company's business segments' allocated equity was primarily based on RBC, an internally developed formula based on applying a multiple to the NAIC Statutory Risk-Based Capital and includes certain GAAP accounting adjustments. Economic Capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The Economic Capital model accounts for the unique and specific nature of the risks inherent in MetLife's businesses. This is in contrast to the standardized regulatory RBC formula, which is not as refined in its risk calculations with respect to the nuances of the Company's businesses. This change in methodology is being applied prospectively. This change has and will continue to impact the level of net investment income and net income of each of the Company's business segments. A portion of net investment income is credited to the segments based on the level of allocated equity. This change in methodology of allocating equity does not impact the Company's consolidated net investment income or net income. 109 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, 2003 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 foreign 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. 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 110 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, 2003 and 2002. 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, 2003 and 2002 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:
DECEMBER 31, ---------------------- 2003 2002 --------- --------- (DOLLARS IN MILLIONS) Interest rate risk.......................................... $3,617 $2,710 Equity price risk........................................... $ 155 $ 120 Foreign currency exchange rate risk......................... $ 619 $ 529
The change in potential loss in fair value related to market risk exposure between December 31, 2003 and 2002 was primarily attributable to a shift in the yield curve. 111 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, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001: 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 Statement Schedules as of December 31, 2003 and for the years ended December 31, 2003, 2002 and 2001: Schedule I -- Consolidated Summary of Investments -- Other Than Investments in Affiliates......................... 116 Schedule II -- Condensed Financial Information of MetLife, Inc. (Registrant)...................................... 117 Schedule III -- Consolidated Supplementary Insurance Information............................................ 119 Schedule IV -- Consolidated Reinsurance................... 121
112 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of MetLife, Inc.: We have audited the accompanying consolidated balance sheets of MetLife, Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2003, 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. As discussed in Note 1, the Company changed its method of accounting for embedded derivatives in certain insurance products as required by new accounting guidance which became effective on October 1, 2003, and recorded the impact as a cumulative effect of a change in accounting principle. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP New York, New York March 5, 2004 F-1 METLIFE, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 (DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
2003 2002 -------- -------- ASSETS Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $158,333 and $132,899, respectively).......................................... $167,752 $140,288 Equity securities, at fair value (cost: $1,222 and $1,556, respectively).......................................... 1,598 1,613 Mortgage loans on real estate............................. 26,249 25,086 Policy loans.............................................. 8,749 8,580 Real estate and real estate joint ventures held-for-investment.................................... 4,714 3,926 Real estate held-for-sale................................. 89 799 Other limited partnership interests....................... 2,477 2,395 Short-term investments.................................... 1,826 1,921 Other invested assets..................................... 4,645 3,727 -------- -------- Total investments................................. 218,099 188,335 Cash and cash equivalents................................... 3,733 2,323 Accrued investment income................................... 2,186 2,088 Premiums and other receivables.............................. 7,047 6,445 Deferred policy acquisition costs........................... 12,943 11,727 Other assets................................................ 7,077 6,815 Separate account assets..................................... 75,756 59,693 -------- -------- Total assets...................................... $326,841 $277,426 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Future policy benefits.................................... $ 94,148 $ 89,815 Policyholder account balances............................. 75,901 66,830 Other policyholder funds.................................. 6,343 5,685 Policyholder dividends payable............................ 1,049 1,030 Policyholder dividend obligation.......................... 2,130 1,882 Short-term debt........................................... 3,642 1,161 Long-term debt............................................ 5,703 4,425 Shares subject to mandatory redemption.................... 277 -- Current income taxes payable.............................. 652 769 Deferred income taxes payable............................. 2,399 1,625 Payables under securities loaned transactions............. 27,083 17,862 Other liabilities......................................... 10,609 7,999 Separate account liabilities.............................. 75,756 59,693 -------- -------- Total liabilities................................. 305,692 258,776 -------- -------- Company-obligated mandatorily redeemable securities of subsidiary trusts......................................... -- 1,265 -------- -------- Stockholders' Equity: Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; none issued......................... -- -- Common stock, par value $0.01 per share; 3,000,000,000 shares authorized; 786,766,664 shares issued at December 31, 2003 and 2002; 757,186,137 shares outstanding at December 31, 2003 and 700,278,412 shares outstanding at December 31, 2002....................... 8 8 Additional paid-in capital................................ 14,991 14,968 Retained earnings......................................... 4,193 2,807 Treasury stock, at cost; 29,580,527 shares at December 31, 2003 and 86,488,252 shares at December 31, 2002........ (835) (2,405) Accumulated other comprehensive income.................... 2,792 2,007 -------- -------- Total stockholders' equity........................ 21,149 17,385 -------- -------- Total liabilities and stockholders' equity........ $326,841 $277,426 ======== ========
See accompanying notes to consolidated financial statements. F-2 METLIFE, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
2003 2002 2001 ------- ------- ------- REVENUES Premiums.................................................... $20,673 $19,077 $17,212 Universal life and investment-type product policy fees...... 2,496 2,147 1,889 Net investment income....................................... 11,636 11,261 11,187 Other revenues.............................................. 1,342 1,332 1,507 Net investment gains (losses) (net of amounts allocable from other accounts of ($215), ($145) and ($134), respectively)............................................. (358) (751) (579) ------- ------- ------- Total revenues.................................... 35,789 33,066 31,216 ------- ------- ------- EXPENSES Policyholder benefits and claims (excludes amounts directly related to net investment gains (losses) of ($184), ($150) and ($159), respectively)................................. 20,848 19,523 18,454 Interest credited to policyholder account balances.......... 3,035 2,950 3,084 Policyholder dividends...................................... 1,975 1,942 2,086 Other expenses (excludes amounts directly related to net investment gains (losses) of ($31), $5 and $25, respectively)............................................. 7,301 7,015 7,022 ------- ------- ------- Total expenses.................................... 33,159 31,430 30,646 ------- ------- ------- Income from continuing operations before provision for income taxes.............................................. 2,630 1,636 570 Provision for income taxes.................................. 687 502 204 ------- ------- ------- Income from continuing operations........................... 1,943 1,134 366 Income from discontinued operations, net of income taxes.... 300 471 107 ------- ------- ------- Income before cumulative effect of change in accounting..... 2,243 1,605 473 Cumulative effect of change in accounting, net of income taxes..................................................... (26) -- -- ------- ------- ------- Net income.................................................. $ 2,217 $ 1,605 $ 473 ======= ======= ======= Income from continuing operations available to common shareholders per share Basic..................................................... $ 2.60 $ 1.61 $ 0.49 ======= ======= ======= Diluted................................................... $ 2.57 $ 1.56 $ 0.48 ======= ======= ======= Net income available to common shareholders per share Basic..................................................... $ 2.98 $ 2.28 $ 0.64 ======= ======= ======= Diluted................................................... $ 2.94 $ 2.20 $ 0.62 ======= ======= ======= Cash dividends per share.................................... $ 0.23 $ 0.21 $ 0.20 ======= ======= =======
See accompanying notes to consolidated financial statements. F-3 METLIFE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (DOLLARS IN MILLIONS)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ----------------------------------------- NET FOREIGN MINIMUM ADDITIONAL TREASURY UNREALIZED CURRENCY PENSION COMMON PAID-IN RETAINED STOCK AT INVESTMENT TRANSLATION LIABILITY STOCK CAPITAL EARNINGS COST GAINS (LOSSES) ADJUSTMENT ADJUSTMENT TOTAL ------ ---------- -------- -------- -------------- ----------- ---------- ------- Balance at December 31, 2000.... $8 $14,926 $1,021 $ (613) $1,175 $(100) $ (28) $16,389 Treasury stock transactions, net........................... (1,321) (1,321) Dividends on common stock....... (145) (145) Issuance of warrants -- by subsidiary.................... 40 40 Comprehensive income: Net income.................... 473 473 Other comprehensive income: Cumulative effect of change in accounting for derivatives, net of income taxes..................... 22 22 Unrealized gains on derivative instruments, net of income taxes....... 24 24 Unrealized investment gains, net of related offsets, reclassification adjustments and income taxes..................... 658 658 Foreign currency translation adjustments............... (60) (60) Minimum pension liability adjustment................ (18) (18) ------- Other comprehensive income.................... 626 ------- Comprehensive income.......... 1,099 -- ------- ------ ------- ------ ----- ----- ------- Balance at December 31, 2001.... 8 14,966 1,349 (1,934) 1,879 (160) (46) 16,062 Treasury stock transactions, net........................... 2 (471) (469) Dividends on common stock....... (147) (147) Comprehensive income: Net income.................... 1,605 1,605 Other comprehensive income: Unrealized losses on derivative instruments, net of income taxes....... (60) (60) Unrealized investment gains, net of related offsets, reclassification adjustments and income taxes..................... 463 463 Foreign currency translation adjustments............... (69) (69) ------- Other comprehensive income.................... 334 ------- Comprehensive income.......... 1,939 -- ------- ------ ------- ------ ----- ----- ------- Balance at December 31, 2002.... 8 14,968 2,807 (2,405) 2,282 (229) (46) 17,385 Treasury stock transactions, net........................... 20 (92) (72) Issuance of shares -- by subsidiary.................... 24 24 Dividends on common stock....... (175) (175) Settlement of common stock purchase contracts............ (656) 1,662 1,006 Premium on conversion of company-obligated mandatorily redeemable securities of a subsidiary trust.............. (21) (21) Comprehensive income: Net income.................... 2,217 2,217 Other comprehensive income: Unrealized losses on derivative instruments, net of income taxes....... (250) (250) Unrealized investment gains, net of related offsets, reclassification adjustments and income taxes..................... 940 940 Foreign currency translation adjustments............... 177 177 Minimum pension liability adjustment................ (82) (82) ------- Other comprehensive income.................... 785 ------- Comprehensive income.......... 3,002 -- ------- ------ ------- ------ ----- ----- ------- Balance at December 31, 2003.... $8 $14,991 $4,193 $ (835) $2,972 $ (52) $(128) $21,149 == ======= ====== ======= ====== ===== ===== =======
See accompanying notes to consolidated financial statements. F-4 METLIFE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (DOLLARS IN MILLIONS)
2003 2002 2001 --------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 2,217 $ 1,605 $ 473 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expenses................. 478 498 481 Amortization of premiums and accretion of discounts associated with investments, net..................... (180) (519) (575) (Gains) losses from sales of investments and businesses, net...................................... 152 317 713 Interest credited to other policyholder account balances............................................. 3,035 2,950 3,084 Universal life and investment-type product policy fees................................................. (2,496) (2,147) (1,889) Change in premiums and other receivables............... (334) (473) 476 Change in deferred policy acquisition costs, net....... (1,332) (741) (563) Change in insurance-related liabilities................ 4,687 3,104 2,508 Change in income taxes payable......................... 241 479 477 Change in bank customer deposits....................... 897 209 81 Change in other liabilities............................ 560 (117) (40) Other, net............................................. (562) (997) (968) --------- -------- -------- Net cash provided by operating activities................... 7,363 4,168 4,258 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Sales, maturities and repayments of: Fixed maturities....................................... 76,200 64,602 52,426 Equity securities...................................... 612 2,703 2,125 Mortgage loans on real estate.......................... 3,483 2,638 1,993 Real estate and real estate joint ventures............. 889 835 344 Other limited partnership interests.................... 308 209 396 Purchases of: Fixed maturities....................................... (101,577) (85,155) (51,865) Equity securities...................................... (187) (1,260) (3,354) Mortgage loans on real estate.......................... (4,975) (3,206) (3,494) Real estate and real estate joint ventures............. (344) (208) (769) Other limited partnership interests.................... (588) (456) (424) Net change in short-term investments...................... 98 (477) 74 Purchases of businesses, net of cash received............. 18 (879) (276) Proceeds from sales of businesses......................... 5 -- 81 Net change in payable under securities loaned transactions........................................... 9,221 5,201 360 Other, net................................................ (851) (760) (587) --------- -------- -------- Net cash used in investing activities....................... $ (17,688) $(16,213) $ (2,970) --------- -------- -------- See accompanying notes to consolidated financial statements.
F-5 METLIFE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (DOLLARS IN MILLIONS)
2003 2002 2001 --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits............................................... $ 37,023 $ 31,061 $ 31,421 Withdrawals............................................ (28,674) (25,151) (27,899) Net change in short-term debt............................. 2,481 806 (730) Long-term debt issued..................................... 934 1,008 1,600 Long-term debt repaid..................................... (763) (211) (372) Treasury stock acquired................................... (97) (471) (1,321) Settlement of common stock purchase contracts............. 1,006 -- -- Net proceeds from issuance of company-obligated mandatorily redeemable securities of subsidiary trust.................................................. -- -- 197 Dividends on common stock................................. (175) (147) (145) --------- -------- -------- Net cash provided by financing activities................... 11,735 6,895 2,751 --------- -------- -------- Change in cash and cash equivalents......................... 1,410 (5,150) 4,039 Cash and cash equivalents, beginning of year................ 2,323 7,473 3,434 --------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 3,733 $ 2,323 $ 7,473 ========= ======== ======== Supplemental disclosures of cash flow information: Cash paid (refunded) during the year: Interest............................................... $ 505 $ 424 $ 349 ========= ======== ======== Income taxes........................................... $ 702 $ 193 $ (262) ========= ======== ======== Non-cash transactions during the year: Business acquisitions -- assets........................ $ 126 $ 2,630 $ 1,336 ========= ======== ======== Business acquisitions -- liabilities................... $ 144 $ 1,751 $ 1,060 ========= ======== ======== Business dispositions -- assets........................ $ 9 $ -- $ 102 ========= ======== ======== Business dispositions -- liabilities................... $ 4 $ -- $ 44 ========= ======== ======== Purchase money mortgage on real estate sale............ $ 196 $ 954 $ -- ========= ======== ======== MetLife Capital Trust I transactions................... $ 1,037 $ -- $ -- ========= ======== ======== Real estate acquired in satisfaction of debt........... $ 14 $ 30 $ 30 ========= ======== ========
See accompanying notes to consolidated financial statements. F-6 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES BUSINESS "MetLife" or the "Company" refers to MetLife, Inc., a Delaware corporation (the "Holding Company"), and its subsidiaries, including Metropolitan Life Insurance Company ("Metropolitan Life") is a leading provider of insurance and other financial services to a broad spectrum of individual and institutional customers. The Company offers life insurance, annuities, automobile and homeowners insurance and mutual funds to individuals, as well as group insurance, reinsurance and retirement and savings products and services to corporations and other institutions. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of (i) the Holding Company and its subsidiaries: (ii) partnerships and joint ventures in which the Company has a majority voting interest; and (iii) variable interest entities ("VIEs") created or acquired on or after February 1, 2003 of which the Company is deemed to be the primary beneficiary. Closed block assets, liabilities, revenues and expenses are combined on a line by line basis with the assets, liabilities, revenues and expenses outside the closed block based on the nature of the particular item. See Note 6. Intercompany accounts and transactions have been eliminated. The Company uses the equity method of accounting for investments in real estate joint ventures and other limited partnership interests in which it has more than a minor equity interest or more than minor influence over the partnership's operations, but does not have a controlling interest. The Company uses the cost method of accounting for interests in which it has a minor equity investment and virtually no influence over the partnership's operations. Minority interest related to consolidated entities included in other liabilities was $950 million and $491 million at December 31, 2003 and 2002, respectively. This increase was the direct result of the change in MetLife's ownership of RGA to approximately 52% in 2003 compared to 59% in 2002. Certain amounts in the prior years' consolidated financial statements have been reclassified to conform with the 2003 presentation. SUMMARY OF CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The critical accounting policies, estimates and related judgments underlying the Company's consolidated financial statements are summarized below. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company's businesses and operations. Investments The Company's principal investments are in fixed maturities, mortgage loans and real estate, all of which are exposed to three primary sources of investment risk: credit, interest rate and market valuation. The financial statement risks are those associated with the recognition of impairments and income, as well as the determination of fair values. The assessment of whether impairments have occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in F-7 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the market value has been below cost; (ii) the potential for impairments of securities when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; (vi) unfavorable changes in forecasted cash flows on asset-backed securities; and (vii) other subjective factors, including concentrations and information obtained from regulators and rating agencies. In addition, the earnings on certain investments are dependent upon market conditions, which could result in prepayments and changes in amounts to be earned due to changing interest rates or equity markets. The determination of fair values in the absence of quoted market values is based on: (i) valuation methodologies; (ii) securities the Company deems to be comparable; and (iii) assumptions deemed appropriate given the circumstances. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts. In addition, the Company enters into certain structured investment transactions, real estate joint ventures and limited partnerships for which the Company may be deemed to be the primary beneficiary and, therefore, may be required to consolidate such investments. The accounting rules for the determination of the primary beneficiary are complex and require evaluation of the contractual rights and obligations associated with each party involved in the entity, an estimate of the entity's expected losses and expected residual returns and the allocation of such estimates to each party. Derivatives The Company enters into freestanding derivative transactions primarily to manage the risk associated with variability in cash flows or changes in fair values related to the Company's financial assets and liabilities or to changing fair values. The Company also uses derivative instruments to hedge its currency exposure associated with net investments in certain foreign operations. The Company also purchases investment securities, issues certain insurance policies and engages in certain reinsurance contracts that embed derivatives. The associated financial statement risk is the volatility in net income which can result from (i) changes in fair value of derivatives not qualifying as accounting hedges; (ii) ineffectiveness of designated hedges; and (iii) counterparty default. In addition, there is a risk that embedded derivatives requiring bifurcation are not identified and reported at fair value in the consolidated financial statements. Accounting for derivatives is complex, as evidenced by significant authoritative interpretations of the primary accounting standards which continue to evolve, as well as the significant judgments and estimates involved in determining fair value in the absence of quoted market values. These estimates are based on valuation methodologies and assumptions deemed appropriate in the circumstances. Such assumptions include estimated volatility and interest rates used in the determination of fair value where quoted market values are not available. The use of different assumptions may have a material effect on the estimated fair value amounts. Deferred Policy Acquisition Costs The Company incurs significant costs in connection with acquiring new and renewal insurance business. These costs, which vary with and are primarily related to the production of that business, are deferred. The recovery of such costs is dependent upon the future profitability of the related business. The amount of future profit is dependent principally on investment returns in excess of the amounts credited to policyholders, mortality, morbidity, persistency, interest crediting rates, expenses to administer the business, creditworthiness of reinsurance counterparties and certain economic variables, such as inflation. Of these factors, the Company anticipates that investment returns are most likely to impact the rate of amortization of such costs. The aforementioned factors enter into management's estimates of gross margins and profits, which generally are used to amortize such costs. Revisions to estimates result in changes to the amounts expensed in the reporting F-8 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) period in which the revisions are made and could result in the impairment of the asset and a charge to income if estimated future gross margins and profits are less than amounts deferred. In addition, the Company utilizes the reversion to the mean assumption, a standard industry practice, in its determination of the amortization of deferred policy acquisition cost ("DAC"), including value of business acquired ("VOBA"). This practice assumes that the expectation for long-term appreciation in equity markets is not changed by minor short-term market fluctuations, but that it does change when large interim deviations have occurred. Future Policy Benefits The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, annuities and disability insurance. Generally, amounts are payable over an extended period of time and liabilities are established based on methods and underlying assumptions in accordance with GAAP and applicable actuarial standards. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, expenses, persistency, investment returns and inflation. The Company also establishes liabilities for unpaid claims and claims expenses for property and casualty insurance. Liabilities for property and casualty insurance are dependent on estimates of amounts payable for claims reported but not settled and claims incurred but not reported. These estimates are influenced by historical experience and actuarial assumptions with respect to current developments, anticipated trends and risk management strategies. Differences between the actual experience and assumptions used in pricing these policies and in the establishment of liabilities result in variances in profit and could result in losses. Reinsurance The Company enters into reinsurance transactions as both a provider and a purchaser of reinsurance. Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risks. The Company periodically reviews actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluates the financial strength of counterparties to its reinsurance agreements using criteria similar to that evaluated in the security impairment process discussed previously. Additionally, for each of its reinsurance contracts, the Company must determine if the contract provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. The Company must review all contractual features, particularly those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. If the Company determines that a reinsurance contract does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the contract using the deposit method of accounting. Litigation The Company is a party to a number of legal actions. Given the inherent unpredictability of litigation, it is difficult to estimate the impact of litigation on the Company's consolidated financial position. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities related to certain lawsuits, including the Company's asbestos-related liability, are especially difficult to estimate due to the limitation of available data and uncertainty regarding numerous variables used to determine amounts recorded. The data and variables that impact the assumption used to estimate the Company's asbestos-related liability include the number of future claims, the cost to resolve claims, the disease mix and severity of disease, the jurisdiction of claims filed, tort reform efforts and the impact of any possible future adverse verdicts and their amounts. It is possible that an adverse outcome in certain of the Company's litigation, including asbestos-related cases, or the use of different assumptions in the F-9 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) determination of amounts recorded could have a material effect upon the Company's consolidated net income or cash flows in particular quarterly or annual periods. Employee Benefit Plans The Company sponsors pension and other retirement plans in various forms covering employees who meet specified eligibility requirements. The reported expense and liability associated with these plans requires an extensive use of assumptions which include the discount rate, expected return on plan assets and rate of future compensation increases as determined by the Company. Management determines these assumptions based upon currently available market and industry data, historical performance of the plan and its assets, and consultation with an independent consulting actuarial firm to aid it in selecting appropriate assumptions and valuing its related liabilities. The actuarial assumptions used in the calculation of the Company's aggregate projected benefit obligation may vary and include an expectation of long-term market appreciation in equity markets which is not changed by minor short-term market fluctuations, but does change when large interim deviations occur. These assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of the participants. These differences may have a significant effect on the Company's consolidated financial statements and liquidity. SIGNIFICANT ACCOUNTING POLICIES 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 or 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. Such 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. The Company also establishes allowances for loan loss when a loss contingency exists for pools of loans with similar characteristics based on property types and loan to value risk factors. A loss contingency exists when the likelihood that a future event will occur is probable based on past events. Changes in valuation allowances are included in net investment gains and losses. Interest income earned on impaired loans is accrued on the principal amount of the loan based on the loan's contractual interest rate. However, interest ceases to be accrued for loans on which interest is generally more than 60 days past due and/or where the collection of interest is not considered probable. Cash receipts on impaired loans are recorded as a reduction of the recorded investment. Real estate held-for-investment, 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). Once the Company identifies a property that is expected to be sold within one year and commences a firm plan for marketing the property, in accordance with SFAS 144, the Company, if applicable, classifies the property as held-for-sale and reports the related net investment income and any resulting investment gains and losses as discontinued operations. Real estate held-for-sale is stated at the lower of depreciated cost or fair value less expected disposition costs. Real estate is not depreciated while it is classified as held-for-sale. Cost of real estate held-for-investment is adjusted for impairment whenever events F-10 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 and 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 upon foreclosure of commercial and agricultural mortgage loans is recorded at the lower of estimated fair value or the carrying value of the mortgage loan at the date of foreclosure. Policy loans are stated at unpaid principal balances. Short-term investments are stated at amortized cost, which approximates fair value. Other invested assets consist principally of leveraged leases and funds withheld at interest. The leveraged leases are recorded net of non-recourse debt. The Company participates in lease transactions which are diversified by industry, asset type and geographic area. The Company regularly reviews residual values and impairs residuals to expected values as needed. Funds withheld represent amounts contractually withheld by ceding companies in accordance with reinsurance agreements. For agreements written on a modified coinsurance basis and certain agreements written on a coinsurance basis, assets supporting the reinsured policies and equal to the net statutory reserves are withheld and continue to be legally owned by the ceding companies. Other invested assets also includes the fair value of embedded derivatives related to funds withheld and modified coinsurance contracts. The Company recognizes interest on funds withheld in accordance with the treaty terms as investment income is earned on the assets supporting the reinsured policies. Structured Investment Transactions The Company participates in structured investment transactions, primarily asset securitizations and structured notes. These transactions enhance the Company's total return of the investment portfolio principally by generating management fee income on asset securitizations and by providing equity-based returns on debt securities through structured notes and similar instruments. The Company sponsors financial asset securitizations of high yield debt securities, investment grade bonds and structured finance securities and also is the collateral manager and a beneficial interest holder in such transactions. As the collateral manager, the Company earns management fees on the outstanding securitized asset balance, which are recorded in income as earned. When the Company transfers assets to a bankruptcy-remote special purpose entity ("SPE") and surrenders control over the transferred assets, the transaction is accounted for as a sale. Gains or losses on securitizations are determined with reference to the carrying amount of the financial assets transferred, which is allocated to the assets sold and the beneficial interests retained based on relative fair values at the date of transfer. Beneficial interests in securitizations are carried at fair value in fixed maturities. Income on these beneficial interests is recognized using the prospective method in accordance with Emerging Issues Task Force ("EITF") Issue No. 99-20, Recognition of Interest Income and Impairment on Certain Investments ("EITF 99-20"). The SPEs used to securitize assets are not consolidated by the Company because the Company has determined that it is not the primary beneficiary of these entities based on the framework provided in FASB Interpretation No. 46 (revised December 31, 2003), Consolidation of Variable Interest Entities, An Interpretation of ARB No. 51 ("FIN 46(r)"). Prior to the adoption of FIN 46(r), such SPEs were not consolidated because they did not meet the criteria for consolidation under previous accounting guidance. The Company purchases or receives beneficial interests in SPEs, which generally acquire financial assets, including corporate equities, debt securities and purchased options. The Company has not guaranteed the performance, liquidity or obligations of the SPEs and the Company's exposure to loss is limited to its carrying value of the beneficial interests in the SPEs. The Company uses the beneficial interests as part of its risk management strategy, including asset-liability management. These SPEs are not consolidated by the Company because the Company has determined that it is not the primary beneficiary of these entities based F-11 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) on the framework provided in FIN 46(r). Prior to the adoption of FIN 46(r), such SPEs were not consolidated because they did not meet the criteria for consolidation under previous accounting guidance. These beneficial interests are generally structured notes, as defined by EITF Issue No. 96-12, Recognition of Interest Income and Balance Sheet Classification of Structured Notes, which are included in fixed maturities, and their income is recognized using the retrospective interest method or the level yield method, as appropriate. Impairments of these beneficial interests are included in net investment gains and losses. Derivative Financial Instruments The Company uses derivative instruments to manage risk through one of five principal risk management strategies, the hedging of: (i) liabilities; (ii) invested assets; (iii) portfolios of assets or liabilities; (iv) net investments in certain foreign operations; and (v) firm commitments and forecasted transactions. Additionally, the Company enters into income generation and replication derivative transactions as permitted by its insurance subsidiaries' Derivatives Use Plans approved by the applicable state insurance departments. The Company's derivative hedging strategy employs a variety of instruments, including financial futures, financial forwards, interest rate, credit default and foreign currency swaps, foreign currency forwards, and options, including caps and floors. On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure (fair value, cash flow or foreign currency). If a derivative does not qualify for hedge accounting, according to Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended ("SFAS 133"), the changes in its fair value and all scheduled periodic settlement receipts and payments are reported in net investment gains or losses. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. In this documentation, the Company specifically identifies the asset, liability, firm commitment, foreign operation, or forecasted transaction that has been designated as a hedged item, states how the hedging instrument is expected to hedge the risks related to the hedged item, and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument's effectiveness and the method that will be used to measure hedge ineffectiveness. The Company generally determines hedge effectiveness based on total changes in fair value of a derivative instrument. The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (ii) the derivative expires or is sold, terminated, or exercised; (iii) the derivative is de-designated as a hedge instrument; (iv) it is probable that the forecasted transaction will not occur; (v) a hedged firm commitment no longer meets the definition of a firm commitment; or (vi) management determines that designation of the derivative as a hedge instrument is no longer appropriate. The Company designates and accounts for the following as cash flow hedges, when they have met the effectiveness requirements of SFAS 133: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) foreign currency forwards to hedge the exposure of future payments or receipts in foreign currencies; and (v) other instruments to hedge the cash flows of various other forecasted transactions. For all qualifying and highly effective cash flow hedges, the effective portion of changes in fair value of the derivative instrument is reported in other comprehensive income or loss. The ineffective portion of changes in fair value of the derivative instrument is reported in net investment gains or losses. 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 designates and accounts for the following as fair value hedges when they have met the effectiveness requirements of SFAS 133: (i) various types of interest rate swaps to convert fixed rate F-12 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) investments to floating rate investments; (ii) receive U.S. dollar floating on foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated investments; (iii) pay U.S. dollar floating on foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated liabilities, and (iv) other instruments to hedge various other fair value exposures of investments. For all qualifying and highly effective fair value hedges, the changes in fair value of the derivative instrument are reported as net investment gains or losses. In addition, changes in fair value attributable to the hedged portion of the underlying instrument are reported in net investment gains and losses. In addition, changes in fair value attributable to the hedged portion of the underlying instrument are reported in net investment gains and losses. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative continues to be carried on the consolidated balance sheet at its fair value, but the hedged asset or liability will no longer be adjusted for changes in fair value. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the derivative continues to be carried on the consolidated balance sheet at its fair value, and any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the consolidated balance sheet and recognized as a net investment gain or loss in the current period. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative continues to be carried on the consolidated balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income or loss are recognized immediately in net investment gains or losses. When the hedged forecasted transaction is no longer probable, but is reasonably possible, the accumulated gain or loss remains in other comprehensive income or loss and is recognized when the transaction affects net income or loss; however, prospective hedge accounting for the transaction is terminated. In all other situations in which hedge accounting is discontinued, the derivative is carried at its fair value on the consolidated balance sheet, with changes in its fair value recognized in the current period as net investment gains or losses. The Company uses forward exchange contracts that provide an economic hedge on portions of its net investments in foreign operations against adverse movements in foreign currency exchange rates. Unrealized losses on instruments so designated are recorded as components of accumulated other comprehensive income. The Company may enter into contracts that are not themselves derivative instruments but contain embedded derivatives. For each contract, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to those of the host contract and determines whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. If it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and accounted for as a stand-alone derivative. Such embedded derivatives are recorded on the consolidated balance sheet at fair value and changes in their fair value are recognized in the current period in net investment gains or losses. If the Company is unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the consolidated balance sheet at fair value, with changes in fair value recognized in the current period as net investment gains or losses. The Company also uses derivatives to synthetically create investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These securities, called replication synthetic asset transactions ("RSATs"), are a combination of a credit default swap and a U.S. Treasury or Agency security, synthetically creating a third replicated security. These derivatives are not designated as hedges. As of December 31, 2003 and 2002, 24 and 16, respectively, of such RSATs, with notional amounts totaling $489 million and $240 million, respectively, were outstanding. The Company records both the premiums F-13 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) received on the credit default swaps over the life of the contracts and changes in their fair value in net investment gains and losses. The Company enters into written covered calls to generate additional investment income on the underlying assets it holds. These derivatives are not designated as hedges. The Company records the premiums received over the life of the contract and changes in fair value of such options as net investment gains and losses. 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, Leasehold Improvements and Computer Software 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. The estimated life for company occupied real estate property is generally 40 years. Estimated lives range from five to ten years for leasehold improvements and three to five years for all other property and equipment. Accumulated depreciation and amortization of property, equipment and leasehold improvements was $527 million and $428 million at December 31, 2003 and 2002, respectively. Related depreciation and amortization expense was $119 million, $85 million and $99 million for the years ended December 31, 2003, 2002 and 2001, respectively. Computer software, which is included in other assets, is stated at cost, less accumulated amortization. Purchased software costs, as well as internal and external costs incurred to develop internal-use computer software during the application development stage, are capitalized. Such costs are amortized generally over a three-year period using the straight-line method. Accumulated amortization of capitalized software was $432 million and $317 million at December 31, 2003 and 2002, respectively. Related amortization expense was $150 million, $155 million and $110 million for the years ended December 31, 2003, 2002 and 2001, respectively. Deferred Policy Acquisition Costs The costs of acquiring new and renewal insurance business that vary with, and are primarily related to, the production of that 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, DAC is 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 utilizes the reversion to the mean assumption, a standard industry practice, in its determination of the amortization of DAC. This practice assumes that the expectation for long-term equity investment appreciation is not changed by minor short-term market fluctuations, but that it does change when large interim deviations have occurred. Management periodically updates these estimates and evaluates the recoverability of DAC. When appropriate, management revises its assumptions of the estimated gross margins or profits of these contracts, and the cumulative amortization is reestimated and adjusted by a cumulative charge or credit to current operations. DAC for non-participating traditional life, non-medical health and annuity policies with life contingencies is 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. F-14 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Policy acquisition costs related to internally replaced contracts are expensed at the date of replacement. DAC for property and casualty insurance contracts, which is 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. VOBA, included as part of DAC, 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 estimated gross profits or premiums from such policies and contracts. Goodwill The excess of cost over the fair value of net assets acquired ("goodwill") is included in other assets. On January 1, 2002, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, ("SFAS 142"). In accordance with SFAS 142, goodwill is not amortized but is tested for impairment at least annually to determine whether a writedown of the cost of the asset is required. Impairments are recognized in operating results when the carrying amount of goodwill exceeds its implied fair value. Prior to the adoption of SFAS 142, goodwill was amortized on a straight-line basis over a period ranging from ten to 30 years and impairments were recognized in operating results when permanent diminution in value was deemed to have occurred. Changes in goodwill were as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2003 2002 2001 ------ ----- ----- (DOLLARS IN MILLIONS) Net balance at January 1.................................... $ 750 $609 $703 Acquisitions................................................ 3 166 54 Amortization................................................ -- -- (47) Impairment Losses........................................... -- (8) (61) Disposition and other....................................... (125) (17) (40) ----- ---- ---- Net balance at December 31.................................. $ 628 $750 $609 ===== ==== ====
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 and are recognized in the period in which services are provided. Amounts that are charged to operations include interest credited and benefit claims incurred in excess of related policyholder account balances. F-15 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Other Revenues Other revenues include asset management and advisory fees, broker/dealer commissions and fees, and administrative service fees. Such fees and commissions are recognized in the period in which services are performed. Other revenues also include changes in account value relating to corporate-owned life insurance ("COLI"). Under certain COLI contracts, if the Company reports certain unlikely adverse results in its consolidated financial statements, withdrawals would not be immediately available and would be subject to market value adjustment, which could result in a reduction of the account value. Policyholder Dividends Policyholder dividends are approved annually by the insurance subsidiaries' 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 14% and 16% of the Company's life insurance in-force, and 57% and 55% of the number of life insurance policies in-force, at December 31, 2003 and 2002, respectively. Participating policies represented approximately 38% and 38%, 39% and 41%, and 43% and 45% of gross and net life insurance premiums for the years ended December 31, 2003, 2002 and 2001, 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. 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. DAC is 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 and is reported in other revenues. F-16 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 revenues of the Company. Fees charged to contractholders, principally mortality, policy administration and surrender charges, are included in universal life and investment-type products fees. See "-- Application of Recent Accounting Pronouncements." Stock-Based Compensation Effective January 1, 2003, the Company accounts for stock-based compensation plans using the prospective fair value accounting method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), as amended by SFAS 148, Accounting for Stock-Based Compensation -- Transition and Disclosure ("SFAS 148"). Stock-based compensation grants prior to January 1, 2003 are accounted for using the accounting method prescribed by Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees ("APB 25") and Note 14 includes the pro forma disclosures required by SFAS No. 123, as amended. Foreign Currency 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. Discontinued Operations The results of operations of a component of the Company that either has been disposed of or is classified as held-for-sale on or after January 1, 2002 are reported in discontinued operations if the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the Company as a result of the disposal transaction and the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction. Earnings Per Share 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 the assumed: (i) conversion of forward purchase contracts; (ii) exercise of stock options, and (iii) issuance under deferred stock compensation using the treasury stock method. Under the treasury stock method, forward purchase contracts, exercise of the stock options and issuance under deferred stock compensation 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. F-17 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 (the "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 in 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 Metropolitan Life's Canadian operations in 1998, as a result of a commitment made in connection with obtaining Canadian regulatory approval of that sale. APPLICATION OF RECENT ACCOUNTING PRONOUNCEMENTS Effective December 31, 2003, the Company adopted EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ("EITF 03-1"). EITF 03-1 provides guidance on the disclosure requirements for other-than-temporary impairments of debt and marketable equity investments that are accounted for under Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. The adoption of EITF 03-1 requires the Company to include certain quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS 115 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. (See Note 2). The initial adoption of EITF 03-1, which only required additional disclosures, did not have a material impact on the Company's consolidated financial statements. In December 2003, the Financial Accounting Standards Board ("FASB") revised SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits -- an Amendment of FASB Statements No. 87, 88 and 106 ("SFAS 132(r)"). SFAS 132(r) retains most of the disclosure requirements of SFAS 132 and requires additional disclosure about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined postretirement plans. SFAS 132(r) is primarily effective for fiscal years ending after December 15, 2003; however, certain disclosures about foreign plans and estimated future benefit payments are effective for fiscal years ending after June 15, 2004. The Company's adoption of SFAS 132(r) on December 31, 2003 did not have a significant impact on its consolidated financial statements since it only revises disclosure requirements. In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("FSP 106-1"), which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the new legislation. The Company has elected to defer the accounting until further guidance is issued by the FASB. The measurements of the Company's postretirement accumulated benefit plan obligation and net periodic benefit cost disclosed in Note 13 do not reflect the effects of the new legislation. The guidance, when issued, could require the Company to change previously reported information. In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts ("SOP 03-1"). SOP 03-1 provides guidance on (i) the classification and valuation of long-duration contract liabilities, (ii) the accounting for sales inducements, and (iii) separate account presentation and valuation. SOP 03-1 is effective F-18 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for fiscal years beginning after December 15, 2003. As of January 1, 2004, the Company increased future policyholder benefits for various guaranteed minimum death and income benefits net of DAC and unearned revenue liability offsets under certain variable annuity and universal life contracts of approximately $40 million, net of income tax, which will be reported as a cumulative effect of a change in accounting. Industry standards and practices continue to evolve relating to the valuation of liabilities relating to these types of benefits, which may result in further adjustments to the Company's measurement of liabilities associated with such benefits in subsequent accounting periods. Effective with the adoption of SOP 03-1, costs associated with enhanced or bonus crediting rates to contractholders will be deferred and amortized over the life of the related contract using assumptions consistent with the amortization of DAC. Prior to adoption of SOP 03-1, the costs associated with these sales inducements have been deferred and amortized over the contingent sales inducement period. This provision of SOP 03-1 will be applied prospectively to contracts. Effective January 1, 2004, the Company reclassified $115 million of ownership in its own separate accounts from other assets to fixed maturities available-for-sale and equity securities. This reclassification will have no effect on net income or other comprehensive income. In accordance with SOP 03-1's revised definition of a separate account, effective January 1, 2004, the Company also reclassified $1,678 million of separate account assets to general account investments and $1,678 million of separate account liabilities to future policy benefits and policyholder account balances. The net cumulative effect of this reclassification was insignificant. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150"). SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as a liability or, in certain circumstances, an asset. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150, as of July 1, 2003, required the Company to reclassify $277 million of company-obligated mandatorily redeemable securities of subsidiary trusts from mezzanine equity to liabilities. In April 2003, the FASB cleared Statement 133 Implementation Issue No. B36, Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments ("Issue B36"). Issue B36 concluded that (i) a company's funds withheld payable and/or receivable under certain reinsurance arrangements, and (ii) a debt instrument that incorporates credit risk exposures that are unrelated or only partially related to the creditworthiness of the obligor include an embedded derivative feature that is not clearly and closely related to the host contract. Therefore, the embedded derivative feature must be measured at fair value on the balance sheet and changes in fair value reported in income. Issue B36 became effective on October 1, 2003 and required the Company to increase policyholder account balances by $40 million, to decrease other invested assets by $1 million and to increase DAC by $2 million. These amounts, net of income tax of $13 million, were recorded as a cumulative effect of a change in accounting. As a result of the adoption of Issue B36, the Company recognized investment gains of $9 million, net of income tax, for the three month period ended December 31, 2003. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies the accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Except for certain implementation guidance that is incorporated in SFAS 149 and already effective, SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The Company's adoption of SFAS 149 on July 1, 2003 did not have a significant impact on the consolidated financial statements. During 2003, the Company adopted FASB Interpretation No. 46 Consolidation of Variable Interest Entities -- An Interpretation of ARB No. 51 ("FIN 46") and its December 2003 revision ("FIN 46(r)"). Certain of the Company's asset-backed securitizations, collateralized debt obligations, structured investment F-19 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) transactions, and investments in real estate joint ventures and other limited partnership interests meet the definition of a variable interest entity ("VIE") and must be consolidated, in accordance with the transition rules and effective dates, if the Company is deemed to be the primary beneficiary. A VIE is defined as (i) any entity in which the equity investments at risk in such entity do not have the characteristics of a controlling financial interest, or (ii) any entity that does not have sufficient equity at risk to finance its activities without additional subordinated support from other parties. Effective February 1, 2003, the Company adopted FIN 46 for VIEs created or acquired on or after February 1, 2003 and, effective December 31, 2003, the Company adopted FIN 46(r) with respect to interests in entities formerly considered special purpose entities ("SPEs"), including interests in asset-backed securities and collateralized debt obligations. In accordance with the provisions of FIN 46(r), the Company has elected to defer until March 31, 2004 the consolidation of interests in VIEs for non SPEs acquired prior to February 1, 2003 for which it is the primary beneficiary. The adoption of FIN 46 as of February 1, 2003 did not have a significant impact on the Company's consolidated financial statements. The adoption of the provisions of FIN 46(r) at December 31, 2003 did not require the Company to consolidate any additional VIEs that were not previously consolidated. Effective January 1, 2003, the Company adopted FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires entities to establish liabilities for certain types of guarantees and expands financial statement disclosures for others. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a significant impact on the Company's consolidated financial statements. See Note 12. Effective January 1, 2003, the Company adopted SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure ("SFAS 148"), which provides guidance on how to apply the fair value method of accounting and use the prospective transition method for stock options granted by the Company subsequent to December 31, 2002. As permitted under SFAS 148, options granted prior to January 1, 2003 will continue to be accounted for under Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and the pro forma impact of accounting for these options at fair value will continue to be disclosed in the consolidated financial statements until the last of those options vest in 2005. See Note 14. Effective January 1, 2003, the Company adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recorded and measured initially at fair value only when the liability is incurred rather than at the date of an entity's commitment to an exit plan as required by EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity Including Certain Costs Incurred in a Restructuring ("EITF 94-3"). The Company's activities subject to this guidance in 2003 were not significant. Effective January 1, 2003, the Company adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). In addition to amending or rescinding other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions, SFAS 145 generally precludes companies from recording gains and losses from the extinguishment of debt as an extraordinary item. SFAS 145 also requires sale-leaseback treatment for certain modifications of a capital lease that result in the lease being classified as an operating lease. The adoption of SFAS 145 did not have a significant impact on the Company's consolidated financial statements. Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 provides a single model for accounting for long-lived assets to be disposed of by superseding SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"), and the accounting and reporting F-20 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) provisions of APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB 30"). Under SFAS 144, discontinued operations are measured at the lower of carrying value or fair value less costs to sell, rather than on a net realizable value basis. Future operating losses relating to discontinued operations also are no longer recognized before they occur. SFAS 144 (i) broadens the definition of a discontinued operation to include a component of an entity (rather than a segment of a business); (ii) requires long-lived assets to be disposed of other than by sale to be considered held and used until disposed; and (iii) retains the basic provisions of (a) APB 30 regarding the presentation of discontinued operations in the statements of income, (b) SFAS 121 relating to recognition and measurement of impaired long-lived assets (other than goodwill), and (c) SFAS 121 relating to the measurement of long-lived assets classified as held-for-sale. Adoption of SFAS 144 did not have a material impact on the Company's consolidated financial statements other than the presentation as discontinued operations of net investment income and net investment gains related to operations of real estate on which the Company initiated disposition activities subsequent to January 1, 2002 and the classification of such real estate as held-for-sale on the consolidated balance sheets. See Note 20. Effective January 1, 2002, the Company adopted SFAS No. 142. SFAS 142 eliminates the systematic amortization and establishes criteria for measuring the impairment of goodwill and certain other intangible assets by reporting unit. Amortization of goodwill, prior to the adoption of SFAS 142 was $47 million for the year ended December 31, 2001. Amortization of other intangible assets was not material for the years ended December 31, 2003, 2002 and 2001. The Company completed the required impairment tests of goodwill and indefinite-lived intangible assets in the third quarter of 2002 and recorded a $5 million charge to earnings relating to the impairment of certain goodwill assets as a cumulative effect of a change in accounting. There was no impairment of identified intangible assets or significant reclassifications between goodwill and other intangible assets at January 1, 2002. Effective July 1, 2001, the Company adopted SFAS No. 141, Business Combinations ("SFAS 141"). SFAS 141 requires the purchase method of accounting for all business combinations and separate recognition of intangible assets apart from goodwill if such intangible assets meet certain criteria. In accordance with SFAS 141, the elimination of $5 million of negative goodwill was reported in net income in the first quarter of 2002 as a cumulative effect of a change in accounting. In July 2001, the U.S. Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin ("SAB") No. 102, Selected Loan Loss Allowance and Documentation Issues ("SAB 102"). SAB 102 summarizes certain of the SEC's views on the development, documentation and application of a systematic methodology for determining allowances for loan and lease losses. The application of SAB 102 by the Company did not have a material impact on the Company's consolidated financial statements. Effective April 1, 2001, the Company adopted certain additional accounting and reporting requirements of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a Replacement of FASB Statement No. 125, relating to the derecognition of transferred assets and extinguished liabilities and the reporting of servicing assets and liabilities. The initial adoption of these requirements did not have a material impact on the Company's consolidated financial statements. Effective April 1, 2001, the Company adopted EITF 99-20, Recognition of Interest Income and Impairment on Certain Investments. This pronouncement requires investors in certain asset-backed securities to record changes in their estimated yield on a prospective basis and to apply specific evaluation methods to these securities for an other-than-temporary decline in value. The initial adoption of EITF 99-20 did not have a material impact on the Company's consolidated financial statements. Effective January 1, 2001, the Company adopted SFAS 133 which established new accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other F-21 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) contracts, and for hedging activities. The cumulative effect of the adoption of SFAS 133, as of January 1, 2001, resulted in a $33 million increase in other comprehensive income, net of income taxes of $18 million, and had no material impact on net income. The increase to other comprehensive income is attributable to net gains on cash flow-type hedges at transition. Also at transition, the amortized cost of fixed maturities decreased and other invested assets increased by $22 million, representing the fair value of certain interest rate swaps that were accounted for prior to SFAS 133 using fair value-type settlement accounting. During the year ended December 31, 2001, $18 million of the pre-tax gain reported in accumulated other comprehensive income at transition was reclassified into net investment income. The FASB continues to issue additional guidance relating to the accounting for derivatives under SFAS 133, which may result in further adjustments to the Company's treatment of derivatives in subsequent accounting periods. 2. INVESTMENTS FIXED MATURITIES AND EQUITY SECURITIES Fixed maturities and equity securities at December 31, 2003 were as follows:
COST OR GROSS UNREALIZED AMORTIZED ---------------- ESTIMATED COST GAIN LOSS FAIR VALUE --------- -------- ----- ---------- (DOLLARS IN MILLIONS) Fixed Maturities: Bonds: U.S. corporate securities................. $ 56,757 $ 3,886 $252 $ 60,391 Mortgage-backed securities................ 30,836 720 102 31,454 Foreign corporate securities.............. 21,727 2,194 79 23,842 U.S treasuries/agencies................... 14,707 1,264 26 15,945 Asset-backed securities................... 11,736 187 60 11,863 Commercial mortgage-backed................ 10,523 530 22 11,031 securities Foreign government securities.............................. 7,789 1,003 28 8,764 States and political subdivisions......... 3,155 209 15 3,349 Other fixed income assets................. 492 167 83 576 -------- ------- ---- -------- Total bonds.......................... 157,722 10,160 667 167,215 Redeemable preferred stocks.................. 611 2 76 537 -------- ------- ---- -------- Total fixed maturities............... $158,333 $10,162 $743 $167,752 ======== ======= ==== ======== Equity Securities: Common stocks................................ $ 620 $ 334 $ 2 $ 952 Nonredeemable preferred stocks............... 602 48 4 646 -------- ------- ---- -------- Total equity securities.............. $ 1,222 $ 382 $ 6 $ 1,598 ======== ======= ==== ========
F-22 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Fixed maturities and equity securities at December 31, 2002 were as follows:
COST OR GROSS UNREALIZED AMORTIZED ----------------- ESTIMATED COST GAIN LOSS FAIR VALUE --------- ------- ------- ---------- (DOLLARS IN MILLIONS) Fixed Maturities: Bonds: U.S. corporate securities................. $ 47,021 $3,193 $ 957 $ 49,257 Mortgage-backed securities................ 26,966 1,076 16 28,026 Foreign corporate securities.............. 18,001 1,435 207 19,229 U.S treasuries/agencies................... 14,373 1,565 4 15,934 Asset-backed securities................... 9,483 228 208 9,503 Commercial mortgage-backed................ 6,290 573 6 6,857 securities Foreign government securities.............................. 7,012 636 52 7,596 States and political subdivisions......... 2,580 182 20 2,742 Other fixed income assets................. 609 191 103 697 -------- ------ ------ -------- Total bonds.......................... 132,335 9,079 1,573 139,841 Redeemable preferred stocks.................. 564 -- 117 447 -------- ------ ------ -------- Total fixed maturities............... $132,899 $9,079 $1,690 $140,288 ======== ====== ====== ======== Equity Securities: Common stocks................................ $ 877 $ 115 $ 79 $ 913 Nonredeemable preferred stocks............... 679 25 4 700 -------- ------ ------ -------- Total equity securities.............. $ 1,556 $ 140 $ 83 $ 1,613 ======== ====== ====== ========
The Company held foreign currency derivatives with notional amounts of $4,273 million and $2,371 million to hedge the exchange rate risk associated with foreign bonds and loans at December 31, 2003 and 2002, respectively. The Company held fixed maturities at estimated fair values that were below investment grade or not rated by an independent rating agency that totaled $12,825 million and $11,619 million at December 31, 2003 and 2002, respectively. These securities had a net unrealized gain of $888 million and a loss of $422 million at December 31, 2003 and 2002, respectively. Non-income producing fixed maturities were $371 million and $479 million at December 31, 2003 and 2002, respectively. F-23 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The cost or amortized cost and estimated fair value of bonds at December 31, 2003, by contractual maturity date (excluding scheduled sinking funds), are shown below:
COST OR AMORTIZED ESTIMATED COST FAIR VALUE --------- ---------- (DOLLARS IN MILLIONS) Due in one year or less..................................... $ 5,381 $ 5,542 Due after one year through five years....................... 30,893 32,431 Due after five years through ten years...................... 29,342 31,830 Due after ten years......................................... 39,011 43,064 -------- -------- Subtotal............................................... 104,627 112,867 Mortgage-backed and other asset-backed securities........... 53,095 54,348 -------- -------- Subtotal............................................... 157,722 167,215 Redeemable preferred stock.................................. 611 537 -------- -------- Total fixed maturities................................. $158,333 $167,752 ======== ========
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 fixed maturities and equity securities classified as available-for-sale were as follows:
YEARS ENDED DECEMBER 31, ------------------------------ 2002 2001 2000 -------- -------- -------- (DOLLARS IN MILLIONS) Proceeds............................................. $ 54,801 $ 37,427 $ 28,105 Gross investment gains............................... $ 498 $ 1,661 $ 646 Gross investment losses.............................. $ (500) $ (979) $ (948)
Gross investment losses above exclude writedowns recorded during 2003, 2002 and 2001 for other-than-temporarily impaired available-for-sale fixed maturities and equity securities of $355 million, $1,375 million and $278 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. F-24 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table shows the estimated fair values and gross unrealized losses of the Company's fixed maturities, aggregated by sector and length of time that the securities have been in a continuous unrealized loss position at December 31, 2003:
EQUAL TO OR GREATER LESS THAN 12 MONTHS THAN 12 MONTHS TOTAL ---------------------- ---------------------- ---------------------- ESTIMATED GROSS ESTIMATED GROSS ESTIMATED GROSS FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSS VALUE LOSS VALUE LOSS --------- ---------- --------- ---------- --------- ---------- (DOLLARS IN MILLIONS) U.S. corporate securities....... $ 7,214 $152 $1,056 $100 $ 8,270 $252 Mortgage-backed securities...... 8,372 98 27 4 8,399 102 Foreign corporate securities.... 2,583 65 355 14 2,938 79 U.S treasuries/agencies......... 3,697 26 -- -- 3,697 26 Asset-backed securities......... 2,555 34 861 26 3,416 60 Commercial mortgage-backed securities.................... 2,449 20 282 2 2,731 22 Foreign government securities... 331 28 2 -- 333 28 States and political subdivisions.................. 389 12 38 3 427 15 Other fixed income assets....... 130 73 40 10 170 83 ------- ---- ------ ---- ------- ---- Total bonds................ 27,720 508 2,661 159 30,381 667 Redeemable preferred stocks..... 222 62 278 14 500 76 ------- ---- ------ ---- ------- ---- Total fixed maturities..... $27,942 $570 $2,939 $173 $30,881 $743 ======= ==== ====== ==== ======= ====
At December 31, 2003, the Company had gross unrealized losses of $6 million from equity securities that had been in an unrealized loss position for less than twelve months. The amount of unrealized losses from equity securities that had been in an unrealized loss position for twelve months or greater is less than $1 million at December 31, 2003. The fair value of those equity securities that had been in an unrealized loss position for less than twelve months and for twelve months or greater at December 31, 2003, is $53 million and $22 million, respectively. SECURITIES LENDING PROGRAM The Company participates in a securities lending program whereby blocks of securities, which are included in investments, are loaned to third parties, primarily major brokerage firms. The Company requires a minimum of 102% of the fair value of the loaned securities to be separately maintained as collateral for the loans. Securities with a cost or amortized cost of $25,121 million and $16,196 million and an estimated fair value of $26,387 million and $17,625 million were on loan under the program at December 31, 2003 and 2002, respectively. The Company was liable for cash collateral under its control of $27,083 million and $17,862 million at December 31, 2003 and 2002, 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 $1,353 million and $975 million at December 31, 2003 and 2002, respectively. Company securities held in trust to satisfy collateral requirements had an amortized cost of $2,276 million and $1,949 million at December 31, 2003 and 2002, respectively. F-25 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) MORTGAGE LOANS ON REAL ESTATE Mortgage loans on real estate were categorized as follows:
DECEMBER 31, ------------------------------------- 2003 2002 ----------------- ----------------- AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------- ------- (DOLLARS IN MILLIONS) Commercial mortgage loans........................ $20,422 78% $19,671 78% Agricultural mortgage loans...................... 5,333 20 5,152 20 Residential mortgage loans....................... 623 2 389 2 ------- --- ------- --- Total....................................... 26,378 100% 25,212 100% === === Less: Valuation allowances....................... 129 126 ------- ------- Mortgage loans.............................. $26,249 $25,086 ======= =======
Mortgage loans on real estate are collateralized by properties primarily located throughout the United States. At December 31, 2003, approximately 21%, 7% and 7% of the properties were located in California, New York and Florida, 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 $639 million and $620 million at December 31, 2003 and 2002, respectively. Changes in mortgage loan valuation allowances were as follows:
YEARS ENDED DECEMBER 31, -------------------------- 2003 2002 2001 ------ ------ ------ (DOLLARS IN MILLIONS) Balance at January 1........................................ $126 $144 $ 83 Additions................................................... 52 41 106 Deductions.................................................. (49) (59) (45) ---- ---- ---- Balance at December 31...................................... $129 $126 $144 ==== ==== ====
A portion of the Company's mortgage loans on real estate was impaired and consisted of the following:
DECEMBER 31, --------------------- 2003 2002 ------- ------- (DOLLARS IN MILLIONS) Impaired mortgage loans with valuation allowances........... $296 $627 Impaired mortgage loans without valuation allowances........ 165 261 ---- ---- Total.................................................. 461 888 Less: Valuation allowances on impaired mortgages............ 62 125 ---- ---- Impaired mortgage loans................................ $399 $763 ==== ====
The average investment in impaired mortgage loans on real estate was $652 million, $1,088 million and $947 million for the years ended December 31, 2003, 2002 and 2001, respectively. Interest income on impaired mortgage loans was $58 million, $91 million and $103 million for the years ended December 31, 2003, 2002 and 2001, respectively. F-26 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The investment in restructured mortgage loans on real estate was $191 million and $414 million at December 31, 2003 and 2002, respectively. Interest income of $19 million, $44 million and $76 million was recognized on restructured loans for the years ended December 31, 2003, 2002 and 2001, respectively. Gross interest income that would have been recorded in accordance with the original terms of such loans amounted to $24 million, $41 million and $60 million for the years ended December 31, 2003, 2002 and 2001, 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 $51 million and $40 million at December 31, 2003 and 2002, respectively. REAL ESTATE AND REAL ESTATE JOINT VENTURES Real estate and real estate joint ventures consisted of the following:
DECEMBER 31, ---------------------- 2003 2002 --------- --------- (DOLLARS IN MILLIONS) Real estate and real estate joint ventures held-for-investment....................................... $4,997 $4,197 Impairments................................................. (283) (271) ------ ------ Total.................................................. 4,714 3,926 ------ ------ Real estate held-for-sale................................... 101 815 Impairments................................................. -- (5) Valuation allowance......................................... (12) (11) ------ ------ Total.................................................. 89 799 ------ ------ Real estate and real estate joint ventures........... $4,803 $4,725 ====== ======
Accumulated depreciation on real estate was $1,955 million and $1,951 million at December 31, 2003 and 2002, respectively. The related depreciation expense was $183 million, $227 million and $220 million for the years ended December 31, 2003, 2002 and 2001, respectively. These amounts include $15 million, $66 million and $93 million of depreciation expense related to discontinued operations for the years ended December 31, 2003, 2002 and 2001, respectively. Real estate and real estate joint ventures were categorized as follows:
DECEMBER 31, ----------------------------------- 2003 2002 ---------------- ---------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- (DOLLARS IN MILLIONS) Office............................................. $2,775 58% $2,733 58% Retail............................................. 667 14 699 15 Apartments......................................... 861 18 835 18 Land............................................... 81 2 87 2 Agriculture........................................ 1 - 7 - Other.............................................. 418 8 364 7 ------ --- ------ --- Total......................................... $4,803 100% $4,725 100% ====== === ====== ===
F-27 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's real estate holdings are primarily located throughout the United States. At December 31, 2003, approximately 28%, 17% and 16% of the Company's real estate holdings were located in New York, California and Illinois, respectively. Changes in real estate and real estate joint ventures held-for-sale valuation allowance were as follows:
YEARS ENDED DECEMBER 31, -------------------------- 2003 2002 2001 ------ ------ ------ (DOLLARS IN MILLIONS) Balance at January 1........................................ $ 11 $ 35 $ 39 Additions charged to investment income...................... 17 21 16 Deductions for writedowns and dispositions.................. (16) (45) (20) ---- ---- ---- Balance at December 31...................................... $ 12 $ 11 $ 35 ==== ==== ====
Investment income related to impaired real estate and real estate joint ventures held-for-investment was $35 million, $48 million and $34 million for the years ended December 31, 2003, 2002 and 2001, respectively. There was no investment income related to impaired real estate and real estate joint ventures held-for-sale for the year ended December 31, 2003. Investment income related to impaired real estate and real estate joint ventures held-for-sale was $3 million and $19 million for the years ended December 31, 2002 and 2001, respectively. The carrying value of non-income producing real estate and real estate joint ventures was $77 million and $63 million at December 31, 2003 and 2002, respectively. The Company owned real estate acquired in satisfaction of debt of $3 million and $10 million at December 31, 2003 and 2002, respectively. LEVERAGED LEASES Leveraged leases, included in other invested assets, consisted of the following:
DECEMBER 31, ---------------------- 2003 2002 --------- --------- (DOLLARS IN MILLIONS) Investment.................................................. $ 974 $ 985 Estimated residual values................................... 386 428 ------ ------ Total.................................................. 1,360 1,413 Unearned income............................................. (380) (368) ------ ------ Leveraged leases....................................... $ 980 $1,045 ====== ======
The investment amounts set forth above are generally due in monthly installments. The payment periods generally range from one to 15 years, but in certain circumstances are as long as 30 years. These receivables are generally collateralized by the related property. The Company's deferred tax liability related to leveraged leases was $870 million and $981 million at December 31, 2003 and 2002, respectively. F-28 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NET INVESTMENT INCOME The components of net investment income were as follows:
YEARS ENDED DECEMBER 31, --------------------------- 2003 2002 2001 ------- ------- ------- (DOLLARS IN MILLIONS) Fixed maturities........................................ $ 8,817 $ 8,367 $ 8,562 Equity securities....................................... 31 43 62 Mortgage loans on real estate........................... 1,903 1,883 1,848 Real estate and real estate joint ventures(1)........... 982 971 845 Policy loans............................................ 554 543 536 Other limited partnership interests..................... 75 57 48 Cash, cash equivalents and short-term investments....... 171 252 279 Other................................................... 206 185 225 ------- ------- ------- Total.............................................. 12,739 12,301 12,405 Less: Investment expenses(1)............................ 1,103 1,040 1,218 ------- ------- ------- Net investment income.............................. $11,636 $11,261 $11,187 ======= ======= =======
- --------------- (1) Excludes amounts related to real estate held-for-sale presented as discontinued operations in accordance with SFAS 144. NET INVESTMENT GAINS (LOSSES) Net investment gains (losses), including changes in valuation allowances, and related policyholder amounts were as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2003 2002 2001 ------ ------ ------ (DOLLARS IN MILLIONS) Fixed maturities............................................ $(398) $(917) $(645) Equity securities........................................... 41 224 65 Mortgage loans on real estate............................... (56) (22) (91) Real estate and real estate joint ventures(1)............... 19 (6) (4) Other limited partnership interests......................... (84) (2) (161) Sales of businesses......................................... -- -- 25 Derivatives(2).............................................. (134) (140) 124 Other....................................................... 39 (33) (26) ----- ----- ----- Total.................................................. (573) (896) (713) Amounts allocated from: Deferred policy acquisition costs......................... 31 (5) (25) Participating contracts................................... 40 (7) -- Policyholder dividend obligation.......................... 144 157 159 ----- ----- ----- Total net investment gains (losses)............... $(358) $(751) $(579) ===== ===== =====
F-29 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - --------------- (1) The amounts presented exclude amounts related to sales of real estate held-for-sale presented as discontinued operations in accordance with SFAS 144. (2) The amounts presented include scheduled periodic settlement payments on derivative instruments that do not qualify for hedge accounting under SFAS 133. Investment gains and losses are net of related policyholder amounts. The amounts netted against investment gains and losses are (i) amortization of DAC to the extent that such amortization results from investment gains and losses; (ii) adjustments to participating contractholder accounts when amounts equal to such investment gains and losses are applied to the contractholder's accounts; and (iii) adjustments to the policyholder dividend obligation resulting from investment gains and losses. This presentation may not be comparable to presentations made by other insurers. NET UNREALIZED INVESTMENT GAINS The components of net unrealized investment gains, included in accumulated other comprehensive income, were as follows:
YEARS ENDED DECEMBER 31, --------------------------- 2003 2002 2001 ------- ------- ------- (DOLLARS IN MILLIONS) Fixed maturities........................................ $ 9,204 $ 7,360 $ 3,097 Equity securities....................................... 376 57 617 Derivatives............................................. (427) (24) 71 Other invested assets................................... (33) 16 59 ------- ------- ------- Total.............................................. 9,120 7,409 3,844 ------- ------- ------- Amounts allocated from: Future policy benefit loss recognition................ (1,482) (1,269) (30) Deferred policy acquisition costs..................... (674) (559) (21) Participating contracts............................... (183) (153) (127) Policyholder dividend obligation...................... (2,130) (1,882) (708) Deferred income taxes................................... (1,679) (1,264) (1,079) ------- ------- ------- Total.............................................. (6,148) (5,127) (1,965) ------- ------- ------- Net unrealized investment gains............... $ 2,972 $ 2,282 $ 1,879 ======= ======= =======
F-30 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The changes in net unrealized investment gains were as follows:
YEARS ENDED DECEMBER 31, ------------------------- 2003 2002 2001 ------ ------- ------ (DOLLARS IN MILLIONS) Balance at January 1...................................... $2,282 $ 1,879 $1,175 Unrealized investment gains (losses) during the year...... 1,711 3,565 1,365 Unrealized investment gains (losses) relating to: Future policy benefit gains (losses) recognition........ (213) (1,239) 254 Deferred policy acquisition costs....................... (115) (538) (140) Participating contracts................................. (30) (26) 6 Policyholder dividend obligation........................ (248) (1,174) (323) Deferred income taxes..................................... (415) (185) (458) ------ ------- ------ Balance at December 31.................................... $2,972 $ 2,282 $1,879 ====== ======= ====== Net change in unrealized investment gains................. $ 690 $ 403 $ 704 ====== ======= ======
STRUCTURED INVESTMENT TRANSACTIONS The Company securitizes high yield debt securities, investment grade bonds and structured finance securities. The Company has sponsored four securitizations with a total of approximately $1,431 million in financial assets as of December 31, 2003. The Company's beneficial interests in these SPEs as of December 31, 2003 and 2002 and the related investment income for the years ended December 31, 2003, 2002 and 2001 were insignificant. The Company also invests in structured notes and similar type instruments, which generally provide equity-based returns on debt securities. The carrying value of such investments was approximately $880 million and $870 million at December 31, 2003 and 2002, respectively. The related income recognized was $78 million, $1 million and $44 million for the years ended December 31, 2003, 2002 and 2001, respectively. VARIABLE INTEREST ENTITIES As discussed in Note 1, the Company has adopted the provisions of FIN 46 and FIN 46(r). At December 31, 2003, FIN 46(r) did not require the Company to consolidate any additional VIEs that were not previously consolidated. The following table presents the total assets of and maximum exposure to loss relating to VIEs for which the Company has concluded that (i) it is the primary beneficiary and which will be consolidated in the F-31 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's financial statements beginning March 31, 2004, and (ii) it holds significant valuable interests but it is not the primary beneficiary and which will not be consolidated:
DECEMBER 31, 2003 ------------------------------------------------- PRIMARY BENEFICIARY(1) NOT PRIMARY BENEFICIARY ----------------------- ----------------------- MAXIMUM MAXIMUM EXPOSURE EXPOSURE TOTAL TO TOTAL TO ASSETS(2) LOSS(3) ASSETS(2) LOSS(3) ----------- --------- ----------- --------- (DOLLARS IN MILLIONS) SPES: Asset-backed securitizations and Collateralized debt obligations........................................ $ -- $ -- $2,400 $20 NON-SPES: Real estate joint ventures(4)........................ 617 238 42 59 Other limited partnerships(5)........................ 29 27 459 10 ---- ---- ------ --- Total................................................ $646 $265 $2,901 $89 ==== ==== ====== ===
- --------------- (1) Had the Company consolidated these VIEs at December 31, 2003, the transition adjustments would have been $10 million, net of income tax. (2) The assets of the asset-backed securitizations and collateralized debt obligations are reflected at fair value as of December 31, 2003. The assets of the real estate joint ventures and other limited partnerships are reflected at the carrying amounts at which such assets would have been reflected on the Company's balance sheet had the Company consolidated the VIE from the date of its initial investment in the entity. (3) The maximum exposure to loss of the asset-backed securitizations and collateralized debt obligations is equal to the carrying amounts of retained interests. In addition, the Company provides collateral management services for certain of these structures for which it collects a management fee. The maximum exposure to loss relating to real estate joint ventures and other limited partnerships is equal to the carrying amounts plus any unfunded commitments, reduced by amounts guaranteed by other partners. (4) Real estate joint ventures include partnerships and other ventures, which engage in the acquisition, development, management and disposal of real estate investments. (5) Other limited partnerships include partnerships established for the purpose of investing in public and private debt and equity securities, as well as limited partnerships established for the purpose of investing in low-income housing that qualifies for federal tax credits. F-32 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. DERIVATIVE FINANCIAL INSTRUMENTS The table below provides a summary of notional amount and fair value of derivative financial instruments held at December 31, 2003 and 2002:
2003 2002 ------------------------------- ------------------------------- CURRENT MARKET CURRENT MARKET OR FAIR VALUE OR FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- (DOLLARS IN MILLIONS) Financial futures.............. $ 1,348 $ 8 $ 30 $ 4 $ -- $ -- Interest rate swaps............ 9,944 189 36 3,866 196 126 Floors......................... 325 5 -- 325 9 -- Caps........................... 9,345 29 -- 8,040 -- -- Financial forwards............. 1,310 2 3 1,945 -- 12 Foreign currency swaps......... 4,710 9 796 2,371 92 181 Options........................ 6,065 7 -- 6,472 9 -- Foreign currency forwards...... 695 5 32 54 -- 1 Credit default swaps........... 615 2 1 376 2 -- ------- ---- ---- ------- ---- ---- Total contractual commitments............. $34,357 $256 $898 $23,453 $308 $320 ======= ==== ==== ======= ==== ====
The following is a reconciliation of the notional amounts by derivative type and strategy at December 31, 2003 and 2002:
DECEMBER 31, 2002 TERMINATIONS/ DECEMBER 31, 2003 NOTIONAL AMOUNT ADDITIONS MATURITIES NOTIONAL AMOUNT ----------------- --------- ------------- ----------------- (DOLLARS IN MILLIONS) BY DERIVATIVE TYPE Financial futures............. $ 4 $ 2,208 $ 864 $ 1,348 Interest rate swaps........... 3,866 8,063 1,985 9,944 Floors........................ 325 -- -- 325 Caps.......................... 8,040 3,000 1,695 9,345 Financial forwards............ 1,945 1,310 1,945 1,310 Foreign currency swaps........ 2,371 2,534 195 4,710 Options....................... 6,472 -- 407 6,065 Foreign currency forwards..... 54 663 22 695 Written covered calls......... -- 1,178 1,178 -- Credit default swaps.......... 376 284 45 615 ------- ------- ------ ------- Total contractual commitments............ $23,453 $19,240 $8,336 $34,357 ======= ======= ====== ======= BY DERIVATIVE STRATEGY Liability hedging............. $ 8,954 $ 5,386 $1,952 $12,388 Invested asset hedging........ 5,411 7,295 1,823 10,883 Portfolio hedging............. 9,028 2,443 4,539 6,932 Firm commitments and forecasted transactions..... 60 3,589 22 3,627 Hedging net investments in foreign operations.......... -- 527 -- 527 ------- ------- ------ ------- Total contractual commitments............ $23,453 $19,240 $8,336 $34,357 ======= ======= ====== =======
F-33 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents the notional amounts of derivative financial instruments by maturity at December 31, 2003:
REMAINING LIFE ----------------------------------------------------------------------------- ONE YEAR AFTER ONE YEAR AFTER FIVE YEARS OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS TOTAL -------- ------------------ ----------------- --------------- ------- (DOLLARS IN MILLIONS) Financial futures.......... $ 1,348 $ -- $ -- $ -- $ 1,348 Interest rate swaps........ 242 6,343 1,693 1,666 9,944 Floors..................... -- -- 325 -- 325 Caps....................... 3,150 6,195 -- -- 9,345 Financial forwards......... 1,310 -- -- -- 1,310 Foreign currency swaps..... 327 1,676 2,271 436 4,710 Options.................... 4,163 1,901 -- 1 6,065 Foreign currency forwards................. 695 -- -- -- 695 Written covered calls...... -- -- -- -- -- Credit default swaps....... 189 426 -- -- 615 ------- ------- ------ ------ ------- Total contractual commitments......... $11,424 $16,541 $4,289 $2,103 $34,357 ======= ======= ====== ====== =======
The following table presents the notional amounts and fair values of derivatives by type of hedge designation at December 31, 2003 and 2002:
2003 2002 ------------------------------- ------------------------------- FAIR VALUE FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- (DOLLARS IN MILLIONS) BY TYPE OF HEDGE Fair value..................... $ 4,027 $ 27 $297 $ 420 $ -- $ 64 Cash flow...................... 13,173 59 449 3,520 69 73 Foreign operations 527 -- 10 -- -- -- Non qualifying................. 16,630 170 142 19,513 239 183 ------- ---- ---- ------- ---- ---- Total..................... $34,357 $256 $898 $23,453 $308 $320 ======= ==== ==== ======= ==== ====
The Company recognized net investment expense of $63 million and net investment income of $9 million and $9 million, from the periodic settlement of interest rate caps and interest rate, foreign currency and credit default swaps that qualify as accounting hedges under SFAS No. 133, as amended, for the years ended December 31, 2003, 2002 and 2001, respectively. During the years ended December 31 2003 and 2002, the Company recognized $191 million and $30 million, respectively, in net investment losses related to qualifying fair value hedging instruments. Accordingly, $159 million and $34 million of net unrealized gains on fair value hedged investments were recognized in net investment gains and losses during the years ended December 31, 2003 and 2002, respectively. There were no discontinued fair value hedges during the years ended December 31, 2003 or 2002. There were no derivatives designated as fair value hedges during the year ended December 31, 2001. For the years ended December 31, 2003 and 2002, the net amounts accumulated in other comprehensive income relating to cash flow hedges were losses of $417 million and $24 million, respectively. For the years ended December 31, 2003 and 2002, the market value of cash flow hedges decreased by $456 million and F-34 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $145 million, respectively. During the years ended December 31, 2003 and 2002, the Company recognized other comprehensive net losses of $387 million and $142 million, respectively, relating to the effective portion of cash flow hedges. During the year ended December 31, 2003, other comprehensive expense of $2 million was reclassified to net investment income. During the year ended December 31, 2002 other comprehensive losses of $57 million were reclassified to net investment losses. During the year ended December 31, 2003, insignificant amounts were recognized in net investment losses related to discontinued cash flow hedges. During the years ended December 31, 2002 and 2001, no cash flow hedges were discontinued. For the years ended December 31, 2003, 2002 and 2001, $8 million, $10 million and $19 million of other comprehensive income was reclassified to net investment income, respectively, related to the SFAS 133 transition adjustment. Approximately $2 million of net investment expense and $40 million of net losses reported in accumulated other comprehensive income at December 31, 2003 are expected to be reclassified during the year ending December 31, 2004 into net investment income and net investment loss, respectively, as the derivatives and underlying investments mature or expire according to their original terms. For the years ended December 31, 2003, 2002 and 2001, the Company recognized as net investment gains, the scheduled periodic settlement payments on derivative instruments of $84 million, $32 million and $24 million, respectively, and net investment losses from changes in fair value of $218 million and $172 million and net investment gains of $100 million, respectively, related to derivatives not qualifying as accounting hedges. The Company uses forward exchange contracts that provide an economic hedge on portions of its net investments in foreign operations against adverse movements in foreign currency exchange rates. For the year ended December 31, 2003, the Company experienced net unrealized foreign currency losses of $10 million related to hedges of its net investments in foreign operations. These unrealized losses were recorded as components of accumulated other comprehensive income. F-35 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. INSURANCE DEFERRED POLICY ACQUISITION COSTS Information regarding VOBA and DAC for the years ended December 31, 2003, 2002 and 2001 is as follows:
DEFERRED VALUE OF POLICY BUSINESS ACQUISITION ACQUIRED COSTS TOTAL -------- ----------- ------- (DOLLARS IN MILLIONS) Balance at December 31, 2000............................ $1,674 $ 8,944 $10,618 Capitalizations......................................... -- 2,039 2,039 Acquisitions............................................ 124 -- 124 ------ ------- ------- Total.............................................. 1,798 10,983 12,781 ------ ------- ------- Amortization allocated to: Net investment gains (losses)......................... (15) 40 25 Unrealized investment gains (losses).................. 8 132 140 Other expenses........................................ 126 1,287 1,413 ------ ------- ------- Total amortization................................. 119 1,459 1,578 ------ ------- ------- Dispositions and other.................................. (1) (35) (36) ------ ------- ------- Balance at December 31, 2001............................ 1,678 9,489 11,167 Capitalizations......................................... 2,340 2,340 Acquisitions............................................ 369 -- 369 ------ ------- ------- Total.............................................. 2,047 11,829 13,876 ------ ------- ------- Amortization allocated to: Net investment gains (losses)......................... 16 (11) 5 Unrealized investment gains (losses).................. 154 384 538 Other expenses........................................ 132 1,507 1,639 ------ ------- ------- Total amortization................................. 302 1,880 2,182 ------ ------- ------- Dispositions and other.................................. (6) 39 33 ------ ------- ------- Balance at December 31, 2002............................ 1,739 9,988 11,727 Capitalizations......................................... -- 2,792 2,792 Acquisitions............................................ 40 218 258 ------ ------- ------- Total.............................................. 1,779 12,998 14,777 ------ ------- ------- Amortization allocated to: Net investment gains (losses)......................... (7) (24) (31) Unrealized investment gains (losses).................. (31) 146 115 Other expenses........................................ 162 1,656 1,818 ------ ------- ------- Total amortization................................. 124 1,778 1,902 ------ ------- ------- Dispositions and other.................................. 2 66 68 ------ ------- ------- Balance at December 31, 2003............................ $1,657 $11,286 $12,943 ====== ======= =======
The estimated future amortization expense allocated to other expenses for VOBA is $135 million in 2004, $128 million in 2005, $122 million in 2006, $117 million in 2007 and $114 million in 2008. Amortization of VOBA and DAC is allocated to (i) investment gains and losses to provide consolidated statement of income information regarding the impact of such gains and losses on the amount of the F-36 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amortization, (ii) unrealized investment gains and losses to provide information regarding the amount that would have been amortized if such gains and losses had been recognized, and (iii) 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 VOBA and DAC. Presenting investment gains and losses net of related amortization of VOBA and DAC provides information useful in evaluating the operating performance of the Company. This presentation may not be comparable to presentations made by other insurers. FUTURE POLICY BENEFITS AND POLICYHOLDER ACCOUNT BALANCES Future policy benefit liabilities for participating traditional life insurance policies are equal to the aggregate of (i) 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), (ii) the liability for terminal dividends, and (iii) 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 DAC is 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 2% to 11%. 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 1% to 13%, 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. SEPARATE ACCOUNTS Separate accounts include two categories of account types: non-guaranteed separate accounts totaling $59,278 million and $44,470 million at December 31, 2003 and 2002, respectively, for which the policyholder assumes the investment risk, and guaranteed separate accounts totaling $16,478 million and $15,223 million at December 31, 2003 and 2002, 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 $626 million, $542 million and $559 million for the years ended December 31, 2003, 2002 and 2001, respectively. Guaranteed separate accounts consisted primarily of Met Managed Guaranteed Interest Contracts and participating close-out contracts. The average interest rates credited on F-37 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) these contracts were 4.5% and 4.8% at December 31, 2003 and 2002, respectively. The assets that support these liabilities were comprised of $13,513 million and $12,984 million in fixed maturities at December 31, 2003 and 2002, respectively. 5. REINSURANCE The Company's life insurance operations participate in reinsurance activities in order to limit losses, minimize exposure to large risks, and to provide additional capacity for future growth. The Company currently reinsures up to 90% of the mortality risk for all new individual life insurance policies that it writes through its various franchises. This practice was initiated by different franchises for different products starting at various points in time between 1992 and 2000. Risks in excess of $25 million on single life policies and $30 million on survivorship policies are 100% coinsured. In addition, in 1998, the Company reinsured substantially all of the mortality risk on its universal life policies issued since 1983. RGA retains a maximum of $6 million of coverage per individual life with respect to its assumed reinsurance business. The Company reinsures its business through a diversified group of reinsurers. Placement of reinsurance is done primarily on an automatic basis and also on a facultative basis for risks of specific characteristics. The Company is contingently liable with respect to ceded reinsurance should any reinsurer be unable to meet its obligations under these agreements. In addition to reinsuring mortality risk, the Company reinsures other risks and specific coverages. The Company routinely reinsures certain classes of risks in order to limit its exposure to particular travel, avocation and lifestyle hazards. The Company has exposure to catastrophes, which are an inherent risk of the property and casualty 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 Company has also protected itself through the purchase of combination risk coverage. This reinsurance coverage pools risks from several lines of business and includes individual and group life claims in excess of $2 million per policy, as well as excess property and casualty losses, among others. See Note 12 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, --------------------------- 2003 2002 2001 ------- ------- ------- (DOLLARS IN MILLIONS) Direct premiums......................................... $19,396 $18,439 $16,332 Reinsurance assumed..................................... 3,706 2,993 2,907 Reinsurance ceded....................................... (2,429) (2,355) (2,027) ------- ------- ------- Net premiums............................................ $20,673 $19,077 $17,212 ======= ======= ======= Reinsurance recoveries netted against policyholder benefits.............................................. $ 2,417 $ 2,886 $ 2,255 ======= ======= =======
Reinsurance recoverables, included in premiums and other receivables, were $4,014 million and $3,918 million at December 31, 2003 and 2002, respectively, including $1,341 million and $1,348 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 $106 million and $79 million at December 31, 2003 and 2002, respectively. F-38 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table provides an analysis of the activity in the liability for benefits relating to property and casualty, group accident and non-medical health policies and contracts:
YEARS ENDED DECEMBER 31, ------------------------ 2003 2002 2001 ------ ------ ------ (DOLLARS IN MILLIONS) Balance at January 1....................................... $4,885 $4,597 $4,226 Reinsurance recoverables................................. (498) (457) (410) ------ ------ ------ Net balance at January 1................................... 4,387 4,140 3,816 ------ ------ ------ Incurred related to: Current year............................................. 4,483 4,219 4,182 Prior years.............................................. 45 (81) (84) ------ ------ ------ 4,528 4,138 4,098 ------ ------ ------ Paid related to: Current year............................................. (2,676) (2,559) (2,538) Prior years.............................................. (1,352) (1,332) (1,236) ------ ------ ------ (4,028) (3,891) (3,774) ------ ------ ------ Net Balance at December 31................................. 4,887 4,387 4,140 Add: Reinsurance recoverables............................ 525 498 457 ------ ------ ------ Balance at December 31..................................... $5,412 $4,885 $4,597 ====== ====== ======
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. At least annually, the Company compares actual and projected experience against the experience assumed in the then-current dividend scales. Dividend scales are adjusted periodically to give effect to changes in experience. 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. F-39 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. F-40 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Closed block liabilities and assets designated to the closed block are as follows:
DECEMBER 31, --------------------- 2003 2002 --------- --------- (DOLLARS IN MILLIONS) CLOSED BLOCK LIABILITIES Future policy benefits...................................... $41,928 $41,207 Other policyholder funds.................................... 260 279 Policyholder dividends payable.............................. 682 719 Policyholder dividend obligation............................ 2,130 1,882 Payables under securities loaned transactions............... 6,418 4,851 Other liabilities........................................... 180 433 ------- ------- Total closed block liabilities......................... 51,598 49,371 ------- ------- ASSETS DESIGNATED TO THE CLOSED BLOCK Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $30,381 and $28,339, respectively)... 32,348 29,981 Equity securities, at fair value (cost: $217 and $236, respectively)......................................... 250 218 Mortgage loans on real estate.......................... 7,431 7,032 Policy loans........................................... 4,036 3,988 Short-term investments................................. 123 24 Other invested assets.................................. 108 604 ------- ------- Total investments................................. 44,296 41,847 Cash and cash equivalents................................... 531 435 Accrued investment income................................... 527 540 Deferred income taxes....................................... 1,043 1,151 Premiums and other receivables.............................. 164 130 ------- ------- Total assets designated to the closed block............ 46,561 44,103 ------- ------- Excess of closed block liabilities over assets designated to to the closed block....................................... 5,037 5,268 ------- ------- Amounts included in accumulated other comprehensive loss: Net unrealized investment gains net of deferred income tax of $730 and $577, respectively.................... 1,270 1,047 Unrealized derivative gains (losses), net of deferred income tax (benefit) expense of $(28) and $7, respectively.......................................... (48) 13 Allocated to policyholder dividend obligation, net of deferred income tax benefit of ($778) and ($668), respectively.......................................... (1,352) (1,214) ------- ------- (130) (154) ------- ------- Maximum future earnings to be recognized from closed block assets and liabilities.................................... $ 4,907 $ 5,114 ======= =======
F-41 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information regarding the policyholder dividend obligation is as follows:
YEARS ENDED DECEMBER 31, ------------------------- 2003 2002 2001 ------- ------- ----- (DOLLARS IN MILLIONS) Balance at beginning of year................................ $1,882 $ 708 $385 Impact on net income before amounts allocated from policyholder dividend obligation.......................... 144 157 159 Net investment gains (losses)............................... (144) (157) (159) Change in unrealized investment and derivative gains........ 248 1,174 323 ------ ------ ---- Balance at end of year...................................... $2,130 $1,882 $708 ====== ====== ====
Closed block revenues and expenses were as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2003 2002 2001 ------ ------ ------ (DOLLARS IN MILLIONS) REVENUES Premiums................................................... $3,365 $3,551 $3,658 Net investment income and other revenues................... 2,554 2,568 2,547 Net investment gains (losses) (net of amounts allocated from the policyholder dividend obligation of ($144), ($157) and ($159), respectively)......................... 16 168 (12) ------ ------ ------ Total revenues........................................... 5,935 6,287 6,193 ------ ------ ------ EXPENSES Policyholder benefits and claims........................... 3,660 3,770 3,862 Policyholder dividends..................................... 1,509 1,573 1,544 Change in policyholder dividend obligation (excludes amounts directly related to net investment gains (losses) of ($144), ($157) and ($159), respectively).............. 144 157 159 Other expenses............................................. 297 310 352 ------ ------ ------ Total expenses........................................... 5,610 5,810 5,917 ------ ------ ------ Revenues net of expenses before income taxes............... 325 477 276 Income taxes............................................... 118 173 97 ------ ------ ------ Revenues net of expenses and income taxes.................. $ 207 $ 304 $ 179 ====== ====== ======
The change in maximum future earnings of the closed block is as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2003 2002 2001 ------ ------ ------ (DOLLARS IN MILLIONS) Balance at end of year..................................... $4,907 $5,114 $5,333 Less: Reallocation of assets................................... -- 85 -- Balance at beginning of year............................. 5,114 5,333 5,512 ------ ------ ------ Change during year......................................... $ (207) $ (304) $ (179) ====== ====== ======
F-42 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During the year ended December 31, 2002, the allocation of assets to the closed block was revised to appropriately classify assets in accordance with the plan of demutualization. The reallocation of assets had no impact on consolidated assets or liabilities. Metropolitan Life charges the closed block with federal income taxes, state and local premium taxes, and other additive state or local taxes, as well as investment management expenses relating to the closed block as provided in the plan of demutualization. Metropolitan Life also charges the closed block for expenses of maintaining the policies included in the closed block. Many of the derivative instrument strategies used by the Company are also used for the closed block. The table below provides a summary of the notional amount and fair value of derivatives by hedge accounting classification at:
DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------------------- ------------------------------- FAIR VALUE FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- (DOLLAR IN MILLIONS) BY TYPE OF HEDGE Fair value.............................. $ 6 $ -- $ 1 $ -- $ -- $ -- Cash flow............................... 473 -- 80 128 2 11 Non qualifying.......................... 90 -- 12 258 32 2 ---- ------ --- ---- ---- ---- Total................................. $569 $ -- $93 $386 $ 34 $ 13 ==== ====== === ==== ==== ====
During the years ended December 31, 2003, 2002 and 2001, the closed block recognized net investment expenses of $2 million and net investment income of $1 million and $1 million, respectively, from the periodic settlement of interest rate caps and interest rate, foreign currency and credit default swaps that qualify as accounting hedges under SFAS 133, as amended. During the year ended December 31, 2003, the closed block recognized $1 million in net investment losses related to qualifying fair value hedges. Accordingly, $1 million of unrealized gains on fair value hedged investments was recognized in net investment losses during the year ended December 31, 2003. There were no fair value hedges during the years ended December 31, 2002 and 2001. There were no discontinued fair value hedges during the years ended December 31, 2003, 2002 and 2001. For the years ended December 31, 2003 and 2002, the net amounts accumulated in other comprehensive income relating to cash flow hedges were losses of $75 million and gains of $21 million, respectively. For the years ended December 31, 2003 and 2002, the market value of cash flow hedges decreased by $106 million and increased by $4 million, respectively. During the years ended December 31, 2003 and 2002, the closed block recognized other comprehensive net losses of $93 million and other comprehensive net gains of $4 million, respectively, relating to the effective portion of cash flow hedges. During the years ended December 31, 2003, 2002 and 2001, no cash flow hedges were discontinued. For the years ended December 31, 2003 and 2002, $3 million and $4 million of other comprehensive income was reclassified to net investment income, respectively, related to the SFAS 133 transition adjustment. Amounts reclassified for the transition adjustment for the year ended December 31, 2001 were insignificant. Approximately $5 million of net losses reported in accumulated other comprehensive income at December 31, 2003 are expected to be reclassified during the year ending December 31, 2004 into net investment losses as the derivatives and underlying investments mature or expire according to their original terms. For the years ended December 31, 2003, 2002 and 2001, scheduled periodic settlement payments on derivative instruments recognized as net investment gains and losses were immaterial. Net investment losses F-43 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) from changes in fair value of $18 million and $11 million and gains of $5 million related to derivatives not qualifying as accounting hedges were recognized for the years ended December 31, 2003, 2002 and 2001, respectively. 7. DEBT Debt consisted of the following:
DECEMBER 31, --------------------- 2003 2002 -------- -------- (DOLLARS IN MILLIONS) Senior notes, interest rates ranging from 3.91% to 7.25%, maturity dates ranging from 2005 to 2033.................. $4,256 $2,539 Surplus notes, interest rates ranging from 7.00% to 7.88%, maturity dates ranging from 2005 to 2025.................. 940 1,632 Fixed rate notes, interest rates ranging from 1.69% to 12.00%, maturity dates ranging from 2005 to 2009.......... 110 83 Capital lease obligations................................... 74 21 Other notes with varying interest rates..................... 323 150 ------ ------ Total long-term debt........................................ 5,703 4,425 Total short-term debt....................................... 3,642 1,161 ------ ------ Total..................................................... $9,345 $5,586 ====== ======
The Company maintains committed and unsecured credit facilities aggregating $2,478 million ($1,000 million expiring in 2004, $1,303 million expiring in 2005 and $175 million expiring in 2006). If these facilities were drawn upon, they would bear interest at rates stated in the agreements. The facilities are primarily used for general corporate purposes and as back-up lines of credit for the borrowers' commercial paper program. At December 31, 2003, the Company had drawn approximately $49 million under the facilities expiring in 2005 at interest rates ranging from 4.08% to 5.48% and approximately another $50 million under the facility expiring in 2006 at an interest rate of 1.69%. In April 2003, the Company replaced an expiring $1 billion five-year credit facility with a $1 billion 364-day credit facility and the Holding Company was added as a borrower. In May 2003, the Company replaced an expiring $140 million three-year credit facility, with a $175 million three-year credit facility which expires in 2006. At December 31, 2003, the Company had approximately $828 million in letters of credit from various banks. 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. On November 1, 2003, the Company redeemed the $300 million of 7.45% surplus notes outstanding scheduled to mature on November 1, 2023 at a redemption price of $311 million. The aggregate maturities of long-term debt for the Company are $134 million in 2004, $1,436 million in 2005, $662 million in 2006, $39 million in 2007, $44 million in 2008 and $3,388 million thereafter. Short-term debt of the Company consisted of commercial paper with a weighted average interest rate of 1.1% and a weighted average maturity of 31 days at December 31, 2003. Short-term debt of the Company consisted of commercial paper with a weighted average interest rate of 1.5% and a weighted average maturity of 74 days at December 31, 2002. The Company also has other collateralized borrowings with a weighted average coupon rate of 5.07% and a weighted average maturity of 30 days at December 31, 2003. Such securities had a weighted average coupon rate of 5.83% and a weighted average maturity of 34 days at December 31, 2002. F-44 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest expense related to the Company's indebtedness included in other expenses was $420 million, $288 million and $252 million for the years ended December 31, 2003, 2002 and 2001, respectively. 8. SHARES SUBJECT TO MANDATORY REDEMPTION AND COMPANY-OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS MetLife Capital Trust I. In connection with MetLife, Inc.'s, initial public offering in April 2000, the Holding Company and MetLife Capital Trust I (the "Trust") issued equity security units (the "units"). Each unit originally consisted of (i) a contract to purchase, for $50, shares of the Holding Company's common stock (the "purchase contracts") on May 15, 2003; and (ii) a capital security of the Trust, with a stated liquidation amount of $50. In accordance with the terms of the units, the Trust was dissolved on February 5, 2003, and $1,006 million aggregate principal amount of 8.00% debentures of the Holding Company (the "MetLife debentures"), the sole assets of the Trust, were distributed to the owners of the Trust's capital securities in exchange for their capital securities. The MetLife debentures were remarketed on behalf of the debenture owners on February 12, 2003 and the interest rate on the MetLife debentures was reset as of February 15, 2003 to 3.911% per annum for a yield to maturity of 2.876%. As a result of the remarketing, the debenture owners received $21 million ($0.03 per diluted common share) in excess of the carrying value of the capital securities. This excess was recorded by the Company as a charge to additional paid-in capital and, for the purpose of calculating earnings per share, is subtracted from net income to arrive at net income available to common shareholders. On May 15, 2003, the purchase contracts associated with the units were settled. In exchange for $1,006 million, the Company issued 2.97 shares of MetLife, Inc. common stock per purchase contract, or approximately 59.8 million shares of treasury stock. The excess of the Company's cost of the treasury stock ($1,662 million) over the contract price of the stock issued to the purchase contract holders ($1,006 million) was $656 million, which was recorded as a direct reduction to retained earnings. Interest expense on the capital securities is included in other expenses and was $10 million, $81 million and $81 million for the years ended December 31, 2003, 2002 and 2001, respectively. GenAmerica Capital I. 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 any time after June 30, 2007. Capital securities outstanding were $119 million, net of unamortized discounts of $6 million, at both December 31, 2003 and 2002. Interest expense on these instruments is included in other expenses and was $11 million for each of the years ended December 31, 2003, 2002 and 2001. RGA Capital Trust I. In December 2001, a majority-owned subsidiary of the Company, Reinsurance Group of America Incorporated ("RGA"), through its wholly-owned trust, RGA Capital Trust I (the "Trust"), issued 4,500,000 Preferred Income Equity Redeemable Securities ("PIERS") Units. Each PIERS unit consists of (i) a preferred security issued by the Trust, having a stated liquidation amount of $50 per unit, representing an undivided beneficial ownership interest in the assets of the Trust, which consist solely of junior subordinated debentures issued by RGA which have a principal amount at maturity of $50 and a stated maturity of March 18, 2051, and (ii) a warrant to purchase, at any time prior to December 15, 2050, 1.2508 shares of RGA stock at an exercise price of $50. The fair market value of the warrant on the issuance date was $14.87 and is detachable from the preferred security. RGA fully and unconditionally guarantees, on a subordinated basis, the obligations of the Trust under the preferred securities. The preferred securities and subordinated debentures were issued at a discount (original issue discount) to the face or liquidation value of F-45 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $14.87 per security. The securities will accrete to their $50 face/liquidation value over the life of the security on a level yield basis. The weighted average effective interest rate on the preferred securities and the subordinated debentures is 8.25% per annum. Capital securities outstanding were $158 million, net of unamortized discount of $67 million, at both December 31, 2003 and 2002. 9. SEPTEMBER 11, 2001 TRAGEDIES On September 11, 2001, terrorist attacks occurred in New York, Washington, D.C. and Pennsylvania (the "tragedies") triggering a significant loss of life and property, which had an adverse impact on certain of the Company's businesses. The Company's original estimate of the total insurance losses related to the tragedies, which was recorded in the third quarter of 2001, was $208 million, net of income taxes of $117 million. As of December 31, 2003 and 2002, the Company's remaining liability for unpaid and future claims associated with the tragedies was $9 million and $47 million, respectively, principally related to disability coverages. This estimate has been and will continue to be subject to revision in subsequent periods, as claims are received from insureds and processed. Any revision to the estimate of losses in subsequent periods will affect net income in such periods. 10. BUSINESS REALIGNMENT INITIATIVES During the fourth quarter of 2001, the Company implemented several business realignment initiatives, which resulted from a strategic review of operations and an ongoing commitment to reduce expenses. The impact of these actions on a segment basis were charges of $399 million in Institutional, $97 million in Individual and $3 million in Auto & Home. The liability at December 31, 2003 and 2002 was $27 million and $40 million, in the Institutional segment and $9 million and $18 million, in the Individual segment, respectively. The remaining liability is due to certain contractual obligations. 11. INCOME TAXES The provision for income taxes for continuing operations was as follows:
YEARS ENDED DECEMBER 31, ------------------------- 2003 2002 2001 ------ ------- ------ (DOLLARS IN MILLIONS) Current: Federal................................................... $363 $ 803 $(67) State and local........................................... 22 (17) (4) Foreign................................................... 47 31 15 ---- ----- ---- 432 817 (56) ---- ----- ---- Deferred: Federal................................................... 240 (332) 247 State and local........................................... 27 16 12 Foreign................................................... (12) 1 1 ---- ----- ---- 255 (315) 260 ---- ----- ---- Provision for income taxes.................................. $687 $ 502 $204 ==== ===== ====
F-46 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reconciliations of the income tax provision at the U.S. statutory rate to the provision for income taxes as reported for continuing operations were as follows:
YEARS ENDED DECEMBER 31, ------------------------- 2003 2002 2001 ------- ------ ------ (DOLLARS IN MILLIONS) Tax provision at U.S. statutory rate........................ $ 920 $572 $200 Tax effect of: Tax exempt investment income.............................. (118) (87) (82) State and local income taxes.............................. 44 20 6 Foreign operations net of foreign income taxes.............. (81) (1) 4 Prior year taxes.......................................... (26) (7) 38 Sales of businesses....................................... -- -- 5 Other, net................................................ (52) 5 33 ----- ---- ---- Provision for income taxes.................................. $ 687 $502 $204 ===== ==== ====
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, --------------------- 2003 2002 --------- --------- (DOLLARS IN MILLIONS) Deferred income tax assets: Policyholder liabilities and receivables.................. $ 3,704 $ 3,845 Net operating losses...................................... 352 322 Litigation related........................................ 72 99 Intangible tax asset...................................... 120 199 Other..................................................... 268 386 ------- ------- 4,516 4,851 Less: Valuation allowance................................. 32 84 ------- ------- 4,484 4,767 ------- ------- Deferred income tax liabilities: Investments............................................... 1,343 1,681 Deferred policy acquisition costs......................... 3,595 3,307 Employee benefits......................................... 131 55 Net unrealized investment gains........................... 1,679 1,264 Other..................................................... 135 85 ------- ------- 6,883 6,392 ------- ------- Net deferred income tax liability........................... $(2,399) $(1,625) ======= =======
Domestic net operating loss carryforwards amount to $828 million at December 31, 2003 and will expire beginning in 2013. Foreign net operating loss carryforwards amount to $241 million at December 31, 2003 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 informa- F-47 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) tion, 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. In 2003, the Company recorded a tax benefit for the reduction of the deferred tax valuation allowance related to certain foreign net operating loss carryforwards. The 2003 tax provision also includes an adjustment revising the estimate of income taxes for 2002. 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 its consolidated financial statements. 12. COMMITMENTS, CONTINGENCIES AND GUARANTEES LITIGATION Sales Practices Claims Over the past several years, Metropolitan Life, New England Mutual Life Insurance Company ("New England Mutual") and General American Life Insurance Company ("General American") have faced numerous claims, including class action lawsuits, alleging improper marketing and sales of individual life insurance policies or annuities. These lawsuits are generally referred to as "sales practices claims." In December 1999, a federal court approved a settlement resolving sales practices claims on behalf of a class of owners of permanent life insurance policies and annuity contracts or certificates issued pursuant to individual sales in the United States by Metropolitan Life, Metropolitan Insurance and Annuity Company or Metropolitan Tower Life Insurance Company between January 1, 1982 and December 31, 1997. The class includes owners of approximately six million in-force or terminated insurance policies and approximately one million in-force or terminated annuity contracts or certificates. Similar sales practices class actions against New England Mutual, with which Metropolitan Life merged in 1996, and General American, which was acquired in 2000, have been settled. In October 2000, a federal court approved a settlement resolving sales practices claims on behalf of a class of owners of permanent life insurance policies issued by New England Mutual between January 1, 1983 through August 31, 1996. The class includes owners of approximately 600,000 in-force or terminated policies. A federal court has approved a settlement resolving sales practices claims on behalf of a class of owners of permanent life insurance policies issued by General American between January 1, 1982 through December 31, 1996. An appellate court has affirmed the order approving the settlement. The class includes owners of approximately 250,000 in-force or terminated policies. Certain class members have opted out of the class action settlements noted above and have brought or continued non-class action sales practices lawsuits. In addition, other sales practices lawsuits have been brought. As of December 31, 2003, there are approximately 366 sales practices lawsuits pending against Metropolitan Life, approximately 40 sales practices lawsuits pending against New England Mutual and approximately 25 sales practices lawsuits pending against General American. Metropolitan Life, New England Mutual and General American continue to defend themselves vigorously against these lawsuits. Some individual sales practices claims have been resolved through settlement, won by dispositive motions, or, in a few instances, have gone to trial. Most of the current cases seek substantial damages, including in some cases punitive and treble damages and attorneys' fees. Additional litigation relating to the Company's marketing and sales of individual life insurance may be commenced in the future. The Metropolitan Life class action settlement did not resolve two putative class actions involving sales practices claims filed against Metropolitan Life in Canada, and these actions remain pending. F-48 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for sales practices claims against Metropolitan Life, New England Mutual and General American. Regulatory authorities in a small number of states have had investigations or inquiries relating to Metropolitan Life's, New England Mutual's or General American's sales of individual life insurance policies or annuities. Over the past several years, these and a number of investigations by other regulatory authorities were resolved for monetary payments and certain other relief. The Company may continue to resolve investigations in a similar manner. Asbestos-Related Claims Metropolitan Life is also a defendant in thousands of lawsuits seeking compensatory and punitive damages for personal injuries allegedly caused by exposure to asbestos or asbestos-containing products. Metropolitan Life has never engaged in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products nor has Metropolitan Life issued liability or workers' compensation insurance to companies in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products. Rather, these lawsuits have principally been based upon allegations relating to certain research, publication and other activities of one or more of Metropolitan Life's employees during the period from the 1920's through approximately the 1950's and have alleged that Metropolitan Life learned or should have learned of certain health risks posed by asbestos and, among other things, improperly publicized or failed to disclose those health risks. Metropolitan Life believes that it should not have legal liability in such cases. Legal theories asserted against Metropolitan Life have included negligence, intentional tort claims and conspiracy claims concerning the health risks associated with asbestos. Although Metropolitan Life believes it has meritorious defenses to these claims, and has not suffered any adverse monetary judgments in respect of these claims, due to the risks and expenses of litigation, almost all past cases have been resolved by settlements. Metropolitan Life's defenses (beyond denial of certain factual allegations) to plaintiffs' claims include that: (i) Metropolitan Life owed no duty to the plaintiffs -- it had no special relationship with the plaintiffs and did not manufacture, produce, distribute or sell the asbestos products that allegedly injured plaintiffs; (ii) plaintiffs cannot demonstrate justifiable detrimental reliance; and (iii) plaintiffs cannot demonstrate proximate causation. In defending asbestos cases, Metropolitan Life selects various strategies depending upon the jurisdictions in which such cases are brought and other factors which, in Metropolitan Life's judgment, best protect Metropolitan Life's interests. Strategies include seeking to settle or compromise claims, motions challenging the legal or factual basis for such claims or defending on the merits at trial. In 2002 and 2003, trial courts in California, Utah and Georgia granted motions dismissing claims against Metropolitan Life on some or all of the above grounds. Other courts have denied motions brought by Metropolitan Life to dismiss cases without the necessity of trial. There can be no assurance that Metropolitan Life will receive favorable decisions on motions in the future. Metropolitan Life intends to continue to exercise its best judgment regarding settlement or defense of such cases, including when trials of these cases are appropriate. F-49 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 years ended on those dates and the total settlement payments made to resolve asbestos personal injury claims during those years:
AT OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 2003 2002 2001 ----------- ----------- ---------- (DOLLARS IN MILLIONS) Asbestos personal injury claims at year end (approximate)..................................... 111,700 106,500 89,000 Number of new claims during the year (approximate)..................................... 60,300 66,000 59,500 Settlement payments during the year (1)............. $ 84.2 $ 95.1 $ 90.7
- --------------- (1) Settlement payments represent payments made by Metropolitan Life during the year in connection with settlements made in that year and in prior years. Amounts do not include Metropolitan Life's attorneys' fees and expenses and do not reflect amounts received from insurance carriers. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for asbestos-related claims. The ability of Metropolitan Life to estimate its ultimate asbestos exposure is subject to considerable uncertainty due to numerous factors. The availability of data is limited and it is difficult to predict with any certainty numerous variables that can affect liability estimates, including the number of future claims, the cost to resolve claims, the disease mix and severity of disease, the jurisdiction of claims filed, tort reform efforts and the impact of any possible future adverse verdicts and their amounts. Recent bankruptcies of other companies involved in asbestos litigation, as well as advertising by plaintiffs' asbestos lawyers, may result in an increase in the number of claims and the cost of resolving claims, as well as the number of trials and possible adverse verdicts Metropolitan Life may experience. Plaintiffs are seeking additional funds from defendants, including Metropolitan Life, in light of such recent bankruptcies by certain other defendants. In addition, publicity regarding legislative reform efforts may result in an increase in the number of claims. Metropolitan Life will continue to study its claims experience, review external literature regarding asbestos claims experience in the United States and consider numerous variables that can affect its asbestos liability exposure, including bankruptcies of other companies involved in asbestos litigation and legislative and judicial developments, to identify trends and to assess their impact on the recorded asbestos liability. The number of asbestos cases that may be brought or the aggregate amount of any liability that Metropolitan Life may ultimately incur is uncertain. Accordingly, it is reasonably possible that the Company's total exposure to asbestos claims may be greater than the liability recorded by the Company in its consolidated financial statements and that future charges to income may be necessary. While the potential future charges could be material in particular quarterly or annual periods in which they are recorded, based on information currently known by management, it does not believe any such charges are likely to have a material adverse effect on the Company's consolidated financial position. During the fourth quarter of 2002, Metropolitan Life analyzed its claims experience and reviewed external publications and numerous variables to identify trends and assessed their impact on its recorded asbestos liability. Certain publications suggested a trend towards more asbestos-related claims and a greater awareness of asbestos litigation generally by potential plaintiffs and plaintiffs' lawyers. Plaintiffs' lawyers continue to advertise heavily with respect to asbestos litigation. Bankruptcies and reorganizations of other defendants in asbestos litigation may increase the pressures on remaining defendants, including Metropolitan Life. Through the first nine months of 2002, the number of new claims received by Metropolitan Life was F-50 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) lower than those received during the comparable 2001 period. However, the number of new claims received by Metropolitan Life during the fourth quarter of 2002 was significantly higher than those received in the prior year quarter, resulting in more new claims being received by Metropolitan Life in 2002 than in 2001. Factors considered also included expected trends in filing cases, the dates of initial exposure of plaintiffs to asbestos, the likely percentage of total asbestos claims which included Metropolitan Life as a defendant and experience in claims settlement negotiations. Metropolitan Life also considered views derived from actuarial calculations it made in the fourth quarter of 2002. These calculations were made using, among other things, then current information regarding Metropolitan Life's claims and settlement experience, information available in public reports, as well as a study regarding the possible future incidence of mesothelioma. Based on all of the above information, including greater than expected claims experience in 2000, 2001 and 2002, Metropolitan Life expected to receive more claims in the future than it had previously expected. Previously, Metropolitan Life's liability reflected that the increase in asbestos-related claims was a result of an acceleration in the reporting of such claims; the liability now reflects that such an increase is also the result of an increase in the total number of asbestos-related claims expected to be received by Metropolitan Life. Accordingly, Metropolitan Life increased its recorded liability for asbestos-related claims by $402 million from approximately $820 million to $1,225 million at December 31, 2002. This total recorded asbestos-related liability (after the self-insured retention) is within the coverage of the excess insurance policies discussed below. The aforementioned analysis was updated through December 31, 2003. During 1998, Metropolitan Life paid $878 million in premiums for excess insurance policies for asbestos-related claims. The excess insurance policies for asbestos-related claims provide for recovery of losses up to $1,500 million, which is in excess of a $400 million self-insured retention. The asbestos-related policies are also subject to annual and per-claim sublimits. Amounts are recoverable under the policies annually with respect to claims paid during the prior calendar year. Although amounts paid by Metropolitan Life in any given year that may be recoverable in the next calendar year under the policies will be reflected as a reduction in the Company's operating cash flows for the year in which they are paid, management believes that the payments will not have a material adverse effect on the Company's liquidity. Each asbestos-related policy contains an experience fund and a reference fund that provides for payments to Metropolitan Life at the commutation date if the reference fund is greater than zero at commutation or pro rata reductions from time to time in the loss reimbursements to Metropolitan Life if the cumulative return on the reference fund is less than the return specified in the experience fund. The return in the reference fund is tied to performance of the Standard & Poor's 500 Index and the Lehman Brothers Aggregate Bond Index. A claim was made under the excess insurance policies in 2003 for the amounts paid with respect to asbestos litigation in excess of the retention. Based on performance of the reference fund, at December 31, 2002, the loss reimbursements to Metropolitan Life in 2003 and the recoverable with respect to later periods was $42 million less than the amount of the recorded losses. Such foregone loss reimbursements may be recovered upon commutation depending upon future performance of the reference fund. The foregone loss reimbursements were estimated to be $9 million with respect to 2002 claims and estimated to be $42 million in the aggregate. The $402 million increase in the recorded liability for asbestos claims less the foregone loss reimbursement adjustment of $42 million ($27 million, net of income tax) resulted in an increase in the recoverable of $360 million. At December 31, 2002, a portion ($136 million) of the $360 million recoverable was recognized in income while the remainder ($224 million) was recorded as a deferred gain which is expected to be recognized in income in the future over the estimated settlement period of the excess insurance policies. The $402 million increase in the recorded liability, less the portion of the recoverable recognized in income, resulted in a net expense of $266 million ($169 million, net of income tax). The $360 million recoverable may F-51 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) change depending on the future performance of the Standard & Poor's 500 Index and the Lehman Brothers Aggregate Bond Index. As a result of the excess insurance policies, $1,237 million is recorded as a recoverable at December 31, 2002 ($224 million of which is recorded as a deferred gain as mentioned above); the amount includes recoveries for amounts paid in 2002. If at some point in the future, the Company believes the liability for probable and estimable losses for asbestos-related claims should be increased, an expense would be recorded and the insurance recoverable would be adjusted subject to the terms, conditions and limits of the excess insurance policies. Portions of the change in the insurance recoverable would be recorded as a deferred gain and amortized into income over the estimated remaining settlement period of the insurance policies. In 2003, Metropolitan Life also has been named as a defendant in a small number of silicosis, welding and mixed dust cases. The cases are pending in Mississippi, Texas, Ohio, Pennsylvania, West Virginia, Louisiana, Kentucky, Georgia, Alabama, Illinois and Arkansas. The Company intends to defend itself vigorously against these cases. Property And Casualty Actions A purported class action has been filed against Metropolitan Property and Casualty Insurance Company's subsidiary, Metropolitan Casualty Insurance Company, in Florida alleging breach of contract and unfair trade practices with respect to allowing the use of parts not made by the original manufacturer to repair damaged automobiles. Discovery is ongoing and a motion for class certification is pending. Two purported nationwide class actions have been filed against Metropolitan Property and Casualty Insurance Company in Illinois. One suit claims breach of contract and fraud due to the alleged underpayment of medical claims arising from the use of a purportedly biased provider fee pricing system. A motion for class certification has been filed and discovery is ongoing. The second suit claims breach of contract and fraud arising from the alleged use of preferred provider organizations to reduce medical provider fees covered by the medical claims portion of the insurance policy. A motion to dismiss has been filed. A purported class action has been filed against Metropolitan Property and Casualty Insurance Company in Montana. This suit alleges breach of contract and bad faith for not aggregating medical payment and uninsured coverages provided in connection with the several vehicles identified in insureds' motor vehicle policies. Metropolitan Property and Casualty Insurance Company is vigorously defending itself against this lawsuit. Certain plaintiffs' lawyers have alleged that the use of certain automated databases to provide total loss vehicle valuation methods was improper. Metropolitan Property and Casualty Insurance Company, along with a number of other insurers, has tentatively agreed in January 2004 to resolve this issue in a class action format. The amount to be paid in resolution of this matter will not be material to Metropolitan Property and Casualty Insurance Company. Demutualization Actions Several lawsuits were brought in 2000 challenging the fairness of Metropolitan Life's plan of reorganization, as amended (the "plan") and the adequacy and accuracy of Metropolitan Life's disclosure to policyholders regarding the plan. These actions name as defendants some or all of Metropolitan Life, the Holding Company, the individual directors, the New York Superintendent of Insurance (the "Superintendent") and the underwriters for MetLife, Inc.'s initial public offering, Goldman Sachs & Company and Credit Suisse First Boston. Five purported class actions pending in the New York state court in New York County were consolidated within the commercial part. In addition, there remained a separate purported class action in New York state court in New York County. On February 21, 2003, the defendants' motions to dismiss both the consolidated action and separate action were granted; leave to replead as a proceeding under Article 78 of New York's Civil Practice Law and Rules has been granted in the separate action. Plaintiffs in the consolidated action and separate action have filed notices of appeal. Another purported class action in New York state court in Kings County has been voluntarily held in abeyance by plaintiffs. The plaintiffs in the state F-52 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) court class actions seek injunctive, declaratory and compensatory relief, as well as an accounting and, in some instances, punitive damages. Some of the plaintiffs in the above described actions also have brought a proceeding under Article 78 of New York's Civil Practice Law and Rules challenging the Opinion and Decision of the Superintendent who approved the plan. In this proceeding, petitioners seek to vacate the Superintendent's Opinion and Decision and enjoin him from granting final approval of the plan. This case also is being held in abeyance by plaintiffs. Three purported class actions were filed in the United States District Court for the Eastern District of New York claiming violation of the Securities Act of 1933. The plaintiffs in these actions, which have been consolidated, claim that the Policyholder Information Booklets relating to the plan failed to disclose certain material facts and seek rescission and compensatory damages. Metropolitan Life's motion to dismiss these three cases was denied in 2001. On February 4, 2003, plaintiffs filed a consolidated amended complaint adding a fraud claim under the Securities Exchange Act of 1934. Metropolitan Life has served a motion to dismiss the consolidated amended complaint and a motion for summary judgment in this action. Metropolitan Life, the Holding Company and the individual defendants believe they have meritorious defenses to the plaintiffs' claims and are contesting vigorously all of the plaintiffs' claims in these actions. In 2001, a lawsuit was filed in the Superior Court of Justice, Ontario, Canada on behalf of a proposed class of certain former Canadian policyholders against the Holding Company, Metropolitan Life, and Metropolitan Life Insurance Company of Canada. Plaintiffs' allegations concern the way that their policies were treated in connection with the demutualization of Metropolitan Life; they seek damages, declarations, and other non-pecuniary relief. The defendants believe they have meritorious defenses to the plaintiffs' claims and will contest vigorously all of plaintiffs' claims in this matter. In July 2002, a lawsuit was filed in the United States District Court for the Eastern District of Texas on behalf of a proposed class comprised of the settlement class in the Metropolitan Life sales practices class action settlement approved in December 1999 by the United States District Court for the Western District of Pennsylvania. After the defendants' motion to transfer the lawsuit to the Western District of Pennsylvania was granted, plaintiffs filed an amended complaint alleging that the treatment of the cost of the sales practices settlement in connection with the demutualization of Metropolitan Life breached the terms of the settlement. Plaintiffs sought compensatory and punitive damages, as well as attorneys' fees and costs. In October 2003, the court granted defendants' motion to dismiss the action. Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Third Circuit. In January 2004, the appeal was dismissed. Race-Conscious Underwriting Claims Insurance departments in a number of states initiated inquiries in 2000 about possible race-conscious underwriting of life insurance. These inquiries generally have been directed to all life insurers licensed in their respective states, including Metropolitan Life and certain of its affiliates. The New York Insurance Department has concluded its examination of Metropolitan Life concerning possible past race-conscious underwriting practices. Four purported class action lawsuits filed against Metropolitan Life in 2000 and 2001 alleging racial discrimination in the marketing, sale, and administration of life insurance policies have been consolidated in the United States District Court for the Southern District of New York. On April 28, 2003, the United States District Court approved a class-action settlement of the consolidated actions. Several persons filed notices of appeal from the order approving the settlement, but subsequently the appeals were dismissed. Metropolitan Life also has entered into settlement agreements to resolve the regulatory examination. Metropolitan Life recorded a charge in the fourth quarter of 2001 in connection with the anticipated resolution of these matters. The Company believes the remaining portion of the previously recorded charge is adequate to cover the costs associated with the resolution of these matters. Sixteen lawsuits involving approximately 130 plaintiffs have been filed in federal and state court in Alabama, Mississippi and Tennessee alleging federal and/or state law claims of racial discrimination in F-53 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) connection with the sale, formation, administration or servicing of life insurance policies. Metropolitan Life is contesting vigorously plaintiffs' claims in these actions. Other In 2001, a putative class action was filed against Metropolitan Life in the United States District Court for the Southern District of New York alleging gender discrimination and retaliation in the MetLife Financial Services unit of the Individual segment. The plaintiffs were seeking unspecified compensatory damages, punitive damages, a declaration that the alleged practices were discriminatory and illegal, injunctive relief requiring Metropolitan Life to discontinue the alleged discriminatory practices, an order restoring class members to their rightful positions (or appropriate compensation in lieu thereof), and other relief. Plaintiffs filed a motion for class certification. Opposition papers were filed by Metropolitan Life. In August 2003, the court granted preliminary approval to a settlement of the lawsuit. At the fairness hearing held on November 6, 2003, the court approved the settlement of the lawsuit. Implementation of the settlement has commenced in 2004. A putative class action lawsuit is pending in the United States District Court for the District of Columbia, in which plaintiffs allege that they were denied certain ad hoc pension increases awarded to retirees under the Metropolitan Life retirement plan. The ad hoc pension increases were awarded only to retirees (i.e., individuals who were entitled to an immediate retirement benefit upon their termination of employment) and not available to individuals like these plaintiffs whose employment, or whose spouses' employment, had terminated before they became eligible for an immediate retirement benefit. The plaintiffs seek to represent a class consisting of former Metropolitan Life employees, or their surviving spouses, who are receiving deferred vested annuity payments under the retirement plan and who were allegedly eligible to receive the ad hoc pension increases awarded in 1977, 1980, 1989, 1992, 1996 and 2001, as well as increases awarded in earlier years. Metropolitan Life is vigorously defending itself against these allegations. A lawsuit was filed against Metropolitan Life in Ontario, Canada by Clarica Life Insurance Company regarding the sale of the majority of Metropolitan Life's Canadian operation to Clarica in 1998. Clarica alleged that Metropolitan Life breached certain representations and warranties contained in the sale agreement, that Metropolitan Life made misrepresentations upon which Clarica relied during the negotiations and that Metropolitan Life was negligent in the performance of certain of its obligations and duties under the sale agreement. The parties settled the matter in January 2004. The settlement will have no material impact on the Company's consolidated financial results in 2004. A reinsurer of universal life policy liabilities of Metropolitan Life and certain of its affiliates commenced an arbitration proceeding and sought rescission, claiming that, during underwriting, material misrepresentations or omissions were made to the reinsurer. The reinsurer also sent a notice purporting to increase reinsurance premium rates. In December 2003, the arbitration panel denied the reinsurer's attempt to rescind the contract and granted the reinsurer's request to raise rates. As a result of the panel's rulings, liabilities ceded to the reinsurer were recaptured effective May 5, 2003. The recapture had no material impact on the Company's consolidated financial results in 2003. As previously reported, the SEC is conducting a formal investigation of New England Securities Corporation ("NES"), an indirect subsidiary of New England Life Insurance Company ("NELICO"), in response to NES informing the SEC that certain systems and controls relating to one NES advisory program were not operating effectively. NES is cooperating fully with the SEC. Prior to filing the Company's June 30, 2003 Form 10-Q, MetLife announced a $31 million after-tax charge resulting from certain improperly deferred expenses at an affiliate, New England Financial. MetLife notified the SEC about the nature of this charge prior to its announcement. The SEC is pursuing a formal investigation of the matter and MetLife is fully cooperating with the investigation. F-54 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The American Dental Association and two individual providers have sued MetLife, Mutual of Omaha and Cigna in a purported class action lawsuit brought in a Florida federal district court. The plaintiffs purport to represent a nationwide class of in-network providers who allege that their claims are being wrongfully reduced by downcoding, bundling, and the improper use and programming of software. The complaint alleges federal racketeering and various state law theories of liability. MetLife is vigorously defending the case and a motion to dismiss has been filed. A purported class action in which a policyholder seeks to represent a class of owners of participating life insurance policies is pending in state court in New York. Plaintiff asserts that Metropolitan Life breached her policy in the manner in which it allocated investment income across lines of business during a period ending with the 2000 demutualization. In August 2003, an appellate court affirmed the dismissal of fraud claims in this action. MetLife is vigorously defending the case. Regulatory bodies have contacted the Company and have requested information relating to market timing and late trading of mutual funds and variable insurance products. The Company believes that these inquiries are similar to those made to many financial services companies as part of an industry-wide investigation by various regulatory agencies into the practices, policies and procedures relating to trading in mutual fund shares. State Street Research Investment Services, one of the Company's indirect broker/dealer subsidiaries, has entered into a settlement with the National Association of Securities Dealers ("NASD") resolving all outstanding issues relating to its investigation. The SEC has commenced an investigation with respect to market timing and late trading in a limited number of privately-placed variable insurance contracts that were sold through General American. The Company is in the process of responding and is fully cooperating with regard to these information requests and investigations. The Company at the present time is not aware of any systemic problems with respect to such matters that may have a material adverse effect on the Company's consolidated financial position. Various litigation, claims and assessments against the Company, in addition to those discussed above and those otherwise provided for in the Company's consolidated financial statements, have arisen in the course of the Company's business, including, but not limited to, in connection with its activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company's compliance with applicable insurance and other laws and regulations. Summary It is not feasible to predict or determine the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses, except as noted above in connection with specific matters. In some of the matters referred to above, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company's consolidated financial position, based on information currently known by the Company's management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's consolidated net income 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. F-55 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum rental and sublease income, and minimum gross rental payments relating to these lease agreements were as follows:
GROSS RENTAL SUBLEASE RENTAL INCOME INCOME PAYMENTS ------ -------- -------- (DOLLARS IN MILLIONS) 2004...................................................... $ 567 $16 $210 2005...................................................... $ 522 $15 $192 2006...................................................... $ 481 $14 $168 2007...................................................... $ 432 $12 $145 2008...................................................... $ 366 $10 $113 Thereafter................................................ $1,955 $13 $717
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 $1,380 million and $1,667 million at December 31, 2003 and 2002, respectively. The Company anticipates that these amounts will be invested in the partnerships over the next three to five years. GUARANTEES In the course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties pursuant to which it may be required to make payments now or in the future. In the context of acquisition, disposition, investment and other transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and other specific liabilities, and other indemnities and guarantees that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities, such as third party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual limitations and those that arise by operation of law, such as applicable statutes of limitation. In some cases, the maximum potential obligation under the indemnities and guarantees is subject to a contractual limitation ranging from $1 million to $800 million, while in other cases such limitations are not specified or applicable. Since certain of these obligations are not subject to limitations, the Company does not believe that it is possible to determine the maximum potential amount due under these guarantees in the future. In addition, the Company indemnifies its directors and officers as provided in its charters and by-laws. Also, the Company indemnifies other of its agents for liabilities incurred as a result of their representation of the Company's interests. Since these indemnities are generally not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount due under these indemnities in the future. The fair value of such indemnities, guarantees and commitments entered into was insignificant. The Company's recorded liability at December 31, 2003 and 2002 for indemnities, guarantees and commitments provided to third parties prior to January 1, 2003 was insignificant. The Company writes credit default swap obligations requiring payment of principal due in exchange for the reference credit obligation, depending on the nature or occurrence of specified credit events for the referenced entities. In the event of a specified credit event, the Company's maximum amount at risk, assuming F-56 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the value of the referenced credits become worthless, is $489 million at December 31, 2003. The credit default swaps expire at various times during the next four years. 13. EMPLOYEE BENEFIT PLANS PENSION BENEFIT AND OTHER BENEFIT PLANS The Company is both the sponsor and administrator of defined benefit pension plans covering eligible employees and sales representatives of the Company. Retirement benefits are based upon years of credited service and final average or career average earnings history. The Company also provides certain postemployment benefits and certain postretirement health care and life insurance benefits for retired employees through insurance contracts. Substantially all of the Company's employees may, in accordance with the plans applicable to the postretirement benefits, become eligible for these benefits if they attain retirement age, with sufficient service, while working for the Company. The Company uses a December 31 measurement date for all of its pension and postretirement benefit plans. F-57 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OBLIGATIONS, FUNDED STATUS AND NET PERIODIC BENEFIT COSTS
DECEMBER 31, ----------------------------------- PENSION BENEFITS OTHER BENEFITS ----------------- --------------- 2003 2002 2003 2002 ------- ------- ------ ------ (DOLLARS IN MILLIONS) Change in projected benefit obligation: Projected benefit obligation at beginning of year.......... $4,785 $4,426 $1,878 $1,669 Service cost............................................. 123 105 38 36 Interest cost............................................ 314 308 122 123 Acquisitions and divestitures............................ (1) (73) -- -- Actuarial losses......................................... 352 312 167 342 Curtailments and terminations............................ (7) (3) (4) (2) Change in benefits....................................... (2) -- (1) (168) Benefits paid............................................ (292) (290) (122) (122) ------ ------ ------ ------ Projected benefit obligation at end of year................ 5,272 4,785 2,078 1,878 ------ ------ ------ ------ Change in plan assets: Contract value of plan assets at beginning of year......... 4,053 4,161 965 1,169 Actual return on plan assets............................. 634 (179) 112 (92) Acquisitions and divestitures............................ (1) (67) -- -- Employer and participant contributions................... 337 428 46 10 Benefits paid............................................ (292) (290) (122) (122) ------ ------ ------ ------ Contract value of plan assets at end of year............... 4,731 4,053 1,001 965 ------ ------ ------ ------ Under funded............................................... (541) (732) (1,077) (913) Unrecognized net asset at transition....................... 3 -- -- -- Unrecognized net actuarial losses.......................... 1,451 1,507 364 262 Unrecognized prior service cost............................ 82 101 (184) (208) ------ ------ ------ ------ Prepaid (accrued) benefit cost............................. $ 995 $ 876 $ (897) $ (859) ====== ====== ====== ====== Qualified plan prepaid pension cost........................ $1,325 $1,171 Non-qualified plan accrued pension cost.................... (474) (341) Unamortized prior service cost............................. 14 -- Accumulated other comprehensive loss....................... 130 46 ------ ------ Prepaid benefit cost....................................... $ 995 $ 876 ====== ======
F-58 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 ----------------- ------------- ----------------- 2003 2002 2003 2002 2003 2002 ------- ------- ----- ----- ------- ------- (DOLLARS IN MILLIONS) Aggregate projected benefit obligation........................... $(4,735) $(4,311) $(537) $(474) $(5,272) $(4,785) Aggregate contract value of plan assets (principally Company contracts)...... 4,731 4,053 -- -- 4,731 4,053 ------- ------- ----- ----- ------- ------- Under funded........................... $ (4) $ (258) $(537) $(474) $ (541) $ (732) ======= ======= ===== ===== ======= =======
The accumulated benefit obligation for all defined benefit pension plans was $4,902 million and $4,259 million at December 31, 2003 and 2002, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets:
DECEMBER 31, --------------------- 2003 2002 ------- ------- (DOLLARS IN MILLIONS) Projected benefit obligation................................ $560 $489 Accumulated benefit obligation.............................. $472 $359 Fair value of plan assets................................... $ 16 $ 9
Information for pension and postretirement plans with a projected benefit obligation in excess of plan assets:
DECEMBER 31, ----------------------------------- PENSION BENEFITS OTHER BENEFITS ----------------- --------------- 2003 2002 2003 2002 ------- ------- ------ ------ (DOLLARS IN MILLIONS) Projected benefit obligation....................... $5,232 $4,746 $2,078 $1,878 Fair value of plan assets.......................... $4,675 $3,995 $1,001 $ 965
The components of net periodic benefit cost were as follows:
PENSION BENEFITS OTHER BENEFITS --------------------- ------------------- 2003 2002 2001 2003 2002 2001 ----- ----- ----- ---- ---- ----- (DOLLARS IN MILLIONS) Service cost........................... $ 123 $ 105 $ 104 $ 38 $ 36 $ 34 Interest cost.......................... 314 308 308 122 123 115 Expected return on plan assets......... (335) (356) (402) (71) (93) (108) Amortization of prior actuarial losses (gains).............................. 103 33 (2) (12) (9) (27) Curtailment cost....................... 10 11 21 3 4 6 ----- ----- ----- ---- ---- ----- Net periodic benefit cost.............. $ 215 $ 101 $ 29 $ 80 $ 61 $ 20 ===== ===== ===== ==== ==== =====
F-59 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Assumptions Assumptions used in determining benefit obligations were as follows:
DECEMBER 31, -------------------------------------------- PENSION BENEFITS OTHER BENEFITS ------------------- ---------------------- 2003 2002 2003 2002 --------- ------- --------- ---------- Discount rate........................ 3.5%-9.5% 4%-9.5% 6.1%-6.5% 6.5%-7.25% Rate of compensation increase........ 3%-8% 2%-8% N/A N/A
Assumptions used in determining net periodic benefit cost were as follows:
DECEMBER 31, ----------------------------------------------------- PENSION BENEFITS OTHER BENEFITS ----------------------- --------------------------- 2003 2002 2003 2002 ----------- --------- ------------ ------------ Discount rate................... 4%-9.5% 4%-9.5% 6.5%-6.75% 6.5%-7.40% Expected rate of return on plan assets........................ 3.5%-10% 4%-10 % 3.79%-8.5 % 5.2%-9% Rate of compensation increase... 3%-8% 2%-8% N/A N/A
For the largest of the plans sponsored by the Company (the Metropolitan Life Retirement Plan for United States Employees, with a projected benefit obligation of $5.2 billion or 98% of all qualified plans at December 31, 2003), the discount rate and the range of rates of future compensation increases used in determining that plan's benefit obligation at December 31, 2003 were 6.1% and 4% to 8%, respectively. The discount rate, expected rate of return on plan assets, and the range of rates of future compensation increases used in determining that plan's net periodic benefit cost at December 31, 2003 were 6.75%, 8.5% and 4% to 8%, respectively. The discount rate is based on the yield of a hypothetical portfolio of high-quality debt instruments available on the valuation date, which would provide the necessary future cash flows to pay the aggregate projected benefit obligation when due. The expected rate of return on plan assets is based on anticipated performance of the various asset sectors in which the plan invests, weighted by target allocation percentages. Anticipated future performance is based on long-term historical returns of the plan assets by sector, adjusted for the Company's long-term expectations on the performance of the markets. While the precise expected return derived using this approach will fluctuate from year to year, the Company's policy is to hold this long-term assumption constant as long as it remains within a reasonable tolerance from the derived rate. The expected rate of return on plan assets for use in that plan's valuation in 2004 is currently anticipated to be 8.5%. The discount rates of 3.5% and 9.5% used in determining pension benefit obligations, the discount rates of 4% and 9.5% used in determining net periodic pension costs, and the expected rates of return on pension plan assets of 3.5% and 10% are attributable to the Company's international subsidiaries in Taiwan and Mexico, respectively. The rates of compensation increase of 3% and 2% in 2003 and 2002, respectively, is attributable to the Company's subsidiary in Taiwan. These rates are indicative of the economic environments in those countries. The expected rate of return on postretirement benefit plan assets of 3.79% is attributable to the Company's Canadian subsidiary and reflects the nature of the investments. The assumed health care cost trend rates used in measuring the accumulated nonpension postretirement benefit obligation were as follows:
DECEMBER 31, ------------------------------------------------- 2003 2002 ------------------------ ---------------------- Pre-Medicare eligible claims....... 8.5% down to 5% in 2010 9% down to 5% in 2010 Medicare eligible claims........... 10.5% down to 5% in 2014 11% down to 5% in 2014
F-60 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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..... $ 10 $ (9) Effect of accumulated postretirement benefit obligation..... $108 $(105)
PLAN ASSETS The weighted average allocation of pension plan and other benefit plan assets is as follows:
DECEMBER 31, ------------------------------------- PENSION BENEFITS OTHER BENEFITS ----------------- --------------- 2003 2002 2003 2002 ------ ------ ----- ----- ASSET CATEGORY Equity securities..................................... 52% 38% 38% 36% Fixed maturities...................................... 39% 52% 61% 63% Real estate........................................... 9% 10% -- -- Other................................................. -- -- 1% 1% --- --- --- --- Total............................................... 100% 100% 100% 100% === === === ===
The weighted average target allocation of pension plan and other benefit plan assets for 2004 is as follows:
PENSION OTHER BENEFITS BENEFITS -------- -------- ASSET CATEGORY Equity securities........................................... 35%-60% 25%-40% Fixed maturities............................................ 35%-70% 50%-80% Real estate................................................. 0%-15% N/A Other....................................................... 0%-20% 0%-10%
Target allocations of assets are determined with the objective of maximizing returns and minimizing volatility of net assets through adequate asset diversification and partial liability immunization. Adjustments are made to target allocations based on the Company's assessment of the impact of economic factors and market conditions. CASH FLOWS In January 2004, the Company contributed $450 million to its pension plans and $89 million to its other benefit plans during 2004. F-61 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following benefit payments, which reflect expected future service as appropriate, are expected to be paid:
PENSION OTHER BENEFITS BENEFITS -------- -------- (DOLLARS IN MILLIONS) 2004........................................................ $ 329 $117 2005........................................................ $ 301 $121 2006........................................................ $ 313 $125 2007........................................................ $ 319 $130 2008........................................................ $ 328 $134 2009-2013................................................... $1,828 $729
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 $59 million, $58 million and $60 million for the years ended December 31, 2003, 2002 and 2001, respectively. 14. 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 February 19, 2002, the Holding Company's Board of Directors authorized a $1 billion common stock repurchase program. This program began after the completion of the March 28, 2001 and June 27, 2000 repurchase programs, each of which authorized the repurchase of $1 billion of common stock. Under these authorizations, the Holding Company may purchase common stock from the MetLife Policyholder Trust, in the open market and in privately negotiated transactions. On August 7, 2001, the Company purchased 10 million shares of its common stock as part of the sale of 25 million shares of MetLife common stock by Santusa Holdings, S.L., an affiliate of Banco Santander Central Hispano, S.A. The sale by Santusa Holdings, S.L. was made pursuant to a shelf registration statement, effective June 29, 2001. The Company acquired 2,997,200, 15,244,492 and 45,242,966 shares of common stock for $97 million, $471 million and $1,322 million during the years ended December 31, 2003, 2002 and 2001, respectively. During the year ended December 31, 2003, 59,904,925 shares of common stock were issued from treasury stock for $1,667 million, of which 59,771,221 shares were issued in connection with the settlement of the F-62 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) purchase contracts (see Note 8) with cash proceeds of approximately $1,006 million. During the years ended December 31, 2002 and 2001, 16,379 and 67,578 shares of common stock were issued from treasury stock for $438 thousand and $1 million, respectively. At December 31, 2003, the Company had approximately $709 million remaining on its existing share repurchase authorization. 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 statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains). Metropolitan Life will be permitted to pay a cash dividend to the Holding Company in excess of the lesser of such two amounts only if it files notice of its intention to declare such a dividend and the amount thereof with the 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 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. For the year ended December 31, 2003, Metropolitan Life paid to MetLife, Inc. $698 million in dividends for which prior insurance regulatory clearance was not required and $750 million in special dividends, as approved by the Superintendent. For the year ended December 31, 2002, Metropolitan Life paid to MetLife, Inc. $535 million in dividends for which prior insurance regulatory clearance was not required and $369 million in special dividends, as approved by the Superintendent. For the year ended December 31, 2001, Metropolitan Life paid to MetLife, Inc. $721 million in dividends for which prior insurance regulatory clearance was not required and $3,033 million in special dividends, as approved by the Superintendent. At December 31, 2003, the maximum amount of the dividend which may be paid to the Holding Company from Metropolitan Life in 2004, without prior regulatory approval is $798 million. Metropolitan Life could pay the Holding Company a dividend of $798 million without prior approval of the Superintendent. Under the Delaware Insurance Law, MIAC 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 greater of (i) 10% of its surplus to policyholders as of the immediately preceding calendar year, and (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains). MIAC will be permitted to pay a cash dividend to the Holding Company in excess of the greater 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 Delaware 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 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. MIAC paid to MetLife, Inc. $104 million in dividends for which prior insurance regulatory clearance was not required and $94 million in special dividends, as approved by the Superintendent for the year ended December 31, 2003. For the years ended December 31, 2002 and 2001, respectively, MIAC paid to MetLife, Inc. $25 million and $31 million in dividends for which prior insurance regulatory clearance was not required. As of December 31, 2003, the maximum amount of the dividend which may be paid to the Holding Company from MIAC in 2004, without prior regulatory approval, is $185 million. Under the Rhode Island Insurance Law, Metropolitan Property and Casualty Insurance Company 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 F-63 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (i) 10% of its surplus to policyholders as of the immediately preceding calendar year, and (ii) next preceding three year earnings reduced by capital gains and dividends paid to stockholders. Metropolitan Property and Casualty Insurance Company 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. For the year ended December 31, 2003, Metropolitan Property and Casualty Insurance Company paid to MetLife, Inc. $75 million in dividends for which prior insurance regulatory clearance was not required. As of December 31, 2003, the maximum amount of the dividend which may be paid to the Holding Company from Metropolitan Property and Casualty Insurance Company in 2004, without prior regulatory approval, is $200 million. STOCK COMPENSATION PLANS Under the MetLife, Inc. 2000 Stock Incentive Plan (the "Stock Incentive Plan"), awards granted may be in the form of non-qualified or incentive stock options qualifying under Section 422A of the Internal Revenue Code. Under the MetLife, Inc. 2000 Directors Stock Plan, as amended (the "Directors Stock Plan"), awards granted may be in the form of stock awards or non-qualified stock options or a combination of the foregoing to outside Directors of the Company. The aggregate number of shares of stock that may be awarded under the Stock Incentive Plan is subject to a maximum limit of 37,823,333 shares for the duration of the plan. The Directors Stock Plan has a maximum limit of 500,000 share awards. All options granted have an exercise price equal to the fair market value price of the Company's common stock on the date of grant, and an option's maximum term is ten years. Certain options under the Stock Incentive Plan become exercisable over a three-year period commencing with the date of grant, while other options become exercisable three years after the date of grant. Options issued under the Directors Stock Plan are exercisable immediately. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants for the:
YEARS ENDED DECEMBER 31, ------------------------------------- 2003 2002 2001 ----------- ----------- --------- Dividend yield................................. 0.68%-0.79% 0.68% 0.68% Risk-free rate of return....................... 2.71%-4.03% 4.74%-5.52% 5.72% Volatility..................................... 37.0%-38.7% 25.3%-30.3% 31.60% Expected duration.............................. 6 years 6 years 4-6 years
F-64 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the status of options included in the Company's Stock Incentive Plan and Directors Stock Plan is presented below:
WEIGHTED WEIGHTED AVERAGE OPTIONS AVERAGE OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE ---------- -------------- ----------- -------------- Outstanding at December 31, 2000.... -- $ -- -- $ -- Granted............................. 12,263,550 $29.93 -- $ -- Exercised........................... -- $ -- -- $ -- Canceled/Expired.................... (1,146,866) $29.95 -- $ -- ---------- Outstanding at December 31, 2001.... 11,116,684 $29.93 -- $ -- Granted............................. 7,275,855 $30.35 -- $ -- Exercised........................... (11,401) $29.95 -- $ -- Canceled/Expired.................... (2,121,508) $30.07 -- $ -- ---------- Outstanding at December 31, 2002.... 16,259,630 $30.10 1,357,034 $30.01 Granted............................. 5,634,439 $26.13 -- $ -- Exercised........................... (20,054) $30.02 -- $ -- Canceled/Expired.................... (1,578,987) $29.45 -- $ -- ---------- Outstanding December 31, 2003....... 20,295,028 $29.05 4,566,265 $30.15 ==========
YEARS ENDED DECEMBER 31, ------------------------ 2003 2002 2001 ------ ------ ------ Weighted average fair value of options granted............. $10.41 $10.48 $10.29 ====== ====== ======
The following table summarizes information about stock options outstanding at December 31, 2003:
WEIGHTED AVERAGE NUMBER NUMBER REMAINING WEIGHTED EXERCISABLE AT WEIGHTED RANGE OF OUTSTANDING AT CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE EXERCISE PRICES DECEMBER 31, 2003 LIFE (YEARS) EXERCISE PRICE 2003 EXERCISE PRICE - --------------- ----------------- ------------ -------------- -------------- -------------- $23.75-$26.75 5,180,950 9.12 $25.97 9,334 $23.75 $26.76-$28.75 201,336 8.52 $27.41 2,336 $28.10 $28.76-$30.75 14,707,077 7.28 $30.11 4,471,306 $30.12 $30.76-$32.75 146,135 8.18 $31.86 58,759 $31.72 $32.76-$33.64 59,530 9.27 $33.26 24,530 $33.64 ---------- --------- 20,295,028 7.77 $29.05 4,566,265 $30.15 ========== =========
Effective January 1, 2003, the Company elected to apply the fair value method of accounting for stock options granted by the Company subsequent to December 31, 2002. As permitted under SFAS 148, options granted prior to January 1, 2003 will continue to be accounted for under APB 25. Had compensation expense for grants awarded prior to January 1, 2003 been determined based on fair value at the date of grant in F-65 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) accordance with SFAS 123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company's earnings and earnings per share amounts would have been reduced to the following pro-forma amounts:
YEARS ENDED DECEMBER 31, ----------------------------- 2003 2002 2001 -------- -------- ------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Net Income.................................................. $2,217 $1,605 $ 473 Charge for conversion of company-obligated mandatorily redeemable securities of a subsidiary trust(1)............ (21) -- -- ------ ------ ----- Net income available to common shareholders................. $2,196 $1,605 $ 473 ====== ====== ===== Add: Stock-based employee compensation expense included in reported net income, net of related tax effects........... $ 13 $ 1 $ 1 Deduct: Total Stock-based employee compensation determined under fair value based method for all awards, net of related tax effects....................................... (42) (33) (20) ------ ------ ----- Pro forma net income available to common shareholders(2)(3)........................................ $2,167 $1,573 $ 454 ====== ====== ===== BASIC EARNINGS PER SHARE As reported................................................. $ 2.98 $ 2.28 $0.64 ====== ====== ===== Pro forma(2)(3)............................................. $ 2.94 $ 2.23 $0.61 ====== ====== ===== DILUTED EARNINGS PER SHARE As reported................................................. $ 2.94 $ 2.20 $0.62 ====== ====== ===== Pro forma(2)(3)............................................. $ 2.90 $ 2.15 $0.59 ====== ====== =====
- --------------- (1) See Note 8 for a discussion of this charge included in the calculation of net income available to common shareholders. (2) The pro forma earnings disclosures are not necessarily representative of the effects on net income and earnings per share in future years. (3) Includes the Company's ownership share of stock compensation costs related to the Reinsurance Group of America, Incorporated incentive stock plan and the stock compensation costs related to the incentive stock plans at SSRM Holdings, Inc. determined in accordance with SFAS 123. For the years ended December 31, 2003, 2002 and 2001, stock-based compensation expense related to the Company's Stock Incentive Plan and Directors Stock Plan was $20 million, $2.1 million and $1.3 million, respectively, including stock-based compensation for non-employees of $550 thousand, $2.1 million and $1.3 million, respectively. 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 GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions, reporting surplus notes as surplus instead of debt and valuing securities on a different basis. F-66 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 2001, New York Statutory Accounting Practices did not provide for deferred income taxes. The Department has adopted a modification to its regulations, effective December 31, 2002, with respect to the admissibility of deferred taxes by New York insurers, subject to certain limitations. Statutory net income of Metropolitan Life, as filed with the Department, was $2,169 million, $1,455 million and $2,782 million for the years ended December 31, 2003 2002 and 2001, respectively; statutory capital and surplus, as filed, was $7,978 million and $6,986 million at December 31, 2003 and 2002, respectively. Statutory net income of MIAC, which is domiciled in Delaware, as filed with the Insurance Department of Delaware, was $341 million, $34 million and $26 million for the years ended December 31, 2003, 2002 and 2001, respectively; statutory capital and surplus, as filed, was $1,051 million and $1,037 million at December 31, 2003 and 2002, respectively. Statutory net income of Metropolitan Property and Casualty, which is domiciled in Rhode Island, as filed with the Insurance Department of Rhode Island, was $214 million, $173 million and $61 million for the years ended December 31, 2003, 2002 and 2001, respectively; statutory capital and surplus, as filed, was $1,996 million and $1,964 million at December 31, 2003 and 2002, respectively. The National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles (the "Codification"), which is intended to standardize regulatory accounting and reporting to state insurance departments, and became effective January 1, 2001. However, statutory accounting principles continue to be established by individual state laws and permitted practices. The Department required adoption of the Codification, with certain modifications, for the preparation of statutory financial statements effective January 1, 2001. Further modifications by state insurance departments may impact the effect of the Codification on the statutory capital and surplus of Metropolitan Life and the Holding Company's other insurance subsidiaries. OTHER COMPREHENSIVE INCOME The following table sets forth the reclassification adjustments required for the years ended December 31, 2003, 2002 and 2001 in other comprehensive income (loss) that are included as part of net income for the F-67 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) current year that have been reported as a part of other comprehensive income (loss) in the current or prior year:
YEARS ENDED DECEMBER 31, ------------------------ 2003 2002 2001 ------ ------ ------ (DOLLARS IN MILLIONS) Holding gains on investments arising during the year....... $1,549 $3,755 $1,343 Income tax effect of holding gains......................... (582) (1,179) (530) Reclassification adjustments: Recognized holding losses included in current year income................................................ 330 336 510 Amortization of premiums and accretion of discounts associated with investments........................... (168) (526) (488) Recognized holding gains allocated to other policyholder amounts............................................... (215) (145) (134) Income tax effect........................................ 20 105 45 Allocation of holding losses on investments relating to other policyholder amounts............................... (391) (2,832) (69) Income tax effect of allocation of holding losses to other policyholder amounts..................................... 147 889 27 ------ ------ ------ Net unrealized investment gains............................ 690 403 704 Foreign currency translation adjustment.................... 177 (69) (60) Minimum pension liability adjustment....................... (82) -- (18) ------ ------ ------ Other comprehensive income................................. $ 785 $ 334 $ 626 ====== ====== ======
15. OTHER EXPENSES Other expenses were comprised of the following:
YEARS ENDED DECEMBER 31, --------------------------- 2003 2002 2001 ------- ------- ------- (DOLLARS IN MILLIONS) Compensation............................................ $ 2,685 $ 2,481 $ 2,459 Commissions............................................. 2,474 2,000 1,651 Interest and debt issue costs........................... 478 403 332 Amortization of policy acquisition costs (excludes amounts directly related to net investment gains (losses)) of $(31), $5 and $25, respectively)......... 1,818 1,639 1,413 Capitalization of policy acquisition costs.............. (2,792) (2,340) (2,039) Rent, net of sublease income............................ 254 295 282 Minority interest....................................... 110 73 57 Other................................................... 2,274 2,464 2,867 ------- ------- ------- Total other expenses.................................. $ 7,301 $ 7,015 $ 7,022 ======= ======= =======
F-68 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. EARNINGS PER SHARE The following presents a reconciliation of the weighted average shares used in calculating basic earnings per share to those used in calculating diluted earnings per share:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2003 2002 2001 ---------------- ---------------- ---------------- (DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) Weighted average common stock outstanding for basic earnings per share............. 737,903,107 704,599,115 741,041,654 Incremental shares from assumed: Conversion of forward purchase contracts............................. 8,293,269 24,596,950 25,974,114 Exercise of stock options................ 68,111 5,233 1,133 Issuance under deferred stock compensation.......................... 579,810 -- -- ------------ ------------ ------------ Weighted average common stock outstanding for diluted earnings per share........... 746,844,297 729,201,298 767,016,901 ============ ============ ============ INCOME FROM CONTINUING OPERATIONS.......... $ 1,943 $ 1,134 $ 366 Charge for conversion of company-obligated mandatorily redeemable securities of a subsidiary trust(1)...................... (21) -- -- ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS AVAILABLE TO COMMON SHAREHOLDERS................... $ 1,922 $ 1,134 $ 366 ============ ============ ============ Basic earnings per share................. $ 2.60 $ 1.61 $ 0.49 ============ ============ ============ Diluted earnings per share............... $ 2.57 $ 1.56 $ 0.48 ============ ============ ============ INCOME FROM DISCONTINUED OPERATIONS AVAILABLE TO COMMON SHAREHOLDERS......... $ 300 $ 471 $ 107 ============ ============ ============ Basic earnings per share................. $ 0.41 $ 0.67 $ 0.14 ============ ============ ============ Diluted earnings per share............... $ 0.40 $ 0.65 $ 0.14 ============ ============ ============ CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING, NET OF INCOME TAXES...................... $ (26) $ -- $ -- ============ ============ ============ Basic earnings per share................. $ (0.04) $ -- $ -- ============ ============ ============ Diluted earnings per share............... $ (0.03) $ -- $ -- ============ ============ ============
F-69 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2003 2002 2001 ---------------- ---------------- ---------------- (DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) NET INCOME................................. $ 2,217 $ 1,605 $ 473 CHARGE FOR CONVERSION OF COMPANY-OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF A SUBSIDIARY TRUST(1)...................... (21) -- -- ------------ ------------ ------------ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS............................. $ 2,196 $ 1,605 $ 473 ============ ============ ============ Basic earnings per share................. $ 2.98 $ 2.28 $ 0.64 ============ ============ ============ Diluted earnings per share............... $ 2.94 $ 2.20 $ 0.62 ============ ============ ============
- --------------- (1) See Note 8 for a discussion of this charge included in the calculation of net income available to common shareholders. 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The unaudited quarterly results of operations for the years ended December 31, 2003 and 2002 are summarized in the table below:
THREE MONTHS ENDED ----------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 2003 Total revenues............................ $8,364 $8,862 $8,816 $9,747 Total expenses............................ $7,952 $8,079 $8,109 $9,019 Income from continuing operations......... $ 296 $ 571 $ 560 $ 516 Income from discontinued operations, net of income taxes......................... $ 66 $ 9 $ 14 $ 211 Income before cumulative effect of change in accounting........................... $ 362 $ 580 $ 574 $ 727 Net income................................ $ 362 $ 580 $ 574 $ 701 Basic earnings per share: Income from continuing operations available to common shareholders..... $ 0.39 $ 0.78 $ 0.74 $ 0.68 Income from discontinued operations, net of income taxes...................... $ 0.09 $ 0.01 $ 0.02 $ 0.28 Income before cumulative effect of change in accounting available to common shareholders.................. $ 0.49 $ 0.79 $ 0.75 $ 0.96 Net income available to common shareholders......................... $ 0.49 $ 0.79 $ 0.75 $ 0.92 Diluted earnings per share: Income from continuing operations available to common shareholders..... $ 0.38 $ 0.78 $ 0.74 $ 0.68 Income from discontinued operations, net of income taxes...................... $ 0.09 $ 0.01 $ 0.02 $ 0.28 Income before cumulative effect of change in accounting available to common shareholders.................. $ 0.47 $ 0.79 $ 0.75 $ 0.95
F-70 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED ----------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Net income available to common shareholders......................... $ 0.47 $ 0.79 $ 0.75 $ 0.92 2002 Total revenues............................ $7,963 $8,189 $8,111 $8,803 Total expenses............................ $7,482 $7,669 $7,686 $8,593 Income from continuing operations......... $ 299 $ 364 $ 307 $ 164 Income from discontinued operations, net of income taxes......................... $ 25 $ 23 $ 26 $ 397 Income before cumulative effect of change in accounting........................... $ 324 $ 387 $ 333 $ 561 Net income................................ $ 329 $ 387 $ 328 $ 561 Basic earnings per share: Income from continuing operations available to common shareholders..... $ 0.42 $ 0.52 $ 0.44 $ 0.23 Income from discontinued operations, net of income taxes...................... $ 0.04 $ 0.03 $ 0.04 $ 0.57 Income before cumulative effect of change in accounting available to common shareholders.................. $ 0.46 $ 0.55 $ 0.47 $ 0.80 Net income available to common shareholders......................... $ 0.46 $ 0.55 $ 0.47 $ 0.80 Diluted earnings per share: Income from continuing operations available to common shareholders..... $ 0.40 $ 0.50 $ 0.42 $ 0.23 Income from discontinued operations, net of income taxes...................... $ 0.03 $ 0.03 $ 0.04 $ 0.55 Income before cumulative effect of change in accounting available to common shareholders.................. $ 0.44 $ 0.53 $ 0.46 $ 0.78 Net income available to common shareholders......................... $ 0.44 $ 0.53 $ 0.45 $ 0.78
Unaudited net income for the three months ended June 30, 2003 includes a $64 million after-tax benefit from a reduction of a previously established liability related to the Company's race-conscious underwriting settlement, $62 million of after-tax earnings from the merger of the Company's Mexican operations and a reduction in policyholder liabilities resulting from the change in reserve methodology and a $31 million after-tax charge related to previously deferred expenses. Unaudited net income for the three months ended September 30, 2003 includes a $28 million after-tax benefit from a reduction of a previously established liability related to the Company's race-conscious underwriting settlement and a $36 million benefit from a revision to the 2002 income tax estimates. Unaudited net income for the three months ended March 31, 2002 includes a $48 million after-tax charge to cover costs associated with the resolution of a federal government investigation of General American's former Medicare business. Unaudited net income for the three months ended June 30, 2002 includes a $30 million after-tax reduction of a previously established liability related to the Company's sales practice class action settlement in 1999. Unaudited net income for the three months ended December 31, 2002 includes a $169 million after-tax charge to cover costs associated with the asbestos-related claims, a $20 million after-tax reduction of a previously established liability to the Company's 2001 business F-71 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) realignment initiatives and a $17 million after-tax reduction of a previously established disability insurance liability related to the September 11, 2001 tragedies. 18. BUSINESS SEGMENT INFORMATION The Company provides insurance and financial services to customers in the United States, Canada, Central America, Europe, South America, South Africa, Asia and Australia. The Company's business is divided into six segments: Institutional, Individual, Auto & Home, International, Reinsurance and Asset Management. These segments are managed separately because they either provide different products and services, require different strategies or have different technology requirements. Institutional offers a broad range of group insurance and retirement and savings products and services, including group life insurance, non-medical health insurance, such as short and long-term disability, long-term care, and dental insurance, and other insurance products and services. Individual offers a wide variety of individual insurance and investment products, including life insurance, annuities and mutual funds. Auto & Home provides insurance coverages, including private passenger automobile, homeowners and personal excess liability insurance. International provides life insurance, accident and health insurance, annuities and retirement and savings products to both individuals and groups, and auto and homeowners coverage to individuals. Reinsurance provides primarily reinsurance of life and annuity policies in North America and various international markets. Additionally, reinsurance of critical illness policies is provided in select international markets. Asset Management provides a broad variety of asset management products and services to individuals and institutions. Set forth in the tables below is certain financial information with respect to the Company's operating segments as of and for the years ended December 31, 2003, 2002 and 2001. The accounting policies of the segments are the same as those of the Company, except for the method of capital allocation and the accounting for gains and losses from intercompany sales, which are eliminated in consolidation. The Company allocates capital to each segment based upon an internal capital allocation system that allows the Company to more effectively manage its capital. The Company evaluates the performance of each operating segment based upon net income excluding certain net investment gains and losses, net of income taxes, and the impact from the cumulative effect of changes in accounting, net of income taxes. Scheduled periodic settlement payments on derivative instruments not qualifying for hedge accounting are included in net investment gains(losses). The Company allocates certain non-recurring items (e.g., expenses associated with the resolution of proceedings alleging race-conscious underwriting practices, sales practices claims and asbestos-related claims) to Corporate & Other. F-72 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT OR FOR THE YEAR ENDED AUTO & DECEMBER 31, 2003 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE - ------------------------ ------------- ---------- ------ ------------- ----------- (DOLLARS IN MILLIONS) Premiums........................ $ 9,093 $ 4,344 $2,908 $1,678 $2,668 Universal life and investment-type product policy fees.......................... 635 1,589 -- 272 -- Net investment income........... 4,038 6,201 158 502 473 Other revenues.................. 592 407 32 80 49 Net investment gains (losses)... (204) (130) (15) 4 31 Policyholder benefits and claims........................ 9,932 5,183 2,139 1,454 2,136 Interest credited to policyholder account balances...................... 915 1,793 -- 143 184 Policyholder dividends.......... 198 1,700 1 55 21 Other expenses.................. 1,784 2,880 756 659 740 Income (loss) from continuing operations before provision (benefit) for income taxes.... 1,325 855 187 225 140 Income from discontinued operations, net of income taxes......................... 30 30 -- -- -- Cumulative effect of change in accounting, net of income taxes......................... (26) -- -- -- -- Net income...................... 849 601 157 208 92 Total assets.................... 113,743 165,774 4,698 9,935 12,833 Deferred policy acquisition costs......................... 739 8,817 180 1,046 2,160 Goodwill, net................... 59 206 157 85 100 Separate account assets......... 35,632 39,619 -- 504 13 Policyholder liabilities........ 61,599 100,278 2,943 7,179 9,783 Separate account liabilities.... 35,632 39,619 -- 504 13 AT OR FOR THE YEAR ENDED ASSET CORPORATE & DECEMBER 31, 2003 MANAGEMENT OTHER TOTAL - ------------------------ ---------- ----------- ------- (DOLLARS IN MILLIONS) Premiums........................ $ -- $ (18) $20,673 Universal life and investment-type product policy fees.......................... -- -- 2,496 Net investment income........... 66 198 11,636 Other revenues.................. 143 39 1,342 Net investment gains (losses)... 9 (53) (358) Policyholder benefits and claims........................ -- 4 20,848 Interest credited to policyholder account balances...................... -- -- 3,035 Policyholder dividends.......... -- -- 1,975 Other expenses.................. 182 300 7,301 Income (loss) from continuing operations before provision (benefit) for income taxes.... 36 (138) 2,630 Income from discontinued operations, net of income taxes......................... -- 240 300 Cumulative effect of change in accounting, net of income taxes......................... -- -- (26) Net income...................... 22 288 2,217 Total assets.................... 302 19,556 326,841 Deferred policy acquisition costs......................... -- 1 12,943 Goodwill, net................... 18 3 628 Separate account assets......... -- (12) 75,756 Policyholder liabilities........ -- (2,211) 179,571 Separate account liabilities.... -- (12) 75,756
AT OR FOR THE YEAR ENDED AUTO & DECEMBER 31, 2002 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE - ------------------------ ------------- ---------- ------ ------------- ----------- (DOLLARS IN MILLIONS) Premiums........................ $8,245 $ 4,507 $2,828 $1,511 $2,005 Universal life and investment-type product policy fees.......................... 624 1,379 -- 144 -- Net investment income........... 3,918 6,244 177 461 421 Other revenues.................. 609 418 26 14 43 Net investment gains (losses)... (494) (144) (46) (9) 2 Policyholder benefits and claims........................ 9,339 5,220 2,019 1,388 1,554 Interest credited to policyholder account balances...................... 932 1,793 -- 79 146 Policyholder dividends.......... 115 1,770 -- 35 22 Other expenses.................. 1,531 2,629 793 507 622 Income (loss) from continuing operations before provision (benefit) for income taxes.... 985 992 173 112 127 Income from discontinued operations, net of income taxes......................... 121 199 -- -- -- Net income (loss)............... 759 826 132 84 84 Total assets (1)................ 98,234 145,152 4,540 8,301 9,924 Deferred policy acquisition costs......................... 608 8,521 175 945 1,477 Goodwill, net................... 62 223 155 193 96 Separate account assets......... 31,935 27,457 -- 307 11 Policyholder liabilities........ 55,497 95,813 2,673 5,883 7,387 Separate account liabilities.... 31,935 27,457 -- 307 11 AT OR FOR THE YEAR ENDED ASSET CORPORATE & DECEMBER 31, 2002 MANAGEMENT OTHER TOTAL - ------------------------ ---------- ----------- ------- (DOLLARS IN MILLIONS) Premiums........................ $ -- $ (19) $19,077 Universal life and investment-type product policy fees.......................... -- -- 2,147 Net investment income........... 59 (19) 11,261 Other revenues.................. 166 56 1,332 Net investment gains (losses)... (4) (56) (751) Policyholder benefits and claims........................ -- 3 19,523 Interest credited to policyholder account balances...................... -- -- 2,950 Policyholder dividends.......... -- -- 1,942 Other expenses.................. 211 722 7,015 Income (loss) from continuing operations before provision (benefit) for income taxes.... 10 (763) 1,636 Income from discontinued operations, net of income taxes......................... -- 151 471 Net income (loss)............... 6 (286) 1,605 Total assets (1)................ 190 11,085 277,426 Deferred policy acquisition costs......................... -- 1 11,727 Goodwill, net................... 18 3 750 Separate account assets......... -- (17) 59,693 Policyholder liabilities........ -- (2,011) 165,242 Separate account liabilities.... -- (17) 59,693
F-73 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - --------------- (1) These balances reflect the allocation of capital using the Risk-Based Capital methodology, which differs from the original presentation of GAAP equity included in MetLife, Inc.'s 2002 Annual Report on Form 10-K.
AT OR FOR THE YEAR ENDED AUTO & DECEMBER 31, 2001 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE - ------------------------ ------------- ---------- ------ ------------- ----------- (DOLLARS IN MILLIONS) Premiums......................... $7,288 $4,563 $2,755 $846 $1,762 Universal life and investment-type product policy fees........................... 592 1,260 -- 38 -- Net investment income............ 3,967 6,165 200 267 390 Other revenues................... 649 495 22 16 42 Net investment gains (losses).... (16) 853 (17) (16) (6) Policyholder benefits and claims......................... 8,924 5,233 2,121 689 1,484 Interest credited to policyholder account balances............... 1,013 1,898 -- 51 122 Policyholder dividends........... 259 1,767 -- 36 24 Other expenses................... 1,746 2,747 800 329 491 Income (loss) from continuing operations before provision (benefit) for income taxes..... 538 1,691 39 46 67 Income from discontinued operations, net of income taxes.......................... 21 36 -- -- -- Net income (loss)................ 382 1,095 41 14 40 AT OR FOR THE YEAR ENDED ASSET CORPORATE & DECEMBER 31, 2001 MANAGEMENT OTHER TOTAL - ------------------------ ---------- ----------- ------- (DOLLARS IN MILLIONS) Premiums......................... $ -- $ (2) $17,212 Universal life and investment-type product policy fees........................... -- (1) 1,889 Net investment income............ 71 127 11,187 Other revenues................... 198 85 1,507 Net investment gains (losses).... 25 (1,402) (579) Policyholder benefits and claims......................... -- 3 18,454 Interest credited to policyholder account balances............... -- -- 3,084 Policyholder dividends........... -- -- 2,086 Other expenses................... 252 657 7,022 Income (loss) from continuing operations before provision (benefit) for income taxes..... 42 (1,853) 570 Income from discontinued operations, net of income taxes.......................... -- 50 107 Net income (loss)................ 27 (1,126) 473
The following table indicates amounts in the current and prior years that have been classified as discontinued operations in accordance with SFAS 144:
YEAR ENDED DECEMBER 31, ------------------------ 2003 2002 2001 ------ ------ ------ (DOLLARS IN MILLIONS) Net investment income Institutional............................................. $ 2 $ 33 $ 34 Individual................................................ 5 50 56 Corporate & Other......................................... 45 77 79 ---- ---- ---- Total net investment income............................ $ 52 $160 $169 ==== ==== ==== Net investment gains (losses) Institutional............................................. $ 45 $156 $ -- Individual................................................ 43 262 -- Corporate & Other......................................... 333 164 -- ---- ---- ---- Total net investment gains (losses).................... $421 $582 $ -- ==== ==== ==== Interest Expense Individual................................................ $ 1 $ 1 $ -- ---- ---- ---- Total interest expense................................. $ 1 $ 1 $ -- ==== ==== ====
Economic Capital. Beginning in 2003, the Company changed its methodology of allocating capital to its business segments from Risk-Based Capital ("RBC") to Economic Capital. Prior to 2003, the Company's business segments' allocated equity was primarily based on RBC, an internally developed formula based on applying a multiple to the National Association of Insurance Commissioners Statutory Risk-Based Capital and included certain adjustments in accordance with accounting principles generally accepted in the United F-74 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) States of America ("GAAP"). Economic Capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The Economic Capital model accounts for the unique and specific nature of the risks inherent in MetLife's businesses. This is in contrast to the standardized regulatory RBC formula, which is not as refined in its risk calculations with respect to the nuances of the Company's businesses. The change in methodology is being applied prospectively. This change has and will continue to impact the level of net investment income and net income of each of the Company's business segments. A portion of net investment income is credited to the segments based on the level of allocated equity. This change in methodology of allocating equity does not impact the Company's consolidated net investment income or net income. The following table presents actual and pro forma net investment income with respect to the Company's segments for the years ended December 31, 2002 and 2001. The amounts shown as pro forma reflect net investment income that would have been reported in these years had the Company allocated capital based on Economic Capital rather than on the basis of RBC. NET INVESTMENT INCOME
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------- 2002 2001 ------------------- ------------------- ACTUAL PRO FORMA ACTUAL PRO FORMA ------- --------- ------- --------- (DOLLARS IN MILLIONS) Institutional................................. $ 3,918 $ 3,980 $ 3,967 $ 4,040 Individual.................................... 6,244 6,155 6,165 6,078 Auto & Home................................... 177 160 200 184 International................................. 461 424 267 251 Reinsurance................................... 421 382 390 354 Asset Management.............................. 59 71 71 89 Corporate & Other............................. (19) 89 127 191 ------- ------- ------- ------- Total....................................... $11,261 $11,261 $11,187 $11,187 ======= ======= ======= =======
The following table presents actual and pro forma assets for each of the Company's operating segments at December 31, 2002. The amounts shown as pro forma reflect assets that would have been reported in the prior year had the Company allocated capital based on Economic Capital rather than on the basis of RBC.
ASSETS --------------------- ACTUAL(1) PRO FORMA --------- --------- (DOLLARS IN MILLIONS) Institutional............................................... $ 98,234 $ 98,810 Individual.................................................. 145,152 144,073 Auto & Home................................................. 4,540 4,360 International............................................... 8,301 7,990 Reinsurance................................................. 9,924 9,672 Asset Management............................................ 190 320 Corporate & Other........................................... 11,085 12,201 -------- -------- Total..................................................... $277,426 $277,426 ======== ========
F-75 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - --------------- (1) These balances reflect the allocation of capital using the RBC methodology, which differs from the original presentation of GAAP equity included in MetLife, Inc.'s 2002 Annual Report on Form 10-K. The Reinsurance segment's results of operations for the year ended December 31, 2003 include RGA's coinsurance agreement under which it assumed the traditional U.S. life reinsurance business of Allianz Life Insurance Company of North America. The transaction added approximately $246 million of premiums and $11 million of pre-tax income, excluding minority interest expense. The Individual segment's results of operations for the year ended December 31, 2003 includes a second quarter after-tax charge of $31 million resulting from certain improperly deferred expenses at an affiliate, New England Financial. The International segment's results of operations include the results of operations of Aseguradora Hidalgo S.A. ("Hidalgo"), a Mexican life insurer that was acquired on June 20, 2002. During the second quarter of 2003, as part of its acquisition and integration strategy, International completed the legal merger of Hidalgo into its original Mexican subsidiary, Seguros Genesis, S.A., forming MetLife Mexico, S.A. As a result of the merger of these companies, the Company recorded $62 million of after-tax earnings from the merger and a reduction in policyholder liabilities resulting from a change in reserve methodology. The Institutional, Individual, Reinsurance and Auto & Home segments for the year ended December 31, 2001 include $287 million, $24 million, $9 million and $5 million, respectively, of pre-tax losses associated with the September 11, 2001 tragedies. See Note 9. The Institutional, Individual and Auto & Home segments include $399 million, $97 million and $3 million, respectively, in pre-tax charges associated with business realignment initiatives for the year ended December 31, 2001. See Note 10. The Individual segment for the year ended December 31, 2001 includes $118 million of pre-tax expenses associated with the establishment of a policyholder liability for certain group annuity policies. For the year ended December 31, 2001, pre-tax gross investment gains (losses) of $1,027 million, $142 million and $(1,172) million (comprised of a $354 million gain and an intercompany elimination of $(1,526) million), resulting from the sale of certain real estate properties from Metropolitan Life to Metropolitan Insurance and Annuity Company, a subsidiary of MetLife, Inc., are included in the Individual segment, Institutional segment and Corporate & Other, respectively. As part of the GenAmerica acquisition in 2000, the Company acquired Conning Corporation ("Conning"), the results of which are included in the Asset Management segment due to the types of products and strategies employed by the entity from its acquisition date to July 2001, the date of its disposition. The Company sold Conning, receiving $108 million in the transaction and reported a gain of approximately $25 million, in the third quarter of 2001. Corporate & Other includes various start-up and run-off entities, as well as the elimination of all intersegment amounts. The elimination of intersegment amounts relates to intersegment loans, which bear interest rates commensurate with related borrowings, as well as intersegment reinsurance transactions. Net investment income and net investment gains(losses) are based upon the actual results of each segment's specifically identifiable asset portfolio adjusted for allocated capital. Other costs and operating costs were allocated to each of the segments based upon: (i) a review of the nature of such costs; (ii) time studies analyzing the amount of employee compensation costs incurred by each segment; and (iii) cost estimates included in the Company's product pricing. Revenues derived from any customer did not exceed 10% of consolidated revenues for the years ended December 31, 2003, 2002 and 2001. Revenues from U.S. operations were $32,312 million, $30,263 million and F-76 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $29,525 million for the years ended December 31, 2003, 2002 and 2001, respectively, which represented 90%, 92% and 95%, respectively, of consolidated revenues. 19. ACQUISITIONS AND DISPOSITIONS In September 2003, a subsidiary of the Company, Reinsurance Group of America, Incorporated ("RGA"), announced a coinsurance agreement under which it assumed the traditional U.S. life reinsurance business of Allianz Life Insurance Company of North America. The transaction closed during the fourth quarter of 2003 with an effective date retroactive to July 1, 2003. The transaction added approximately $278 billion of life reinsurance in-force, $246 million of premium and $11 million of income before income tax expense, excluding minority interest expense, to the fourth quarter of 2003. In June 2002, the Company acquired Aseguradora Hidalgo S.A. ("Hidalgo"), an insurance company based in Mexico with approximately $2.5 billion in assets as of the date of acquisition. The Company's existing Mexico subsidiary and Hidalgo now operate as a combined entity under the name MetLife Mexico. In November 2001, the Company acquired Compania de Seguros de Vida Santander S.A. and Compania de Reaseguros de Vida Soince Re S.A., wholly-owned subsidiaries of Santander Central Hispano in Chile. These acquisitions marked MetLife's entrance into the Chilean insurance market. In July 2001, the Company completed its sale of Conning Corporation ("Conning"), an affiliate acquired in the acquisition of GenAmerica Financial Corporation ("GenAmerica") in 2000. Conning specialized in asset management for insurance company investment portfolios and investment research. 20. DISCONTINUED OPERATIONS The Company actively manages its real estate portfolio with the objective to maximize earnings through selective acquisitions and dispositions. In accordance with SFAS 144, income related to real estate classified as held-for-sale on or after January 1, 2002 is presented as discontinued operations. These assets are carried at the lower of cost or market. The following table presents the components of income from discontinued operations:
YEARS ENDED DECEMBER 31, -------------------------- 2003 2002 2001 ------ ------- ------- (DOLLARS IN MILLIONS) Investment income........................................... $120 $ 458 $ 508 Investment expense.......................................... (68) (298) (339) Net investment gains (losses)............................... 421 582 -- ---- ----- ----- Total revenues............................................ 473 742 169 Interest Expense............................................ 1 1 -- Provision for income taxes.................................. 172 270 62 ---- ----- ----- Income from discontinued operations....................... $300 $ 471 $ 107 ==== ===== =====
The carrying value of real estate related to discontinued operations was $89 million and $799 million at December 31, 2003 and 2002, respectively. See Note 18 for discontinued operations by business segment. Subsequent to December 31, 2003, MetLife entered into a marketing agreement to sell one of its real estate investments, the Sears Tower, and reclassified the property from Real Estate -- Held-for Investments to Real Estate -- Held-for Sale. The carrying value of the property as of December 31, 2003 is approximately $700 million. F-77 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 21. 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 DECEMBER 31, 2003 AMOUNT VALUE FAIR VALUE - ----------------- -------- -------- ---------- (DOLLARS IN MILLIONS) Assets: Fixed maturities..................................... $167,752 $167,752 Equity securities.................................... $ 1,598 $ 1,598 Mortgage loans on real estate........................ $ 26,249 $ 28,259 Policy loans......................................... $ 8,749 $ 8,749 Short-term investments............................... $ 1,826 $ 1,826 Cash and cash equivalents............................ $ 3,733 $ 3,733 Mortgage loan commitments............................ $ 679 $ -- $ (4) Commitments to fund partnership investments.......... $1,380 $ -- $ -- Liabilities: Policyholder account balances........................ $ 63,957 $ 64,861 Short-term debt...................................... $ 3,642 $ 3,642 Long-term debt....................................... $ 5,703 $ 6,041 Shares subject to mandatory redemption............... $ 277 $ 336 Payable under securities loaned transactions......... $ 27,083 $ 27,083
F-78 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTIONAL CARRYING ESTIMATED DECEMBER 31, 2002 AMOUNT VALUE FAIR VALUE - ----------------- -------- -------- ---------- (DOLLARS IN MILLIONS) Assets: Fixed maturities..................................... $140,288 $140,288 Equity securities.................................... $ 1,613 $ 1,613 Mortgage loans on real estate........................ $ 25,086 $ 27,778 Policy loans......................................... $ 8,580 $ 8,580 Short-term investments............................... $ 1,921 $ 1,921 Cash and cash equivalents............................ $ 2,323 $ 2,323 Mortgage loan commitments............................ $ 859 $ -- $ 12 Commitments to fund partnership investments.......... $1,667 $ -- $ -- Liabilities: Policyholder account balances........................ $ 55,285 $ 55,909 Short-term debt...................................... $ 1,161 $ 1,161 Long-term debt....................................... $ 4,425 $ 4,731 Payable under securities loaned transactions......... $ 17,862 $ 17,862 Other: Company-obligated mandatorily redeemable securities of subsidiary trusts.............................. $ 1,265 $ 1,337
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 for which the market values were not readily available, fair values were estimated using quoted market prices of comparable investments. MORTGAGE LOANS ON REAL ESTATE, MORTGAGE LOAN COMMITMENTS AND COMMITMENTS TO FUND PARTNERSHIP INVESTMENTS 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. Commitments to fund partnership investments have no stated interest rate and are assumed to have a fair value of zero. POLICY LOANS The carrying values for policy loans approximate fair value. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The carrying values for cash and cash equivalents and short-term investments approximated fair values due to the short-term maturities of these instruments. F-79 METLIFE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) POLICYHOLDER ACCOUNT BALANCES The fair value of policyholder account balances is 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. SHORT-TERM AND LONG-TERM DEBT, PAYABLES UNDER SECURITIES LOANED TRANSACTIONS, SHARES SUBJECT TO MANDATORY REDEMPTION AND COMPANY-OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS The fair values of short-term and long-term debt, payables under securities loaned transactions, shares subject to mandatory redemption 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 FINANCIAL INSTRUMENTS The fair value of derivative instruments, including financial futures, financial forwards, interest rate, credit default and foreign currency swaps, foreign currency forwards, caps, floors, options and written covered calls are based upon quotations obtained from dealers or other reliable sources. See Note 3 for derivative fair value disclosures. F-80 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES The Holding Company's management, with the participation of the Holding Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Holding Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in the Holding Company's internal control over financial reporting during the quarter ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, the Holding Company's internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by this Item pertaining to Directors is incorporated herein by reference to the sections entitled "Proposal One -- Election of Directors," "Corporate Governance -- Information about MetLife's Board of Directors, " and "Stock Ownership of Directors and Executive Officers -- Section 16(a) Beneficial Ownership Reporting Compliance" in MetLife, Inc.'s definitive proxy statement for the Annual Meeting of Shareholders to be held on April 27, 2004, to be filed by MetLife, Inc. with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the year ended December 31, 2003 (the "2004 Proxy Statement"). The information called for by this Item pertaining to Executive Officers appears in "Part I -- Item 1. Business -- Executive Officers of the Registrant." The Company has adopted the MetLife Financial Management Code of Professional Conduct (the "Code"), a code of ethics as defined under Regulation S-K, that applies to the Company's chief executive offer, chief financial officer, chief accounting officer, corporate controller and all professionals in finance and finance-related departments. This Code is available on the Company's website at www.metlife.com on the corporate governance portion of the site. The Company intends to satisfy its disclosure obligations under Item 10 of Form 8-K by posting information about amendments to, or waivers from, a provision of the Code that apply to the Company's chief executive officer, chief financial officer, chief accounting officer, and corporate controller on the Company's website at the address above. Also available on the Company's website are the following other items: Employee Code of Business Conduct and Ethics, Directors' Code of Business Conduct and Ethics, Corporate Governance Guidelines, Audit Committee Charter, Compensation Committee Charter and Governance Committee Charter (together with the Code, collectively, the "Governance Documents"). The Company will provide without charge upon written or oral request, a copy of any of such Governance Documents. Requests should be directed to Investor Relations, MetLife, Inc., One Madison Avenue, New York, New York 10010-3690, by electronic mail (metir@metlife.com) or by telephone 1-800-753-4904. ITEM 11. EXECUTIVE COMPENSATION The information called for by this Item is incorporated herein by reference to the section entitled "Executive Compensation" in the 2004 Proxy Statement. 113 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information called for by this Item is incorporated herein by reference to the sections entitled "Stock Ownership of Directors and Executive Officers", "Ownership of MetLife Common Stock" and "Equity Compensation Plans Table" in the 2004 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this Item is incorporated herein by reference to the section entitled "Corporate Governance -- Certain Relationships and Related Transactions" in the 2004 Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information called for by this item is incorporated herein by reference to the section entitled "Proposal Five -- Ratification of Appointment of the Independent Auditor" in the 2004 Proxy Statement. 114 PART IV ITEM 15. 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 112. 2. Financial Statement Schedules The financial statement schedules are listed in the Index to Consolidated Financial Statements and Schedules on page 112. 3. Exhibits The exhibits are listed in the Exhibit Index which begins on page E-1. (b) Reports on Form 8-K During the three months ended December 31, 2003, the following current reports were filed on Form 8-K: 1. Form 8-K filed November 17, 2003 (dated November 17, 2003) regarding purchase by subsidiary of shares of Reinsurance Group of America, Incorporated and attaching press releases regarding (i) certain personnel changes, and (ii) intent to resume common stock repurchase activity. 2. Form 8-K filed November 21, 2003 (dated November 21, 2003) regarding offering of 5.875% senior notes and attaching relevant documentation. 3. Form 8-K filed November 24, 2003 (dated November 24, 2003) regarding offering of 5.00% senior notes and attaching relevant documentation. 4. Form 8-K filed December 8, 2003 (dated December 4, 2003) regarding decrease in percentage ownership of shares of Reinsurance Group of America, Incorporated and attaching press release regarding a contract to sell certain real estate. 5. Form 8-K filed December 15, 2003 (dated December 12, 2003) announcing a new member of the board of directors. 115 METLIFE, INC. SCHEDULE I CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN AFFILIATES DECEMBER 31, 2003 (DOLLARS IN MILLIONS)
AMOUNT AT COST OR ESTIMATED WHICH SHOWN ON AMORTIZED COST(1) FAIR VALUE BALANCE SHEET ----------------- ---------- -------------- TYPE OF INVESTMENT Fixed Maturities: Bonds: U.S. treasuries/agencies...................... $ 14,707 $ 15,945 $ 15,945 State and political subdivisions.............. 3,155 3,349 3,349 Foreign government subsidiaries............... 7,789 8,764 8,764 Public utilities.............................. 7,566 7,885 7,885 Convertibles and bonds with warrants attached.................................... 252 265 265 All other corporate bonds..................... 70,666 76,083 76,083 Mortgage- and asset-backed securities............ 53,095 54,348 54,348 Other............................................ 492 576 576 Redeemable preferred stock....................... 611 537 537 -------- -------- -------- Total fixed maturities................... 158,333 167,752 167,752 Equity Securities: Common stocks: Public Utilities.............................. 9 21 21 Banks, trust and insurance companies.......... 20 22 22 Industrial, miscellaneous and all other....... 591 909 909 Non-Redeemable preferred stocks.................. 602 646 646 -------- -------- -------- Total equity securities.................. 1,222 1,598 1,598 Mortgage loans on real estate...................... 26,249 28,259 26,249 Policy loans....................................... 8,749 8,749 8,749 Real estate and real estate joint ventures......... 4,800 N/A 4,800 Real estate acquired in satisfaction of debt....... 3 N/A 3 Other limited partnership interests................ 2,477 N/A 2,477 Short-term investments............................. 1,826 1,826 1,826 Other invested assets.............................. 4,645 -- 4,645 -------- -------- -------- Total Investments........................ $208,304 $208,184 $218,099 ======== ======== ========
- --------------- (1) Cost for fixed maturities and mortgage loans on real estate represents original cost reduced by repayments, net valuation allowances and writedowns from other-than-temporary declines in value and adjusted for amortization of premiums or accretion of discount; for equity securities, cost represents original cost reduced by writedowns from other-than-temporary declines in value; for real estate, cost represents original cost reduced by writedowns and adjusted for valuation allowances and depreciation; cost for real estate joint ventures and limited partnership interests represents original cost reduced for other-than-temporary impairments or original cost adjusted for equity in earnings and distributions. 116 METLIFE, INC. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF METLIFE, INC. (REGISTRANT) (DOLLARS IN MILLIONS)
AT DECEMBER 31, ----------------- 2003 2002 ------- ------- BALANCE SHEET ASSETS Investments Fixed maturities, available-for-sale, at fair value (amortized cost: $1,524 and $1,222, respectively)...... $ 1,539 $ 1,235 Short-term investments.................................... 8 96 ------- ------- Total Investments...................................... 1,547 1,331 Cash and cash equivalents................................... 317 12 Investment in subsidiaries.................................. 23,531 19,674 Loans to affiliates......................................... 510 500 Other assets................................................ 67 31 ------- ------- Total assets........................................... $25,972 $21,548 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Short-term debt -- unaffiliated............................. $ 106 $ 249 Long-term debt -- unaffiliated.............................. 3,957 2,240 Long-term debt -- affiliated................................ -- 1,037 Payables under securities loaned transactions............... 562 478 Other liabilities........................................... 198 159 ------- ------- Total liabilities...................................... 4,823 4,163 Total stockholders' equity............................. 21,149 17,385 ------- ------- Total liabilities and stockholders' equity............. $25,972 $21,548 ======= =======
YEARS ENDED DECEMBER 31, -------------------------- 2003 2002 2001 ------- ------- ------ STATEMENT OF INCOME Interest income............................................. $ 70 $ 64 $ 91 Investment gains (losses)................................... (4) 2 -- Interest expense............................................ (193) (162) (104) Other expenses.............................................. (45) (43) (40) ------ ------ ----- Loss before income tax benefit............................ (172) (139) (53) Income tax benefit.......................................... (65) (49) (18) Equity in earnings of subsidiaries.......................... 2,050 1,224 401 Income from discontinued operations of subsidiaries, net of income taxes.............................................. 300 471 107 Cumulative effect of change in accounting of subsidiaries, net of income taxes....................................... (26) -- -- ------ ------ ----- Net Income................................................ $2,217 $1,605 $ 473 ====== ====== =====
117 METLIFE, INC. SCHEDULE II -- (CONTINUED) CONDENSED FINANCIAL INFORMATION OF METLIFE, INC. (REGISTRANT) (DOLLARS IN MILLIONS)
YEARS ENDED DECEMBER 31, --------------------------- 2003 2002 2001 ------- ------- ------- CONDENSED STATEMENT OF CASH FLOWS Cash flows from operating activities: Net income.................................................. $ 2,217 $ 1,605 $ 473 Earnings of subsidiaries.................................... (2,324) (1,695) (508) Dividends from subsidiaries................................. 1,728 986 3,785 Other, net.................................................. 51 (190) 256 ------- ------- ------- Net cash provided by operating activities.............. 1,672 706 4,006 ------- ------- ------- Cash flows from investing activities: Sale of fixed maturity securities........................... 1,333 917 -- Purchase of fixed maturity securities....................... (1,631) (2,147) -- Net change in short-term investments........................ 88 (96) 339 Repayment of mandatorially convertible note................. -- -- 1,006 Net change in payable under securities loaned transactions.............................................. 84 478 -- Purchase of subsidiaries.................................... (2,112) (2,355) (1,293) Capital contribution to subsidiaries........................ (239) (595) (870) Loans to affiliate.......................................... (10) (500) -- Other, net.................................................. (168) -- -- ------- ------- ------- Net cash used in investing activities.................. (2,655) (4,298) (818) ------- ------- ------- Cash flows from financing activities: Settlement of common stock purchase contracts............... 1,006 -- -- Treasury stock acquired..................................... (97) (471) (1,321) Dividends paid.............................................. (175) (147) (145) Long-term debt, issued...................................... 697 992 1,248 Short-term debt, issued..................................... (143) 249 -- ------- ------- ------- Net cash provided (used) by financing activities....... 1,288 623 (218) ------- ------- ------- Change in cash and cash equivalents......................... 305 (2,969) 2,970 Cash and cash equivalents, beginning of period.............. 12 2,981 11 ------- ------- ------- Cash and cash equivalents, end of period.................... $ 317 $ 12 $ 2,981 ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid (refunded) during the period for: Interest............................................... $ 155 $ 158 $ 107 ======= ======= ======= Taxes.................................................. $ (90) $ 28 $ (9) ======= ======= ======= Non-cash transactions during the year: MetLife Capital Trust I transactions...................... $ 1,037 $ -- $ -- ======= ======= =======
118 METLIFE, INC. SCHEDULE III CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION AT AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (DOLLARS IN MILLIONS)
FUTURE POLICY BENEFITS, OTHER POLICYHOLDER FUNDS AND DEFERRED POLICY POLICYHOLDER POLICYHOLDER POLICYHOLDER ACQUISITION DIVIDEND ACCOUNT DIVIDENDS UNEARNED PREMIUM REVENUE SEGMENT COSTS OBLIGATION BALANCES PAYABLE REVENUE(1) AND POLICY CHARGES - ------- --------------- --------------- ------------ ------------ ---------- ------------------ 2003 Institutional........ $ 739 $ 33,776 $27,637 $ 186 $ 7 $ 9,728 Individual........... 8,817 57,331 42,087 860 876 5,933 Auto & Home.......... 180 2,943 -- -- -- 2,908 International........ 1,046 4,735 2,441 3 110 1,950 Reinsurance.......... 2,160 5,494 4,289 -- -- 2,668 Asset Management..... -- -- -- -- -- -- Corporate & Other.... 1 (1,658) (553) -- -- (18) ------- -------- ------- ------ ---- ------- $12,943 $102,621 $75,901 $1,049 $993 $23,169 ======= ======== ======= ====== ==== ======= 2002 Institutional........ $ 608 $ 32,516 $22,819 $ 162 $ 4 $ 8,869 Individual........... 8,521 56,118 38,832 863 856 5,886 Auto & Home.......... 175 2,673 -- -- -- 2,828 International........ 945 3,919 1,959 5 47 1,655 Reinsurance.......... 1,477 3,974 3,413 -- -- 2,005 Asset Management..... -- -- -- -- -- -- Corporate & Other.... 1 (1,818) (193) -- -- (19) ------- -------- ------- ------ ---- ------- $11,727 $ 97,382 $66,830 $1,030 $907 $21,224 ======= ======== ======= ====== ==== ======= 2001 Institutional........ $ 509 $ 30,944 $20,964 $ 167 $ 2 $ 7,880 Individual........... 8,757 52,468 34,945 874 855 5,823 Auto & Home.......... 179 2,610 -- -- -- 2,755 International........ 525 2,696 718 5 20 884 Reinsurance.......... 1,196 3,129 2,298 -- -- 1,762 Asset Management..... -- -- -- -- -- -- Corporate & Other.... 1 (811) (2) -- -- (3) ------- -------- ------- ------ ---- ------- $11,167 $ 91,036 $58,923 $1,046 $877 $19,101 ======= ======== ======= ====== ==== =======
- --------------- (1) Amounts are included in Future Policy Benefits, Other Policyholder Funds and Policyholder Dividend Obligation. 119 METLIFE, INC. SCHEDULE III -- (CONTINUED) CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION AT AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (DOLLARS IN MILLIONS)
AMORTIZATION OF AMORTIZATION OF DEFERRED POLICY DEFERRED POLICY ACQUISITION COSTS PREMIUMS INVESTMENT POLICYHOLDER ACQUISITION COSTS CHARGED AGAINST OTHER WRITTEN INCOME, BENEFITS AND CHARGED TO NET INVESTMENT OPERATING (EXCLUDING SEGMENT NET INTEREST CREDITED OTHER EXPENSES GAINS (LOSSES) EXPENSES LIFE) - ------- ---------- ----------------- ----------------- ------------------- --------- ---------- 2003 Institutional........ $ 4,038 $10,847 $ 68 $ -- $1,914 $ -- Individual........... 6,201 6,976 718 (31) 3,862 -- Auto & Home.......... 158 2,139 436 -- 321 2,952 International........ 502 1,597 225 -- 489 157 Reinsurance.......... 473 2,320 371 -- 390 -- Asset Management..... 66 -- -- -- 182 -- Corporate & Other.... 198 4 -- -- 300 -- ------- ------- ------ ---- ------ ------ $11,636 $23,883 $1,818 $(31) $7,458 $3,109 ======= ======= ====== ==== ====== ====== 2002 Institutional........ $ 3,918 $10,271 $ 61 $ -- $1,585 $ -- Individual........... 6,244 7,013 744 10 3,655 -- Auto & Home.......... 177 2,019 431 -- 362 2,866 International........ 461 1,467 128 -- 414 127 Reinsurance.......... 421 1,700 275 (5) 369 -- Asset Management..... 59 -- -- -- 211 -- Corporate & Other.... (19) 3 -- -- 722 -- ------- ------- ------ ---- ------ ------ $11,261 $22,473 $1,639 $ 5 $7,318 $2,993 ======= ======= ====== ==== ====== ====== 2001 Institutional........ $ 3,967 $ 9,937 $ 64 $ -- $1,941 $ -- Individual........... 6,165 7,131 633 21 3,881 -- Auto & Home.......... 200 2,121 432 -- 368 2,779 International........ 267 740 64 -- 301 103 Reinsurance.......... 390 1,606 220 4 295 -- Asset Management..... 71 -- -- -- 252 -- Corporate & Other.... 127 3 -- -- 657 -- ------- ------- ------ ---- ------ ------ $11,187 $21,538 $1,413 $ 25 $7,695 $2,882 ======= ======= ====== ==== ====== ======
120 METLIFE, INC. SCHEDULE IV CONSOLIDATED REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (DOLLARS IN MILLIONS)
% AMOUNT ASSUMED GROSS AMOUNT CEDED ASSUMED NET AMOUNT TO NET ------------ -------- ---------- ---------- -------- 2003 Life insurance in force............ $2,520,700 $678,696 $1,354,410 $3,196,414 42.4% ========== ======== ========== ========== Insurance Premium Life insurance..................... $ 12,536 $ 2,043 $ 3,572 $ 14,065 25.4% Accident and health................ 3,724 277 90 3,537 2.5% Property and casualty insurance.... 3,136 109 44 3,071 1.4% ---------- -------- ---------- ---------- Total insurance premium....... $ 19,396 $ 2,429 $ 3,706 $ 20,673 17.9% ========== ======== ========== ==========
% AMOUNT ASSUMED GROSS AMOUNT CEDED ASSUMED NET AMOUNT TO NET ------------ -------- -------- ---------- -------- 2002 Life insurance in force.............. $2,440,655 $575,567 $834,977 $2,700,065 30.9% ========== ======== ======== ========== Insurance Premium Life insurance....................... $ 12,299 $ 1,962 $ 2,731 $ 13,068 20.9% Accident and health.................. 3,200 286 140 3,054 4.6% Property and casualty insurance...... 2,940 107 122 2,955 4.1% ---------- -------- -------- ---------- Total insurance premium......... $ 18,439 $ 2,355 $ 2,993 $ 19,077 15.7% ========== ======== ======== ==========
% AMOUNT ASSUMED GROSS AMOUNT CEDED ASSUMED NET AMOUNT TO NET ------------ -------- -------- ---------- -------- 2001 Life insurance in force.............. $2,110,411 $479,440 $669,923 $2,300,894 29.1% ========== ======== ======== ========== Insurance Premium Life insurance....................... $ 11,057 $ 1,641 $ 2,195 $ 11,611 18.9% Accident and health.................. 2,906 317 155 2,744 5.6% Property and casualty insurance...... 2,369 69 557 2,857 19.5% ---------- -------- -------- ---------- Total insurance premium......... $ 16,332 $ 2,027 $ 2,907 $ 17,212 16.9% ========== ======== ======== ==========
121 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. March 5, 2004 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 5, 2004 - ------------------------------------- and Chief Executive Officer Robert H. Benmosche (Principal Executive Officer) /s/ CURTIS H. BARNETTE Director March 5, 2004 - ------------------------------------- Curtis H. Barnette /s/ JOHN C. DANFORTH Director March 5, 2004 - ------------------------------------- John C. Danforth /s/ BURTON A. DOLE, JR. Director March 5, 2004 - ------------------------------------- Burton A. Dole, Jr. /s/ CHERYL W. GRISE Director March 5, 2004 - ------------------------------------- Cheryl W. Grise /s/ JAMES R. HOUGHTON Director March 5, 2004 - ------------------------------------- James R. Houghton /s/ HARRY P. KAMEN Director March 5, 2004 - ------------------------------------- Harry P. Kamen /s/ HELENE L. KAPLAN Director March 5, 2004 - ------------------------------------- Helene L. Kaplan /s/ JOHN M. KEANE Director March 5, 2004 - ------------------------------------- John M. Keane /s/ CATHERINE R. KINNEY Director March 5, 2004 - ------------------------------------- Catherine R. Kinney
122
SIGNATURE TITLE DATE --------- ----- ---- /s/ CHARLES M. LEIGHTON Director March 5, 2004 - ------------------------------------- Charles M. Leighton /s/ SYLVIA M. MATHEWS Director March 5, 2004 - ------------------------------------- Sylvia M. Mathews /s/ STEWART G. NAGLER Vice Chairman of the Board March 5, 2004 - ------------------------------------- Stewart G. Nagler /s/ JOHN J. PHELAN, JR. Director March 5, 2004 - ------------------------------------- John J. Phelan, Jr. /s/ HUGH B. PRICE Director March 5, 2004 - ------------------------------------- Hugh B. Price /s/ KENTON J. SICCHITANO Director March 5, 2004 - ------------------------------------- Kenton J. Sicchitano /s/ WILLIAM C. STEERE, JR. Director March 5, 2004 - ------------------------------------- William C. Steere, Jr. /s/ WILLIAM J. WHEELER Executive Vice-President and March 5, 2004 - ------------------------------------- Chief Financial Officer William J. Wheeler (Principal Financial Officer) /s/ JOSEPH J. PROCHASKA, JR. Senior Vice-President, March 5, 2004 - ------------------------------------- Finance Operations and Joseph J. Prochaska, Jr. Chief Accounting Officer (Principal Accounting Officer)
123 EXHIBIT INDEX
EXHIBIT PAGE 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 "S-1 Registration Statement"))......... 2.2 -- Amendment to Plan of Reorganization dated as of March 9, 2000 (Incorporated by reference to Exhibit 2.2 to the S-1 Registration Statement)..................................... 3.1 -- Amended and Restated Certificate of Incorporation of MetLife, Inc. (Incorporated by reference to Exhibit 3.1 to MetLife, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (the "2000 Annual Report")).... 3.2 -- Amended and Restated By-Laws of MetLife, Inc. (Effective January 21, 2004)........................................... 4.1(a) -- Indenture dated as of November 9, 2001 between MetLife, Inc. and Bank One Trust Company, N.A. (predecessor to J.P. Morgan Trust Company, National Association) relating to Senior Debt Securities (Incorporated by reference to Exhibit 4.1 to MetLife, Inc.'s Current Report on Form 8-K dated November 28, 2001 (the "2001 Form 8-K"))............................. 4.1(b) -- Form of Indenture for Senior Debt Securities between MetLife, Inc. and one or more banking institutions to be qualified as Trustee pursuant to Section 305(b)(2) of the Trust Indenture Act of 1939 (Incorporated by reference to Exhibit 4.1(a), except for the name of the trustee)......... 4.2 -- First Supplemental Indenture dated as of November 27, 2001 between MetLife, Inc. and Bank One Trust Company, N.A. (predecessor to J.P. Morgan Trust Company, National Association) relating to the 5.25% Senior Notes due December 1, 2006 (Incorporated by reference to Exhibit 4.2 to the 2001 Form 8-K).............................................. 4.3 -- Second Supplemental Indenture dated as of November 27, 2001 between MetLife, Inc. and Bank One Trust Company, N.A. (predecessor to J.P. Morgan Trust Company, National Association) relating to the 6.125% Senior Notes due December 1, 2011 (Incorporated by reference to Exhibit 4.3 to the 2001 Form 8-K)....................................... 4.4 -- Third Supplemental Indenture dated as of December 10, 2002 between MetLife, Inc. and Bank One Trust Company, N.A. (predecessor to J.P. Morgan Trust Company, National Association) relating to the 5.375% Senior Notes due December 15, 2012 (Incorporated by reference to Exhibit 4.1 to MetLife, Inc.'s Current Report on Form 8-K dated December 17, 2002 (the "2002 Form 8-K"))............................. 4.5 -- Fourth Supplemental Indenture dated as of December 10, 2002 between MetLife, Inc. and Bank One Trust Company, N.A. (predecessor to J.P. Morgan Trust Company, National Association) relating to the 6.50% Senior Notes due December 15, 2032 (Incorporated by reference to Exhibit 4.2 to the 2002 Form 8-K).............................................. 4.6 -- Fifth Supplemental Indenture dated as of November 21, 2003 between MetLife, Inc. and J.P. Morgan Trust Company, National Association (as successor to Bank One Trust Company, N.A.) relating to the 5.875% Senior Notes due November 21, 2033 (Incorporated by reference to Exhibit 4.1 to MetLife, Inc.'s Current Report on Form 8-K dated November 21, 2003 (the "Retail Form 8-K")............................ 4.7 -- Sixth Supplemental Indenture dated as of November 24, 2003 between MetLife, Inc. and J.P. Morgan Trust Company, National Association (as successor to Bank One Trust Company, N.A.) relating to the 5.00% Senior Notes due November 24, 2013 (Incorporated by reference to Exhibit 4.1 to MetLife, Inc.'s Current Report on Form 8-K dated November 24, 2003 (the "Institutional Form 8-K")..................... 4.8(a) -- Form of Indenture between MetLife, Inc. and J.P. Morgan Trust Company, National Association (as successor to Bank One Trust Company, N.A.) relating to Subordinated Debt Securities (Incorporated by reference to Exhibit 4.2 to MetLife, Inc.'s, MetLife Capital Trust II's and MetLife Capital Trust III's Registration Statement on Form S-3 (Nos. 333-61282, 333-61282-01 and 333-61282-02) (the "2001 S-3 Registration Statement"))...................................
E-1
EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 4.8(b) -- Form of Indenture for Subordinated Debt Securities between MetLife, Inc. and one or more banking institutions to be qualified as Trustee pursuant to Section 305(b)(2) of the Trust Indenture Act of 1939 (Incorporated by reference to Exhibit 4.8(a), except for the name of the trustee)......... 4.9 -- Form of 5.25% Senior Note due December 1, 2006 (Included in Exhibit 4.2 incorporated by reference to Exhibit 4.2 to the 2001 Form 8-K).............................................. 4.10 -- Form of 6.125% Senior Note due December 1, 2011 (Included in Exhibit 4.3 incorporated by reference to Exhibit 4.3 to the 2001 Form 8-K).............................................. 4.11 -- Form of 5.375% Senior Note due December 15, 2012 (Included in Exhibit 4.4 incorporated by reference to Exhibit 4.1 to the 2002 Form 8-K).......................................... 4.12 -- Form of 6.50% Senior Note due December 15, 2032 (Included in Exhibit 4.5 incorporated by reference to Exhibit 4.2 to the 2002 Form 8-K).............................................. 4.13 -- Form of 5.875% Senior Note due November 21, 2033 (Included in Exhibit 4.6 incorporated by reference to Exhibit 4.2 to the Retail Form 8-K)........................................ 4.14 -- Form of 5.00% Senior Note due November 24, 2013 (Included in Exhibit 4.7 incorporated by reference to Exhibit 4.2 to the Institutional Form 8-K)..................................... 4.15 -- Certificate of Trust of MetLife Capital Trust II (Incorporated by reference to Exhibit 4.6 to the 2001 S-3 Registration Statement)..................................... 4.16 -- Certificate of Trust of MetLife Capital Trust III (Incorporated by reference to Exhibit 4.7 to the 2001 S-3 Registration Statement)..................................... 4.17 -- Certificate of Amendment to Certificate of Trust of MetLife Capital Trust II (Incorporated by reference to Exhibit 4.5 to MetLife, Inc.'s, MetLife Capital Trust II's and MetLife Capital Trust III's Registration Statement on Form S-3 (Nos. 333-112073, 333-112073-01 and 333-112073-02) (the "2004 S-3 Registration Statement"))................................... 4.18 -- Certificate of Amendment to Certificate of Trust of MetLife Capital Trust III (Incorporated by reference to Exhibit 4.6 to the 2004 S-3 Registration Statement)..................... 4.19 -- Declaration of Trust of MetLife Capital Trust II (Incorporated by reference to Exhibit 4.8 to the 2001 S-3 Registration Statement)..................................... 4.20 -- Declaration of Trust of MetLife Capital Trust III (Incorporated by reference to Exhibit 4.9 to the 2001 S-3 Registration Statement)..................................... 4.21 -- Removal and Appointment of Trustees of MetLife Capital Trust II (Incorporated by reference to Exhibit 4.9 to the 2004 S-3 Registration Statement)..................................... 4.22 -- Removal and Appointment of Trustees of MetLife Capital Trust III (Incorporated by reference to Exhibit 4.10 to the 2004 S-3 Registration Statement)................................. 4.23 -- Form of Amended and Restated Declaration of Trust of MetLife Capital Trust II (Incorporated by reference to Exhibit 4.10 to the 2001 S-3 Registration Statement)..................... 4.24 -- Form of Amended and Restated Declaration of Trust of MetLife Capital Trust III (Incorporated by reference to Exhibit 4.11 to the 2001 S-3 Registration Statement)..................... 4.25 -- Form of Trust Preferred Security Certificate of MetLife Capital Trust II (Included in Exhibit 4.23 incorporated by reference to Exhibit 4.10 to the 2001 S-3 Registration Statement).................................................. 4.26 -- Form of Trust Preferred Security Certificate of MetLife Capital Trust III (Included in Exhibit 4.24 incorporated by reference to Exhibit 4.11 to the 2001 S-3 Registration Statement).................................................. 4.27 -- Form of Trust Preferred Securities Guarantee Agreement for MetLife Capital Trust II (Incorporated by reference to Exhibit 4.14 to the 2001 S-3 Registration Statement)........ 4.28 -- Form of Trust Preferred Securities Guarantee Agreement for MetLife Capital Trust III (Incorporated by reference to Exhibit 4.15 to the 2001 S-3 Registration Statement)........ 4.29 -- Form of Common Securities Guarantee Agreement for MetLife Capital Trust II (Incorporated by reference to Exhibit 4.16 to the 2001 S-3 Registration Statement).....................
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EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 4.30 -- Form of Common Securities Guarantee Agreement for MetLife Capital Trust III (Incorporated by reference to Exhibit 4.17 to the 2001 S-3 Registration Statement)..................... 4.31 -- Form of Certificate for Common Stock, par value $0.01 per share (Incorporated by reference to Exhibit 4.1 to the S-1 Registration Statement)..................................... 4.32 -- Indenture between MetLife, Inc. and The Bank of New York, as trustee, relating to the debt securities (Incorporated by reference to Exhibit 4.2 to the 2000 Annual Report)......... 4.33 -- First Supplemental Indenture between MetLife, Inc. and The Bank of New York, as trustee, relating to the Debentures (Incorporated by reference to Exhibit 4.3 to the 2000 Annual Report)..................................................... 4.34 -- 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"))................................... 4.35 -- Declaration of Trust of MetLife Capital Trust I (Incorporated by reference to Exhibit 4.4 to the Trust Registration Statement)..................................... 4.36 -- Amended and Restated Declaration of Trust of MetLife Capital Trust I (Incorporated by reference to Exhibit 4.6 to the 2000 Annual Report)......................................... 4.37 -- Capital Securities Guarantee Agreement for MetLife Capital Trust I (Incorporated by reference to Exhibit 4.7 to the 2000 Annual Report)......................................... 4.38 -- Capital Security Certificate of MetLife Capital Trust I (Included in Exhibit 4.36 incorporated by reference to Exhibit 4.6 to the 2000 Annual Report)...................... 4.39 -- Purchase Contract Agreement (Incorporated by reference to Exhibit 4.9 to the 2000 Annual Report)...................... 4.40 -- Pledge Agreement (Incorporated by reference to Exhibit 4.10 to the 2000 Annual Report).................................. 4.41 -- Form of Debenture (Included in Exhibit 4.33 incorporated by reference to Exhibit 4.3 to the 2000 Annual Report)......... 4.42 -- Form of Normal Unit (Included in Exhibit 4.39 incorporated by reference to Exhibit 4.9 to the 2000 Annual Report)...... 4.43 -- Form of Stripped Unit (Included in Exhibit 4.39 incorporated by reference to Exhibit 4.9 to the 2000 Annual Report)...... 4.44 -- Common Securities Guarantee Agreement (Incorporated by reference to Exhibit 4.14 to the 2000 Annual Report)........ 4.45 -- Rights Agreement (Incorporated by reference to Exhibit 10.6 to the 2000 Annual Report).................................. 4.46 -- Form of Certificate of Designation (Included as Exhibit A of Exhibit 4.45)............................................... 4.47 -- Form of Right Certificate (Included as Exhibit B of Exhibit 4.45)....................................................... 4.48 -- Form of Warrant Agreement (Incorporated by reference to Exhibit 4.23 to the 2004 S-3 Registration Statement)**...... 4.49 -- Form of Deposit Agreement (Incorporated by reference to Exhibit 4.24 to the 2004 S-3 Registration Statement)**...... 4.50 -- Form of Depositary Receipt (Included in Exhibit 4.49)**..... 4.51 -- Form of Purchase Contract Agreement (Incorporated by reference to Exhibit 4.26 to the 2004 S-3 Registration Statement)**................................................ 4.52 -- Form of Pledge Agreement (Incorporated by reference to Exhibit 4.27 to the 2004 S-3 Registration Statement)**...... 4.53 -- Form of Unit Agreement (Incorporated by reference to Exhibit 4.28 to the 2004 S-3 Registration Statement)**.............. 4.54 -- Form of Capital Note (Incorporated by reference to Exhibit 10.44 to the S-1 Registration Statement)....................
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EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 10.1 -- Form of Amended and Restated Employment Continuation Agreement with Messrs. Benmosche, Nagler and Clark (Incorporated by reference to Exhibit 10.8 to MetLife, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (the "2001 Annual Report"))*.............. 10.2 -- Form of Amended and Restated Employment Continuation Agreement with Messrs. Beller, Henrikson and Toppeta (Incorporated by reference to Exhibit 10.9 to the 2001 Annual Report)*............................................. 10.3 -- Amended and Restated Employment Continuation Agreement with Ms. Rein (Incorporated by reference to Exhibit 10.17 to the 2001 Annual Report)*........................................ 10.4 -- Amended and Restated Employment Continuation Agreement with Ms. Weber (Incorporated by reference to Exhibit 10.58 to the 2001 Annual Report)*........................................ 10.5 -- Amended and Restated Employment Continuation Agreement with Mr. Cavanagh (Incorporated by reference to Exhibit 10.48 to MetLife, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (the "2002 Annual Report")*.... 10.6 -- Form of Employment Continuation Agreement with Messrs. Launer and Lipscomb (Incorporated by reference to Exhibit 10.1 to MetLife, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (the "Third Quarter 2003 10-Q")*................................................ 10.7 -- Form of Employment Continuation Agreement with Mr. Wheeler*.................................................... 10.8 -- Separation Agreement, Waiver and General Release dated July 16, 2002 by and between Metropolitan Life Insurance Company and James M. Benson (Incorporated by reference to Exhibit 10.3 to MetLife, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the "Third Quarter 2002 10-Q"))*............................................... 10.9 -- Agreement, Waiver and General Release dated August 26, 2003 between MetLife Group, Inc. and Gerald Clark *.............. 10.10 -- MetLife, Inc. 2000 Stock Incentive Plan, as amended and restated March 28, 2000 (Incorporated by reference to Exhibit 10.7 to the S-1 Registration Statement)*............ 10.11 -- MetLife, Inc. 2000 Stock Incentive Plan, as amended effective February 8, 2002 (Incorporated by reference to Exhibit 10.13 to the 2001 Annual Report)*................... 10.12 -- Form of Management Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to MetLife, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (the "Second Quarter 2002 10-Q"))*............................... 10.13 -- Form of Director Stock Option Agreement (Incorporated by reference to Exhibit 10.3 to the Second Quarter 2002 10-Q)*...................................................... 10.14 -- MetLife, Inc. 2000 Directors Stock Plan, as amended and restated March 28, 2000 (Incorporated by reference to Exhibit 10.8 to the S-1 Registration Statement)*............ 10.15 -- MetLife, Inc. 2000 Directors Stock Plan, as amended effective February 8, 2002 (Incorporated by reference to Exhibit 10.16 to the 2001 Annual Report)*................... 10.16 -- Policyholder Trust Agreement (Incorporated by reference to Exhibit 10.12 to the S-1 Registration Statement)............ 10.17 -- 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 S-1 Registration Statement)................................. 10.18 -- 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 S-1 Registration Statement)....................
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EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 10.19 -- 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 S-1 Registration Statement)..................................... 10.20 -- Amended and Restated Aggregate Excess of Loss Reinsurance Agreement, dated as of March 1, 2000 between American International Life Assurance Company of New York and Metropolitan Life Insurance Company (Incorporated by reference to Exhibit 10.1 to the MetLife, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (the "First Quarter 2000 10-Q"))............................ 10.21 -- Amended and Restated Aggregate Excess of Loss Reinsurance Agreement, dated as of March 1, 2000, between Stockwood Reinsurance Company, Ltd. and Metropolitan Life Insurance Company (Incorporated by reference to Exhibit 10.2 to the First Quarter 2000 10-Q).................................... 10.22 -- 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 S-1 Registration Statement)............ 10.23 -- Amendment No. 2, dated as of June 30, 2000, to the Five Year Credit Agreement, among Metropolitan Life Insurance Company, MetLife Funding, Inc. and the other parties signatory thereto (Incorporated by reference to Exhibit 10.20 to the 2000 Annual Report)......................................... 10.24 -- Credit Agreement, dated as of April 23, 2002 (the "Three-Year Credit Agreement"), among MetLife, Inc., Metropolitan Life Insurance Company, MetLife Funding, Inc. and other parties signatory thereto (Incorporated by reference to Exhibit 10.1 to the Second Quarter 2002 10-Q)....................................................... 10.25 -- First Amendment to the Three-Year Credit Agreement, dated as of December 19, 2003, among MetLife, Inc., Metropolitan Life Insurance Company, MetLife Funding, Inc. and the other parties signatory thereto................................... 10.26 -- Credit Agreement, dated as of April 25, 2003, among MetLife, Inc., Metropolitan Life Insurance Company, MetLife Funding, Inc. and the other parties signatory thereto (Incorporated by reference to Exhibit 10.1 to MetLife, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Second Quarter 2003 10-Q")................................. 10.27 -- Stipulation of Settlement, as amended, relating to Metropolitan Life Insurance Company Sales Practices Litigation (Incorporated by reference to Exhibit 10.21 to the S-1 Registration Statement)............................. 10.28 -- Regulatory Settlement Agreement dated as of August 29, 2002, by and between Metropolitan Life Insurance Company and the State of New York Insurance Department, along with the insurance regulators of each of the states of the United States and of the District of Columbia that adopt, approve and agree to the Regulatory Settlement Agreement (Incorporated by reference to Exhibit 10.1 to the Third Quarter 2002 10-Q).......................................... 10.29 -- Stipulation of Settlement dated August 29, 2002, by and between Thompson et al., as Plaintiffs in their individual and representative capacities, and Metropolitan Life Insurance Company, as Defendant (Incorporated by reference to Exhibit 10.2 to the Third Quarter 2002 10-Q)............. 10.30 -- Long Term Performance Compensation Plan (for performance periods starting on or after April 1, 2001, as amended) (Incorporated by reference to Exhibit 10.24 to the 2002 Annual Report)*............................................. 10.31 -- Long Term Performance Compensation Plan (for performance periods starting on or after January 1, 2000) (Incorporated by reference to Exhibit 10.24 to the S-1 Registration Statement)*.................................................
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EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 10.32 -- Annual Variable Incentive Plan (for performance periods starting on or after January 1, 2003) (Incorporated by reference to Exhibit 10.27 to the 2002 Annual Report)*...... 10.33 -- Metropolitan Life Auxiliary Savings and Investment Plan, restated effective through August 15, 1998 (Incorporated by reference to Exhibit 10.31 to the S-1 Registration Statement)*................................................. 10.34 -- Amendment to the Metropolitan Life Auxiliary Savings and Investment Plan, effective September 11, 2001 (Incorporated by reference to Exhibit 10.38 to the 2001 Annual Report)*... 10.35 -- Amendment to the Metropolitan Life Auxiliary Savings and Investment Plan, effective November 8, 2002 (Incorporated by reference to Exhibit 10.31 to the 2002 Annual Report)*...... 10.36 -- Amendment to the Metropolitan Life Auxiliary Savings and Investment Plan, effective January 1, 2003 (Incorporated by reference to Exhibit 10.32 to the 2002 Annual Report)*...... 10.37 -- Amendment to the Metropolitan Life Auxiliary Savings and Investment Plan, effective January 1, 2003 (Incorporated by reference to Exhibit 10.33 to the 2002 Annual Report)*...... 10.38 -- Amendment to the Metropolitan Life Auxiliary Savings and Investment Plan, effective January 1, 2003 (Incorporated by reference to Exhibit 10.2 to the Third Quarter 2003 10-Q)*...................................................... 10.39 -- Metropolitan Life Auxiliary Savings and Investment Plan (As restated, effective December 15, 2003)*..................... 10.40 -- 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 S-1 Registration Statement)*........... 10.41 -- Amendment to the Metropolitan Life Supplemental Auxiliary Savings and Investment Plan (Incorporated by reference to Exhibit 10.60 to the 2000 Annual Report)*................... 10.42 -- Amendment to the Metropolitan Life Supplemental Auxiliary Savings and Investment Plan, effective September 11, 2001 (Incorporated by reference to Exhibit 10.40 to the 2001 Annual Report)*............................................. 10.43 -- Amendment to the Metropolitan Life Supplemental Auxiliary Savings and Investment Plan, effective January 1, 2003 (Incorporated by reference to Exhibit 10.37 to the 2002 Annual Report)*............................................. 10.44 -- Amendment to the Metropolitan Life Supplemental Auxiliary Savings and Investment Plan, effective January 1, 2003 (Incorporated by reference to Exhibit 10.38 to the 2002 Annual Report)*............................................. 10.45 -- Amendment to the Metropolitan Life Supplemental Auxiliary Savings and Investment Plan, effective January 1, 2003 (Incorporated by reference to Exhibit 10.3 to the Third Quarter 2003 10-Q)*......................................... 10.46 -- Metropolitan Life Supplemental Auxiliary Savings and Investment Plan (as amended and restated as of December 15, 2003)*...................................................... 10.47 -- 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 S-1 Registration Statement).................... 10.48 -- 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 S-1 Registration Statement)............ 10.49 -- 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 S-1 Registration Statement)............
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EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- 10.50 -- 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 S-1 Registration Statement).......................... 10.51 -- MetLife Deferred Compensation Plan for Officers, as amended and restated, effective November 1, 2003 (Incorporated by reference to Exhibit 10.5 to the Third Quarter 2003 10-Q)*...................................................... 10.52 -- MetLife Deferred Compensation Plan for Officers, as amended and restated, effective October 22, 2002 (Incorporated by reference to Exhibit 10.4 to the Third Quarter 2002 10-Q)*...................................................... 10.53 -- MetLife Deferred Compensation Plan 2003 for Outside Directors, effective January 1, 2003 (Incorporated by reference to Exhibit 10.50 to the 2002 Annual Report)*...... 10.54 -- MetLife Deferred Compensation Plan 2003 for Outside Directors, as amended September 2003 (Incorporated by reference to Exhibit 10.4 to the Third Quarter 2003 10-Q)*...................................................... 10.55 -- MetLife Deferred Compensation Plan 2004 for Outside Directors, effective December 9, 2003*...................... 10.56 -- General American Life Insurance Company Directors' Deferred Savings Plan for Non-Employee Directors 2002 (Incorporated by reference to Exhibit 10.67 to the 2001 Annual Report)*... 10.57 -- MetLife Auxiliary Pension Plan, effective January 1, 2003 (Incorporated by reference to Exhibit 10.53 to the 2002 Annual Report)*............................................. 10.58 -- Amendment to the MetLife Auxiliary Pension Plan, effective January 1, 2003 (Incorporated by reference to Exhibit 10.54 to the 2002 Annual Report)*................................. 10.59 -- MetLife Auxiliary Pension Plan dated October 31, 2003 (as amended and restated, effective January 1, 2003)*........... 12.1 -- Statement re: Computation of Ratios of Earnings to Fixed Charges..................................................... 21.1 -- Subsidiaries of the Registrant.............................. 23.1 -- Consent of Deloitte & Touche LLP............................ 31.1 -- Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002....................... 31.2 -- Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002....................... 32.1 -- Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002....................... 32.2 -- Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.......................
- --------------- * Indicates management contracts or compensatory plans or arrangements. ** Indicates document to be filed as an exhibit to a Current Report on Form 8-K or Quarterly Report on Form 10-Q pursuant to Item 601 of Regulation S-K and incorporated herein by reference. E-7 EX-3.2 3 y94438exv3w2.txt AMENDED AND RESTATED BY-LAWS EXHIBIT 3.2 ================================================================================ METLIFE, INC. AMENDED AND RESTATED BY-LAWS Effective January 21, 2004 ================================================================================ METLIFE, INC. BY-LAWS TABLE OF CONTENTS
SECTION PAGE - ------- ARTICLE I STOCKHOLDERS 1.01. Annual Meetings................................................ 1 1.02. Special Meetings............................................... 1 1.03. Notice of Meetings; Waiver..................................... 1 1.04. Quorum and Required Vote....................................... 2 1.05. Voting Rights.................................................. 2 1.06. Voting by Ballot............................................... 2 1.07. Adjournment.................................................... 2 1.08. Proxies........................................................ 2 1.09. Presiding Officer and Secretary of the Meeting................. 3 1.10. Notice of Stockholder Business and Nominations................. 4 1.11. Inspectors of Elections........................................ 6 1.12. Opening and Closing of Polls................................... 7 1.13. Confidential Voting............................................ 7 1.14. No Stockholder Action by Written Consent....................... 7 ARTICLE II BOARD OF DIRECTORS 2.01. General Powers................................................. 8 2.02. Number of Directors............................................ 8 2.03. Classified Board; Election of Directors........................ 8 2.04. Annual and Regular Meetings.................................... 8 2.05. Special Meetings; Notice....................................... 9 2.06. Quorum; Voting................................................. 9 2.07. Adjournment.................................................... 9 2.08. Action Without a Meeting....................................... 9 2.09. Regulations; Manner of Acting.................................. 9 2.10. Action by Telephonic Communications............................ 10 2.11. Resignations................................................... 10 2.12. Removal of Directors........................................... 10 2.13. Vacancies and Newly Created Directorships...................... 10
2.14. Compensation................................................... 10 2.15. Reliance on Accounts and Reports, etc.......................... 10 ARTICLE III BOARD COMMITTEES 3.01. How Constituted, Commitee Powers............................... 11 3.02. Quorum and Manner of Acting.................................... 11 3.03. Action by Telephonic Communications............................ 11 3.04. Resignations................................................... 12 3.05. Removal........................................................ 12 3.06. Vacancies...................................................... 12 ARTICLE IV OFFICERS 4.01. Number......................................................... 12 4.02. Election....................................................... 12 4.03. Salaries....................................................... 12 4.04. Removal and Resignation; Vacancies............................. 12 4.05. Authority and Duties of Officers............................... 13 4.06. The Chairman................................................... 13 4.07. The Chief Executive Officer.................................... 13 4.08. The President.................................................. 13 4.09. Absence or Disability of the Chief Executive Officer........... 13 4.10. Vice Presidents................................................ 13 4.11. The Secretary.................................................. 14 4.12. The Chief Financial Officer.................................... 14 4.13. The Treasurer.................................................. 14 4.14. The Controller................................................. 14 4.15. The General Counsel............................................ 14 4.16. Additional Officers............................................ 14 4.17. Security....................................................... 15
ARTICLE V CAPITAL STOCK 5.01. Certificates of Stock, Uncertificated Shares................... 15 5.02. Signatures; Facsimile.......................................... 15 5.03. Lost, Stolen or Destroyed Certificates......................... 15 5.04. Transfer of Stock.............................................. 16 5.05. Record Date.................................................... 16 5.06. Registered Stockholders........................................ 16 5.07. Transfer Agent and Registrar................................... 17 ARTICLE VI INDEMNIFICATION 6.01. Nature of Indemnity............................................ 17 6.02. Determination that Indemnification is Proper................... 18 6.03. Advance Payment of Expenses.................................... 18 6.04. Procedure for Indemnification of Directors and Officers........ 18 6.05. Survival; Preservation of Other Rights......................... 19 6.06. Insurance...................................................... 19 6.07. Severability................................................... 19 ARTICLE VII OFFICES 7.01. Registered Office.............................................. 20 7.02. Other Offices.................................................. 20 ARTICLE VIII GENERAL PROVISIONS 8.01. Dividends...................................................... 20 8.02. Reserves....................................................... 20 8.03. Execution of Instruments....................................... 21 8.04. Corporate Indebtedness......................................... 21 8.05. Deposits....................................................... 21 8.06. Checks......................................................... 21 8.07. Sale, Transfer, etc. of Securities............................. 21
8.08. Voting as Stockholder.......................................... 22 8.09. Fiscal Year.................................................... 22 8.10. Seal........................................................... 22 ARTICLE IX AMENDMENT OF BY-LAWS 9.01. Amendment...................................................... 22 ARTICLE X CONSTRUCTION 10.01. Construction................................................... 23
METLIFE, INC. AMENDED AND RESTATED BY-LAWS Effective January 21, 2004 ARTICLE I STOCKHOLDERS Section 1.01. Annual Meetings. The annual meeting of the stockholders of the Corporation for the election of Directors and for the transaction of such other business as properly may come before such meeting shall be held at such place, either within or without the State of Delaware, and at such date and at such time, as may be fixed from time to time by resolution of the Board of Directors and set forth in the notice or waiver of notice of the meeting. Section 1.02. Special Meetings. Special meetings of the stockholders may be called at any time by the Chief Executive Officer (or, in the event of the Chief Executive Officer's absence or disability, by the President or any Director who is also an officer (hereafter, an "Officer Director")). A special meeting shall be called by the Chief Executive Officer (or, in the event of the Chief Executive Officer's absence or disability, by the President or any Officer Director) or by the Secretary pursuant to a resolution approved by a majority of the entire Board of Directors. Such special meetings of the stockholders shall be held at such places, within or without the State of Delaware, as shall be specified in the respective notices or waivers of notice thereof. Any power of the stockholders of the Corporation to call a special meeting is specifically denied. Section 1.03. Notice of Meetings; Waiver. The Secretary or any Assistant Secretary shall cause written notice of the place, date and hour of each meeting of the stockholders and, in the case of a special meeting, the purpose or purposes for which such meeting is called, to be given personally or by mail, not less than ten nor more than sixty days prior to the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is mailed, it shall be deemed to have been given to a stockholder when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the record of stockholders of the Corporation. Such further notice shall be given as may be required by law. A written waiver of any notice of any annual or special meeting signed by the person entitled thereto, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders needs to be specified in a written waiver of notice. Attendance of a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning 1 of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 1.04. Quorum and Required Vote. Except as otherwise required by law or by the Certificate of Incorporation, the presence in person or by proxy of the holders of record of one-third of the shares entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business at such meeting. Except as otherwise required by law or by the Certificate of Incorporation, these By-Laws or the rules or regulations of any stock exchange applicable to the Corporation, the vote of a majority (or, in the case of the election of Directors, a plurality) of the shares represented in person or by proxy at any meeting at which a quorum is present shall be sufficient for the transaction of any business at such meeting. Section 1.05. Voting Rights. Subject to the rights of the holders of any class or series of Preferred Stock, every holder of record of shares entitled to vote at a meeting of stockholders shall be entitled to one vote for each share outstanding in such stockholder's name on the books of the Corporation at the close of business on the date fixed pursuant to the provisions of Section 5.05 hereof as the record date for the determination of the stockholders who shall be entitled to notice of and to vote at such meeting. Section 1.06. Voting by Ballot. No vote of the stockholders need be taken by written ballot unless otherwise required by law. Any vote not required to be taken by ballot may be conducted in any manner approved by the presiding officer at the meeting at which such vote is taken. Section 1.07. Adjournment. If a quorum is not present at any meeting of the stockholders, the presiding officer shall have the power to adjourn any such meeting from time to time until a quorum is present. Notice of any adjourned meeting of the stockholders of the Corporation need not be given if the place, date and hour thereof are announced at the meeting at which the adjournment is taken, provided, however, that if the adjournment is for more than thirty days, or if after the adjournment a new record date for the adjourned meeting is fixed pursuant to Section 5.05 of these By-Laws, a notice of the adjourned meeting, conforming to the requirements of Section 1.03 hereof, shall be given to each stockholder of record entitled to vote at such meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted on the original date of the meeting. Section 1.08. Proxies. Any stockholder entitled to vote at any meeting of the stockholders may authorize another person or persons to vote at any such meeting for such stockholder by proxy. A stockholder may authorize a valid proxy by executing a written instrument signed by such stockholder, or such stockholder's authorized officer, director, employee or agent, or by causing such signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature, or by transmitting or authorizing the transmission of a telegram, cablegram, data and voice telephonic communications, computer network, e-mail or other means of electronic 2 transmission to the person designated as the holder of the proxy, a proxy solicitation firm, a proxy support service organization or a like authorized agent. No such proxy shall be voted or acted upon after the expiration of three years from the date of such proxy, unless such proxy provides for a longer period. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where applicable law provides that a proxy shall be irrevocable. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by filing another duly executed proxy bearing a later date with the Secretary. Proxies by telegram, cablegram, data and voice telephonic communications, computer network, e-mail or other electronic transmission must either set forth or be submitted with information from which it can be determined that such electronic transmission was authorized by the stockholder. If it is determined that such electronic transmission is valid, the inspectors shall specify the information upon which they relied. Any copy, facsimile telecommunication or other reliable reproduction of a writing or transmission created pursuant to this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Section 1.09. Presiding Officer and Secretary of the Meeting. (a) At every meeting of stockholders the presiding officer shall be the Chairman or, in the event of the Chairman's absence or disability, the President, or in the event of the President's absence or disability, any officer designated by the Chief Executive Officer, or in the event of the Chief Executive Officer's absence or the failure of the Chief Executive Officer to designate an officer for such purpose, any officer chosen by resolution of the Board of Directors. The order of business and all other matters of procedure at every meeting of stockholders may be determined by the presiding officer. The Secretary, or in the event of the Secretary's absence or disability, any Assistant Secretary designated by the presiding officer, if any, or if there be no Assistant Secretary, in the absence of the Secretary, an appointee of the presiding officer, shall act as Secretary of the meeting. (b) Conduct of Meetings. The Board of Directors may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with any such rules and regulations as adopted by the Board of Directors, the presiding officer shall have the right and authority to convene and to adjourn the meeting, to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such presiding officer, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the presiding officer, may include, but are not limited to, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the presiding officer shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement 3 thereof; and (v) limitations on the time allotted to questions or comments by participants. Meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. Section 1.10. Notice of Stockholder Business and Nominations. (a) Annual Meetings of Stockholders. (i) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders at an annual meeting of stockholders may be made only (A) by or at the direction of the Board of Directors or the Chief Executive Officer, or (B) by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations promulgated thereunder and the notice procedures set forth in clause (ii) of this paragraph and who was a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder, pursuant to clause (B) of paragraph (a)(i) of this Section 1.10, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and any such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than 120 calendar days prior to the first anniversary of the previous year's annual meeting; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting was changed by more than 30 days from the anniversary date of the previous year's annual meeting, notice by the stockholder must be so received not later than 120 calendar days prior to such annual meeting or 10 calendar days following the date on which public announcement of the date of the meeting is first made. In no event shall an adjournment or postponement of an annual meeting (or the public announcement thereof) commence a new time period (or extend any time period) for the giving of stockholders' notice as described below. Such stockholder's notice shall set forth (A) as to each person whom the stockholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act, and Rule 14a-11 thereunder, including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected; (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and, in the event that such business includes a proposal to amend either the Certificate of Incorporation or the By-Laws of the Corporation, the language of the proposed amendment; (C) any material interest in such business of such stockholder and of any beneficial owner on whose behalf the proposal is made and, in case of nominations, a description of all arrangements or understandings between the stockholder and each nominee and any other persons (naming them) pursuant to which the nominations are to be made by the stockholder; (D) a representation that the stockholder 4 is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by a qualified representative at the meeting to propose such business; (E) if the stockholder intends to solicit proxies in support of such stockholder's proposals, a representation to that effect; and (F) as to the stockholder giving the notice and any beneficial owner on whose behalf the nomination or proposal is made, (1) the name and address of such stockholder, as it appears on the Corporation's books, and of such beneficial owner and (2) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. If such stockholder does not appear or send a qualified representative to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. The presiding officer of any annual meeting of stockholders shall refuse to permit any business proposed by a stockholder to be brought before such annual meeting without compliance with the foregoing procedures or if the stockholder solicits proxies in support of such stockholder's proposal without such stockholder having made the representation required by clause (E) above. (b) Special Meetings of Stockholders. (i) Only such business as shall have been brought before the special meeting of the stockholders pursuant to the Corporation's notice of meeting pursuant to Section 1.02 of these By-Laws shall be conducted at such meeting. (ii) In the event that Directors are to be elected at a special meeting of stockholders pursuant to the Corporation's notice of meeting, nominations of persons for election to the Board of Directors may be made at such special meeting of stockholders (1) by or at the direction of the Board of Directors or (2) by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in this Section 1.10 and who is a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. Nominations by stockholders of persons for election to the Board of Directors may be made at such special meeting of stockholders if the stockholder's notice as required by paragraph (a)(ii) of this Section 1.10 shall be delivered to the Secretary at the principal executive offices of the Corporation not later than 150 calendar days prior to such special meeting or 10 calendar days following the date on which public announcement of the date of the special meeting and of the nominees to be elected at such meeting is first made. In no event shall the adjournment or postponement of a special meeting (or the public announcement thereof) commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. (c) General. (i) Only persons who are nominated in accordance with the procedures set forth in this Section 1.10 shall be eligible to serve as Directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.10. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or 5 proposed in accordance with the procedures set forth in this Section 1.10 and, if any proposed nomination or business is not in compliance with this Section 1.10, to declare that such defective proposal or nomination shall be disregarded. (ii) Nothing in this Section 1.10 shall be deemed to affect any rights of the holders of any class or series of preferred stock, if any, to elect Directors if so provided under any applicable preferred stock Certificate of Designation (as defined in the Certificate of Incorporation). Section 1.11. Inspectors of Elections. (a) Prior to any meeting of the stockholders, the Board of Directors shall appoint one or more persons to act as Inspectors of Elections, and may designate one or more alternate inspectors. If no inspector or alternate is able to act, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of the duties of an inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector's ability. The inspector shall: (i) ascertain the number of shares outstanding and the voting power of each; (ii) determine the shares represented at the meeting and the validity of proxies and ballots; (iii) specify the information relied upon to determine the validity of electronic transmissions in accordance with Section 1.08 hereof; (iv) count all votes and ballots; (v) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; (vi) certify such inspector's determination of the number of shares represented at the meeting, and such inspector's count of all votes and ballots. (b) The inspector may appoint or retain other persons or entities to assist in the performance of the duties of inspector. (c) When determining the shares represented and the validity of proxies and ballots, the inspector shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any proxies provided in accordance with Section 1.08 of these By-Laws, ballots and the regular books and records of the Corporation. The inspector may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers or their nominees or a similar person which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspector 6 considers other reliable information as outlined in this section, the inspector, at the time of certification pursuant to (a)(vi) of this Section 1.11, shall specify the precise information considered, the person or persons from whom such information was obtained, when this information was obtained, the means by which such information was obtained, and the basis for the inspector's belief that such information is accurate and reliable. Section 1.12. Opening and Closing of Polls. The time for the opening and the closing of the polls for the matters to be voted upon at a stockholder meeting shall be announced at the meeting by the presiding officer. The inspector of the election shall be prohibited from accepting any ballots, proxies or votes or any revocations thereof or changes thereto after the closing of the polls, unless the Delaware Court of Chancery upon application by a stockholder shall determine otherwise. Section 1.13. Confidential Voting. (a) Proxies and ballots that identify the votes of specific stockholders shall be kept in confidence by the inspectors of election unless (i) there is an opposing solicitation with respect to the election or removal of Directors, (ii) disclosure is required by applicable law, (iii) a stockholder expressly requests or otherwise authorizes disclosure in relation to such stockholder's vote, or (iv) the Corporation concludes in good faith that a bona fide dispute exists as to the authenticity of one or more proxies, ballots or votes, or as to the accuracy of any tabulation of such proxies, ballots or votes. (b) The inspectors of election and any authorized agents or other persons engaged in the receipt, count and tabulation of proxies and ballots shall be advised of this By-Law and instructed to comply herewith. (c) The inspectors of election shall certify, to the best of their knowledge based on due inquiry, that proxies and ballots have been kept in confidence as required by this Section 1.13. Section 1.14. No Stockholder Action by Written Consent. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of the stockholders of the Corporation, and the ability of the stockholders to consent in writing to the taking of any action is specifically denied. 7 ARTICLE II BOARD OF DIRECTORS Section 2.01. General Powers. Except as may otherwise be provided by law, by the Certificate of Incorporation or by these By-Laws, the property, affairs and business of the Corporation shall be managed by or under the direction of the Board of Directors and the Board of Directors may exercise all the powers of the Corporation. Section 2.02. Number of Directors. Subject to the rights of the holders of any class or series of preferred stock, if any, the number of Directors shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the entire Board of Directors, but the Board of Directors shall at no time consist of fewer than three (3) Directors. Section 2.03. Classified Board; Election of Directors. The Directors of the Corporation, subject to the rights of the holders of shares of any class or series of preferred stock, shall be classified with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, one class ("Class I") whose term expires at the 2000 annual meeting stockholders, another class ("Class II") whose term expires at the 2001 annual meeting of stockholders, and another class ("Class III") whose term expires at the 2002 annual meeting of stockholders, with each class to hold office until its successors are elected and qualified. Except as otherwise provided in Sections 2.12 and 2.13 of these By-Laws, at each annual meeting of stockholders of the Corporation, and subject to the rights of the holders of shares of any class or series of preferred stock, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. Section 2.04. Annual and Regular Meetings. The annual meeting of the Board of Directors for the purpose of electing officers and for the transaction of such other business as may come before the meeting shall be held as soon as practicable following adjournment of the annual meeting of the stockholders. Notice of such annual meeting of the Board of Directors need not be given. The Board of Directors from time to time may by resolution provide for the holding of regular meetings and fix the place (which may be within or without the State of Delaware) and the date of such meetings. Notice of regular meetings need not be given; provided, however, that if the Board of Directors shall fix or change the time or place of any regular meeting, notice of such action shall be mailed promptly, or sent by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means, to each Director who shall not have been present at the meeting at which such action was taken, addressed or transmitted to him or her at such Director's usual place of business, or shall be delivered or transmitted to him or her personally. Notice of such action need not be given to any Director who attends the first regular meeting after such action is taken without protesting the lack of notice to him or her, prior to or at the commencement of such meeting, or 8 to any Director who submits a signed waiver of notice, whether before or after such meeting. Section 2.05. Special Meetings; Notice. Special meetings of the Board of Directors shall be held whenever called by the Chairman or the Chief Executive Officer (or, in the event of the Chief Executive Officer's absence or disability, by the President or any Officer Director) or by the Secretary pursuant to a resolution approved by a majority of the entire Board of Directors, at such place (within or without the State of Delaware), date and hour as may be specified in the respective notices or waivers of notice of such meetings. Special meetings of the Board of Directors may be called on twenty-four (24) hours' notice, if notice is given to each Director personally or by telephone, including a voice messaging system, or other system or technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means, or on five (5) days' notice, if notice is mailed to each Director, addressed or transmitted to him or her at such Director's usual place of business or other designated location. Notice of any special meeting need not be given to any Director who attends such meeting without protesting the lack of notice to him or her, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting, and any business may be transacted thereat. Section 2.06. Quorum; Voting. At all meetings of the Board of Directors, the presence of a majority of the total number of Directors shall constitute a quorum for the transaction of business. Except as otherwise required by law, the vote of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. Section 2.07. Adjournment. A majority of the Directors present, whether or not a quorum is present, may adjourn any meeting of the Board of Directors to another time or place. No notice need be given of any adjourned meeting unless the time and place of the adjourned meeting are not announced at the time of adjournment, in which case notice conforming to the requirements of Section 2.05 of these By-Laws shall be given to each Director. Section 2.08. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 2.09. Regulations; Manner of Acting. To the extent consistent with applicable law, the Certificate of Incorporation and these By-Laws, the Board of Directors may adopt such rules and regulations for the conduct of meetings of the Board of Directors and for the management of the property, affairs and business of the Corporation as the Board of Directors may deem appropriate. The Directors shall act only as a Board and the individual Directors shall have no power as such. 9 Section 2.10 Action by Telephonic Communications. Members of the Board of Directors may participate in any meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in any meeting pursuant to this provision shall constitute presence in person at such meeting. Section 2.11. Resignations. Any Director may resign at any time by delivering a written notice of resignation, signed by such Director, to the Chairman or the Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 2.12. Removal of Directors. Subject to the rights of the holders of any class or series of preferred stock, if any, to elect additional Directors under specified circumstances, any Director may be removed at any time, but only for cause, upon the affirmative vote of the holders of a majority of the combined voting power of the then outstanding stock of the Corporation entitled to vote generally in the election of Directors. Any vacancy in the Board of Directors caused by any such removal may be filled at such meeting by the stockholders entitled to vote for the election of the Director so removed. A Director filling any such vacancy shall be of the same class as that of the Director whose removal created such vacancy and shall hold office until such Director's successor shall have been elected and qualified or until such Director's earlier death, resignation or removal. If such stockholders do not fill such vacancy at such meeting, such vacancy may be filled in the manner provided in Section 2.13 of these By-Laws. Section 2.13. Vacancies and Newly Created Directorships. Subject to the rights of the holders of any class or series of preferred stock, if any, to elect additional Directors under specified circumstances, and except as provided in Section 2.12, if any vacancies shall occur in the Board of Directors, by reason of death, resignation, removal or otherwise, or if the authorized number of Directors shall be increased pursuant to Section 2.02 hereof, the Directors then in office shall continue to act, and such vacancies and newly created directorships may be filled by a majority of the Directors then in office, although less than a quorum. Any Director filling a vacancy shall be of the same class as that of the Director whose death, resignation, removal or other event caused the vacancy, and any Director filling a newly created directorship shall be of the class specified by the Board of Directors at the time the newly created directorships were created. A Director elected to fill a vacancy or a newly created directorship shall hold office until such Director's successor has been elected and qualified or until such Director's earlier death, resignation or removal. Section 2.14. Compensation. The amount, if any, which each Director shall be entitled to receive as compensation for such Director's services as such shall be fixed from time to time by the Board of Directors. Section 2.15. Reliance on Accounts and Reports, etc. A Director, and any member of any committee designated by the Board of Directors shall, in the performance of such Director's duties, be fully protected in relying in good faith upon the records of 10 the Corporation and upon information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees designated by the Board of Directors, or by any other person as to the matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. ARTICLE III BOARD COMMITTEES Section 3.01. How Constituted; Committee Powers. The Board of Directors shall designate such Committees as may be required by applicable laws, rules, regulations and stock exchange listing standards, including an Audit Committee, a Compensation Committee and a Governance Committee, which Committees shall be constituted to comply with applicable requirements thereunder, and may designate one or more additional Committees, including an Executive Committee. Each Committee shall consist of one or more of the Directors of the Corporation. Each such Committee, to the extent provided in any resolution or resolutions of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which require it; provided, however, that no such Committee shall have the power or authority in reference to the following matters: (a) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the General Corporation Law of the State of Delaware to be submitted to stockholders for approval or (b) adopting, amending or repealing any By-Law of the Corporation. Each Committee shall keep regular minutes of its meetings. Section 3.02. Quorum and Manner of Acting. Except as may be otherwise provided in any resolution of the Board of Directors, at all meetings of any Committee the presence of members constituting a majority of the total membership of such Committee shall constitute a quorum for the transaction of business. The act of the majority of the members present at any meeting at which a quorum is present shall be the act of such Committee. Any action required or permitted to be taken at any meeting of any such Committee may be taken without a meeting, if all members of such Committee shall consent to such action in writing and such writing or writings are filed with the minutes of the proceedings of the Committee. The members of any such Committee shall act only as a Committee, and the individual members of such Committee shall have no power as such. Section 3.03. Action by Telephonic Communications. Members of any Committee designated by the Board of Directors may participate in a meeting of such Committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. 11 Section 3.04. Resignations. Any member of any Committee may resign at any time by delivering a written notice of resignation, signed by such member, to the Chairman or the President. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 3.05. Removal. Any member of any Committee may be removed from the position as a member of such Committee at any time, either for or without cause, by resolution adopted by a majority of the Board of Directors. Section 3.06. Vacancies. If any vacancy shall occur in any Committee, by reason of death, resignation, removal or otherwise, the remaining members shall continue to act, and any such vacancy may be filled by the Board of Directors. ARTICLE IV OFFICERS Section 4.01. Number. The officers of the Corporation shall be elected by the Board of Directors and shall be a Chairman, Chief Executive Officer, President, one or more Vice Presidents, a Chief Financial Officer, a Secretary, a Treasurer, a Controller and a General Counsel. The Board of Directors may appoint such other officers as it may deem appropriate, provided that officers of the rank of Vice-President and below may be appointed by the Compensation Committee. Such other officers shall exercise such powers and perform such duties as may be determined from time to time by the Board of Directors, Chief Executive Officer or President. Any number of offices may be held by the same person. No officer, other than the Chairman, need be a Director of the Corporation. Section 4.02. Election. Unless otherwise determined by the Board of Directors, the officers of the Corporation shall be elected by the Board of Directors at the annual meeting of the Board of Directors, and shall be elected to hold office until the next succeeding annual meeting of the Board of Directors. In the event of the failure to elect officers at such meeting, officers may be elected at any regular or special meeting of the Board of Directors. Officers of the rank of Vice-President and below may be elected by the Compensation Committee. Each officer shall hold office until such officer's successor has been elected and qualified, or until such officer's earlier death, resignation or removal. Section 4.03. Salaries. The salaries of all principal officers (as determined by the Board of Directors) of the Corporation shall be fixed by the Board of Directors. Section 4.04. Removal and Resignation; Vacancies. Any officer may be removed for or without cause at any time by the Board of Directors. Any officer may resign at any time by delivering a written notice of resignation, signed by such officer, to 12 the Board of Directors or the Chief Executive Officer. Unless otherwise specified therein, such resignation shall take effect upon delivery. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise, shall be filled by the Board of Directors. Section 4.05. Authority and Duties of Officers. The officers of the Corporation shall have such authority and shall exercise such powers and perform such duties as may be specified in these By-Laws, except that in any event each officer shall exercise such powers and perform such duties as may be required by law. Section 4.06. The Chairman. The Directors shall elect from among the members of the Board of Directors a Chairman of the Board. The Chairman shall have such duties and powers as set forth in these By-Laws or as shall otherwise be conferred upon the Chairman from time to time by the Board of Directors. The Chairman shall preside over all meetings of the Stockholders and the Board of Directors. Section 4.07. The Chief Executive Officer. The Chief Executive Officer shall have general control and supervision of the policies and operations of the Corporation. He or she shall manage and administer the Corporation's business and affairs and shall also perform all duties and exercise all powers usually pertaining to the office of a chief executive officer of a corporation. The Chief Executive Officer shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 4.08. The President. The President, subject to the authority of the Chief Executive Officer (if the President is not the Chief Executive Officer), shall have primary responsibility for, and authority with respect to, the management of the day-to-day business and affairs of the Corporation, to the extent prescribed by the Chief Executive Officer. The President shall perform such other duties and have such other powers as the Board of Directors or (if the President is not the Chief Executive Officer) the Chief Executive Officer may from time to time prescribe. Section 4.09. Absence or Disability of the Chief Executive Officer. In the event of the absence of the Chief Executive Officer or in the event of the Chief Executive Officer's inability to act, the officer, if any, designated by resolution of the Board of Directors (or in the event there is more than one such designated officer, then in the order of designation) shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers and be subject to all the restrictions of the Chief Executive Officer. Section 4.10. Vice Presidents. The Vice Presidents shall have such designations and shall perform such other duties and have such powers as the Board of Directors, the Chief Executive Officer or the President may from time to time prescribe. 13 Section 4.11. The Secretary. The Secretary shall keep or cause to be kept a record of all the proceedings of the meetings of the stockholders and of the Board of Directors, and shall cause all notices to be duly given in accordance with the provisions of these By-Laws and as required by law. The Secretary shall be the custodian of the records and of the seal of the Corporation and cause such seal (or a facsimile thereof) to be affixed to instruments when appropriate. The Secretary shall perform, in general, all duties incident to the office of secretary and such other duties as may be specified in these By-Laws or as may be assigned to him or her from time to time by the Board of Directors, the Chief Executive Officer or the President. Section 4.12. The Chief Financial Officer. The Chief Financial Officer shall be the principal financial officer of the Corporation and shall have responsibility for the financial affairs of the Corporation. The Chief Financial Officer shall perform such other duties and exercise such other powers as are normally incident to the office of chief financial officer and as may be prescribed by the Board of Directors, the Chief Executive Officer or the President. Section 4.13. The Treasurer. The Treasurer shall have charge and supervision over and be responsible for the moneys, securities, receipts and disbursements of the Corporation, and shall keep or cause to be kept full and accurate records of all receipts of the Corporation, and shall cause the moneys and other valuable effects of the Corporation to be deposited in the name and to the credit of the Corporation. The Treasurer shall cause the moneys of the Corporation to be disbursed by checks or drafts upon the authorized depositaries of the Corporation and cause to be taken and preserved proper vouchers for all moneys disbursed. The Treasurer shall perform, in general, all duties incident to the office of treasurer and such other duties as may be specified in these By-Laws or as may be assigned to him or her from time to time by the Board of Directors, the Chief Executive Officer, the President or the Chief Financial Officer. Section 4.14. The Controller. The Controller shall keep or cause to be kept correct records of the business and transactions of the Corporation. The Controller shall perform such other duties and exercise such other powers as are normally incident to the office of controller and as may be prescribed by the Board of Directors, the Chief Executive Officer or the President. Section 4.15. The General Counsel. The General Counsel shall have responsibility for the legal affairs of the Corporation. The General Counsel shall perform such other duties and exercise such other powers as are normally incident to the office of general counsel and as may be prescribed by the Board of Directors, the Chief Executive Officer or the President. Section 4.16. Additional Officers. The Board of Directors from time to time may delegate to any officer the power to appoint subordinate officers and to prescribe their respective rights, terms of office, authorities and duties. Any such officer may remove any such subordinate officer appointed by him or her, for or without cause, 14 but such removal shall be without prejudice to the contractual rights of such subordinate officer or agent, if any, with the Corporation. Section 4.17. Security. The Board of Directors may require any officer, agent or employee of the Corporation to provide security for the faithful performance of such officer's, agent's or employee's duties, in such amount and of such character as may be determined from time to time by the Board of Directors. ARTICLE V CAPITAL STOCK Section 5.01. Certificates of Stock, Uncertificated Shares. The shares of the Corporation may be either represented by certificates or uncertificated shares, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the Corporation shall be uncertificated shares. Any resolution of the Board of Directors providing for uncertificated shares shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such resolution by the Board of Directors, every holder of stock represented by certificates and, upon request, every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of, the Corporation, (i) by the Chief Executive Officer, the President or a Vice President, and (ii) by the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, representing the number of shares registered in certificate form. Such certificate shall be in such form as the Board of Directors may determine, to the extent consistent with applicable law, the Certificate of Incorporation and these By-Laws. Section 5.02. Signatures; Facsimile. All of such signatures on the certificate referred to in Section 5.01 of these By-Laws may be a facsimile, engraved or printed, to the extent permitted by law. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon a certificate representing shares of the Corporation shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Section 5.03. Lost, Stolen or Destroyed Certificates. The Board of Directors may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon delivery to the Board of Directors of an affidavit of the owner or owners of such certificate, setting 15 forth such allegation. The Board of Directors may require the owner of such lost, stolen or destroyed certificate, or such owner's legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of any such new certificate. Section 5.04. Transfer of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares, duly endorsed or accompanied by appropriate evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Within a reasonable time after the transfer of uncertificated stock, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to Sections 151, 156, 202(a) or 218(a) of the General Corporation Law of the State of Delaware. Subject to the provisions of the Certificate of Incorporation and these By-Laws, the Board of Directors may prescribe such additional rules and regulations as it may deem appropriate relating to the issue, transfer and registration of shares of the Corporation. Section 5.05. Record Date. (a) Stockholders Meetings. In order to determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. If no record date is fixed, the record date for determining stockholders for any such purpose shall be the close of business on the day next preceding the day on which notice of the meeting is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) Dividends and Other Distributions. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights of the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 5.06. Registered Stockholders. Prior to due surrender of a certificate for registration of transfer, the Corporation may treat the registered owner as the person exclusively entitled to receive dividends and other distributions, to vote, to 16 receive notice and otherwise to exercise all the rights and powers of the owner of the shares represented by such certificate, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have notice of such claim or interests. Whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certificates are presented to the Corporation for transfer or uncertificated shares are requested to be transferred, both the transferor and transferee request the Corporation to do so. Section 5.07. Transfer Agent and Registrar. The Board of Directors may appoint one or more transfer agents and one or more registrars, and may require all certificates representing shares to bear the signature of any such transfer agents or registrars. ARTICLE VI INDEMNIFICATION Section 6.01. Nature of Indemnity. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (a "Proceeding"), whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer, of another corporation, partnership, joint venture, trust or other entity, or by reason of any action alleged to have been taken or omitted in such capacity, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful; except that in the case of an action or suit by or in the name of the Corporation to procure a judgment in its favor (1) such indemnification shall be limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit, and (2) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Notwithstanding the foregoing, but subject to Section 6.05 of these By-Laws, the Corporation shall not be obligated to indemnify a director or officer of the Corporation in respect of a Proceeding (or such part thereof) instituted by such director or officer, unless such Proceeding (or such part thereof) has been authorized by the Board of Directors. 17 The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. Section 6.02. Determination that Indemnification is Proper. Unless ordered by a court, no indemnification of a present or former director or officer of the Corporation under Section 6.01 hereof (unless ordered by a court) shall be made by the Corporation if a determination is made that indemnification of the present or former director or officer is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Section 6.01 hereof. Section 6.03. Advance Payment of Expenses. Expenses (including attorneys' fees) incurred by a director or officer in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount with interest, as determined by the Corporation, if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article. Such expenses (including attorneys' fees) incurred by former directors and officers may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate. The Board of Directors may authorize the Corporation's counsel to represent such director or officer in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding. Section 6.04. Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer of the Corporation under Section 6.01, or advance of costs, charges and expenses to a director or officer under Section 6.04 of these By-Laws, shall be made promptly, and in any event within thirty (30) days, upon the written request of the director or officer. If a determination by the Corporation that the director or officer is entitled to indemnification pursuant to this Article VI is required, and the Corporation fails to respond within sixty (60) days to a written request for indemnity, the Corporation shall be deemed to have approved such request. If the Corporation denies a written request for indemnity or advancement of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty (30) days, the right to indemnification or advances as granted by this Article VI shall be enforceable by the director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing such person's right to indemnification or advances, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 6.03 of these By-Laws where the required undertaking, if any, has been tendered to the Corporation) that the claimant has not met the standard of conduct set forth in Section 6.01 of these By-Laws, but the burden of proving such defense shall be 18 on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 6.01 of these By-Laws, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 6.05. Survival; Preservation of Other Rights. The foregoing indemnification and advancement provisions shall be deemed to be a contract between the Corporation and each director or officer who serves in any such capacity at any time while these provisions as well as the relevant provisions of the General Corporation Law of the State of Delaware are in effect and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action, suit or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a "contract right" may not be modified retroactively without the consent of such director or officer. The indemnification and advancement provided by this Article VI shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and, once an event has occurred with respect to which a Director or Officer is or may be entitled to indemnification under this Article, such entitlement shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 6.06. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was or has agreed to become a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other entity against any liability asserted against such person and incurred by such person or on such person's behalf in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article VI; provided that such insurance is available on acceptable terms, which determination shall be made by the Chief Executive Officer. Section 6.07. Severability. If this Article VI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director or officer as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the fullest extent permitted by 19 any applicable portion of this Article VI that shall not have been invalidated and to the fullest extent permitted by applicable law. ARTICLE VII OFFICES Section 7.01. Registered Office. The registered office of the Corporation in the State of Delaware shall be located at Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. Section 7.02. Other Offices. The Corporation may maintain offices or places of business at such other locations within or without the State of Delaware as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE VIII GENERAL PROVISIONS Section 8.01. Dividends. Subject to any applicable provisions of law and the Certificate of Incorporation, dividends upon the shares of the Corporation may be declared by the Board of Directors at any regular or special meeting of the Board of Directors and any such dividend may be paid in cash, property or shares of the Corporation's capital stock. A member of the Board of Directors, or a member of any committee designated by the Board of Directors shall be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors, or by any other person as to matters the Director reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation, as to the value and amount of the assets, liabilities and/or net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid. Section 8.02. Reserves. There may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall think conducive to the interests of the Corporation, and the Board of Directors may similarly modify or abolish any such reserve. 20 Section 8.03. Execution of Instruments. The Chief Executive Officer, the President, any Vice President, the Secretary, the Chief Financial Officer or the Treasurer may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. The Board of Directors or the Chief Executive Officer may authorize any other officer or agent to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. Any such authorization may be general or limited to specific contracts or instruments. Section 8.04. Corporate Indebtedness. No loan shall be contracted on behalf of the Corporation, and no evidence of indebtedness shall be issued in its name, unless authorized by the Board of Directors, the Chief Executive Officer or the Chief Financial Officer. Such authorization may be general or confined to specific instances. Loans so authorized may be effected at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual. All bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation issued for such loans shall be made, executed and delivered as the Board of Directors, the Chief Executive Officer or the Chief Financial Officer shall authorize. When so authorized by the Board of Directors, the Chief Executive Officer or the Chief Financial Officer, any part of or all the properties, including contract rights, assets, business or good will of the Corporation, whether then owned or thereafter acquired, may be mortgaged, pledged, hypothecated or conveyed or assigned in trust as security for the payment of such bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation, and of the interest thereon, by instruments executed and delivered in the name of the Corporation. Section 8.05. Deposits. Any funds of the Corporation may be deposited from time to time in such banks, trust companies or other depositaries as may be determined by the Board of Directors, the Chief Executive Officer, the Treasurer or the Chief Financial Officer or by such officers or agents as may be authorized by the Board of Directors or the Chief Executive Officer, the Treasurer or the Chief Financial Officer to make such determination. Section 8.06. Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such agent or agents of the Corporation, and in such manner, as the Board of Directors or the Chief Executive Officer from time to time may determine. Section 8.07. Sale, Transfer, etc. of Securities. To the extent authorized by the Board of Directors or by the Chief Executive Officer, the President, any Vice President, the Secretary, the Chief Financial Officer or the Treasurer or any other officers designated by the Board of Directors or the Chief Executive Officer may sell, transfer, endorse, and assign any shares of stock, bonds or other securities owned by or held in the name of the Corporation, and may make, execute and deliver in the name of the Corporation, under its corporate seal (if required), any instruments that may be appropriate to effect any such sale, transfer, endorsement or assignment. 21 Section 8.08. Voting as Stockholder. Unless otherwise determined by resolution of the Board of Directors, the Chief Executive Officer, the President or any Vice President shall have full power and authority on behalf of the Corporation to attend any meeting of stockholders of any corporation in which the Corporation may hold stock, and to act, vote (or execute proxies to vote) and exercise in person or by proxy all other rights, powers and privileges incident to the ownership of such stock. Such officers acting on behalf of the Corporation shall have full power and authority to execute any instrument expressing consent to or dissent from any action of any such corporation without a meeting. The Board of Directors may by resolution from time to time confer such power and authority upon any other person or persons. Section 8.09. Fiscal Year. The fiscal year of the Corporation shall commence on the first day of January of each year (except for the Corporation's first fiscal year which shall commence on the date of incorporation) and shall terminate in each case on December 31. Section 8.10. Seal. The seal of the Corporation shall be circular in form and shall contain the name of the Corporation, the year of its incorporation and the words "Corporate Seal" and "Delaware". The form of such seal shall be subject to alteration by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed, affixed or reproduced, or may be used in any other lawful manner. ARTICLE IX AMENDMENT OF BY-LAWS Section 9.01. Amendment. These By-Laws may be amended, altered or repealed: (a) by resolution adopted by a majority of the Board of Directors at any special or regular meeting of the Board of Directors if, in the case of such special meeting only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting; or (b) at any regular or special meeting of the stockholders upon the affirmative vote of the holders of three-fourths (3/4) or more of the combined voting power of the outstanding shares of the Corporation entitled to vote generally in the election of Directors if, in the case of such special meeting only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting. 22 ARTICLE X CONSTRUCTION Section 10.01. Construction. In the event of any conflict between the provisions of these By-Laws as in effect from time to time and the provisions of the Certificate of Incorporation of the Corporation as in effect from time to time, the provisions of such Certificate of Incorporation shall be controlling. 23 EX-10.7 4 y94438exv10w7.txt FORM OF EMPLOYMENT CONTINUATION AGREEMENT EXHIBIT 10.7 WILLIAM J. WHEELER EMPLOYMENT CONTINUATION AGREEMENT DATED DECEMBER 22, 2003 METLIFE, INC. EMPLOYMENT CONTINUATION AGREEMENT THIS AGREEMENT between METLIFE, INC., a Delaware corporation (the "Company"), and William J. Wheeler (the "Executive"), dated as of this 22nd day of December, 2003. W I T N E S S E T H : WHEREAS, the Company or an Affiliate has employed the Executive in an officer position and has determined that the Executive holds a critical position with the Company or an Affiliate; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such situation in the best interests of its shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to the Executive's financial and job security; WHEREAS, the Company desires to assure itself or its Affiliate of the Executive's services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of the Executive's position without undue distraction and to exercise judgment without bias due to personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control (as so defined); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Term. The initial term of this Agreement shall commence on the date hereof and continue until the third anniversary of the date hereof. Thereafter, this Agreement will automatically renew for successive and consecutive additional three year periods following the end of its initial term and any extended term, unless the Company or the Executive gives the other party written notice at least 180 days prior to the date the term hereof would otherwise renew that it or the Executive does not want the term to be so extended; provided, however, that, the Company may not deliver a notice of nonrenewal after a Change of Control (as defined in Section 2(a) hereof). Notwithstanding anything to the contrary in this Agreement, the term of this Agreement shall in all events expire (regardless of when the term would otherwise have expired) on the third anniversary of a Change of Control. (b) Effective Date. Notwithstanding the provisions of Section 1(a) hereof, this Agreement shall govern the terms and conditions of the Executive's employment and the benefits and compensation to be provided to the Executive commencing on the date on which a Change of Control occurs (the "Effective Date") and ending on the date the term of this Agreement otherwise expires. If the Executive is not employed by the Company or an Affiliate on the Effective Date, this Agreement shall be void and without effect and shall neither constitute a contract of employment or a guarantee of employment for any period of time or limit in any way the right of the Company or any Affiliate to change the terms and conditions of the Executive's employment or terminate the Executive's employment. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any Person acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities of the Company representing 25% or more of the combined Voting Power of the Company's securities; (ii) within any 24-month period, the persons who were directors of the Company at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board of Directors of the Company (the "Board") or the board of directors of any successor to the Company; provided, however, that any director elected or nominated for election to the Board by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this subclause 2(a)(ii); (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Company which is consummated (a "Corporate Event"), and immediately following the consummation of which the stockholders of the Company immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the Company immediately prior to such Corporate Event; or (iv) any other event occurs which the Board declares to be a Change of Control. (b) Person. For purposes of the definition of Change of Control, "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as supplemented by Section 13(d)(3) of the Exchange Act, and shall include any group 2 (within the meaning of Rule 13d-5(b) under the Exchange Act); provided, however, that "Person" shall not include (x) the Company or any Affiliate, (y) the MetLife Policyholder Trust (or any person(s) who would otherwise be described herein solely by reason of having the power to control the voting of the shares held by that trust), or (z) any employee benefit plan (including an employee stock ownership plan) sponsored by the Company or any Affiliate. (c) Voting Power. "Voting Power" shall mean such number of Voting Securities as shall enable the holders thereof to cast all the votes which could be cast in an annual election of directors of a company, and "Voting Securities" shall mean all securities entitling the holders thereof to vote in an annual election of directors of a company. (d) Affiliate. An "Affiliate" shall mean any corporation, partnership, limited liability company, trust or other entity which directly, or indirectly through one or more intermediaries, controls, or is controlled by, the Company. 3. Employment Period. Subject to Section 6 hereof, the Company agrees to continue the Executive in its employ or the employ of an Affiliate, and the Executive agrees to remain in the employ of the Company or an Affiliate, for the period (the "Employment Period") commencing on the Effective Date and ending on the expiration of the term of this Agreement. 4. Business Time. During the Employment Period, the Executive agrees to devote full attention during normal business hours to the business and affairs of the Company and Affiliates and to use the Executive's best efforts to perform faithfully and efficiently the responsibilities assigned to the Executive hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing the Executive's personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which the Executive is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which the Executive is serving or with which the Executive is otherwise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company or Affiliates. 5. Compensation and Location. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly salary paid to the Executive by the Company and any Affiliate immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof, or the Board of Directors of an Affiliate or any committee thereof, or any individual having authority to take such action in accordance with the regular practices of the Company or an Affiliate. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as the "Base Salary". Neither the Base Salary nor any increase in the Base 3 Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. During the Employment Period, the Executive's Base Salary shall be paid no less frequently than monthly, except as electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company or an Affiliate may make available to the Executive. (b) Total Incentive Compensation. (i) During the Employment Period, in addition to the Base Salary, the Executive shall be afforded the opportunity to (x) receive an annual bonus in an amount which provides the Executive with at least the same bonus opportunity as other executives of the Company and Affiliates of a rank comparable to that of the Executive, and (y) participate in all long-term incentive compensation programs for key executives, including but not limited to those awards or grants made in the form of cash, stock awards, restricted stock, stock options, and other forms of long-term incentive compensation ("Long-Term Compensation"), at a level that is at least commensurate with the level made available from time to time to executives of the Company and Affiliates of a rank comparable to that of the Executive. (ii) For each fiscal year that ends during the Employment Period, the aggregate of the value of the annual bonus awarded or granted to the Executive attributable to that fiscal year (the "Annual Bonus") plus the value of the Long-Term Compensation ("Total Incentive Compensation") awarded or granted to the Executive attributable to that year, shall be no lower than the aggregate value of Total Incentive Compensation awarded or granted to the Executive attributable to any of the prior three (3) fiscal years. (iii) If any fiscal year commences but does not end during the Employment Period, the Executive shall be awarded or granted at least a pro-rated Annual Bonus attributable to the portion of the fiscal year occurring during the Employment Period, and such amount shall be no lower than the same pro-rated portion of the any of the three (3) prior Annual Bonuses awarded or granted to the Executive attributable to complete fiscal years. (iv) Each Annual Bonus shall be paid as soon as practicable following the year for which the amount (or any prorated portion) is awarded or granted, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (v) For all purposes of determining the value of Total Incentive Compensation or any of its components pursuant to this Section 5(b), (w) all compensation awarded or granted to the Executive (or, with reference to Section 5(b)(i), which the Executive has the opportunity to receive) prior to the beginning of the Employment Period shall be valued using the methods as were used by the Company or Affiliate (as applicable) in valuing that compensation for purposes of communicating that annual Total Incentive Compensation to the Executive in 4 writing; (x) all compensation awarded or granted to the Executive (or, with reference to Section 5(b)(i), which the Executive has the opportunity to receive) during the Employment Period shall be valued using the same methods as were used by the Company or Affiliate (as applicable) in valuing compensation for purposes of communicating annual Total Incentive Compensation to the Executive in writing for the final fiscal year that began prior to the Employment Period and, should that communication fail to value a particular form of compensation that must be valued for purposes of this Section 5(b)(x), otherwise using such methods as were presented or produced by the Board or the committee thereof charged with responsibility for executive compensation in writing in valuing the executive compensation programs of enterprises competitive to the Company or any Affiliates for the final fiscal year that began prior to the Employment Period; (y) with regard to fiscal years or portions thereof during to the Employment Period, only to the extent those awards or grants provided to the Executive within that fiscal year or in the first quarter of the following fiscal year free of Company or Affiliate discretion to reduce the amount or value of the award or grant shall such awards or grants be attributable to fiscal years or portions thereof; and (z) notwithstanding any other subclause of this Section 5(b)(v), with regard to the Metropolitan Life Insurance Company Long-Term Performance Compensation Plan, opportunities set shall be considered to constitute awards or grants and such opportunities set within four months after the end of the fiscal year shall be attributed to the prior fiscal year. (c) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, the Executive's dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company or Affiliate, whichever is applicable, at the level made available from time to time to other similarly situated officers. (d) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company or Affiliate, whichever is applicable, as in effect from time to time with respect to expenses incurred by other similarly situated officers. (e) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available from time to time to other similarly situated officers. (f) Indemnification. During and after the Employment Period, the Company (if the Executive is an officer or employee of the Company at the time of the events giving rise to the need for indemnity) and/or each Affiliate of which the Executive is an officer or employee at the time of the events giving rise to the need for indemnity, shall indemnify the Executive and hold the Executive harmless from and against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, on 5 the same terms and conditions applicable from time to time with respect to the indemnification of its other senior officers of comparable rank. (g) Location. During the Employment Period, the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or at any other office or location not more than 50 miles from such pre-Effective Date, except for travel reasonably required in the performance of the Executive's responsibilities. 6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 and Section 7 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's (or Affiliate's, as applicable) retirement plans as in effect from time to time. For purposes of this Agreement, "Disability" shall mean the Executive's inability to perform the duties of the Executive's position, as determined in accordance with the policies and procedures applicable with respect to the Company's (or Affiliate's, as applicable) long-term disability plan, as in effect immediately prior to the Effective Date; provided, however, that the Executive's employment may not be terminated for Disability hereunder unless the Executive has requested that the Executive be considered for, and has qualified to receive, long-term disability benefits under such plan and that such termination is consistent with law. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, the Executive may voluntarily terminate employment during the Employment Period for any reason (including early retirement under the terms of any of the Company's (or Affiliate's, as applicable) retirement plans as in effect from time to time), upon not less than 60 days' written notice to the Company, provided that any termination by the Executive pursuant to Section 6(d) hereof on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company (or Affiliate, as applicable) may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act of dishonesty or gross misconduct on the Executive's part which results or is intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of the Executive's obligations under Section 4 hereof, which violations are demonstrably willful and deliberate on the Executive's part. (d) Good Reason. After the Effective Date, the Executive may terminate the Executive's employment at any time for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the Effective Date: (i) any failure by the Company (or Affiliate, as applicable) to comply with any of the provisions of Section 5 hereof, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; 6 (ii) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor or to cause an Affiliate, as applicable, to comply with the terms of this Agreement as contemplated by Section 12(b) hereof. In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. (e) Notice of Termination. Any termination during the Employment Period by the Company (or Affiliate, as applicable) for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e) hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice given, (i) in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination or (ii) in the case of a termination for Good Reason, within 120 days of the Executive's having actual knowledge of the events giving rise to such termination. Any such Notice of Termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specify the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing the Executive's rights hereunder. (f) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. (g) Transfer of Employment. For purposes of this Agreement, in no event shall the mere transfer of employment from the Company or an Affiliate to the Company or an Affiliate, absent any further impact on the Executive, be deemed to constitute a termination of employment or Good Reason, notwithstanding any technical termination of employment in connection with such a transfer. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or the Executive's beneficiary or estate), at the times determined below, (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the 7 Executive under or in accordance with the terms and conditions of the Company's and Affiliates' otherwise applicable employee benefit plans and programs and any accrued vacation pay not yet paid by the Company or Affiliate (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's and Affiliates' plans, policies or programs (the "Additional Benefits"). Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 30 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 30 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company or an Affiliate other than for Cause and Termination by the Executive for Good Reason. The terms of this Section 7(c) shall apply if and only if (x) the Company or an Affiliate terminates the Executive's employment other than for Cause during the Employment Period or (y) the Executive terminates employment at any time during the Employment Period for Good Reason. (i) Lump Sum Payments. The Company shall pay to the Executive, at the times determined below, the following amounts: (A) the Executive's Earned Salary; (B) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual rate of Base Salary as then in effect; (2) the average of the annual bonuses awarded or granted to the Executive under the Annual Variable Incentive Plan (or any successor plan thereto), and any other Annual Bonus, for the each of the three fiscal years of the Company (or, if less, the number of prior fiscal years during which Executive was an employee of the Company or an Affiliate) ended immediately prior to the Effective Date for which an annual bonus amount had been determined by the Board (or any committee thereof) prior to the Effective Date. If the Executive was employed by the Company or Affiliates (taken as a whole) for only a portion of any fiscal year included in the period for which the average referred to in the immediately preceding sentence is determined and the bonus awarded or granted for such fiscal year took into 8 account such partial period of employment, such bonus for such fiscal year shall be annualized for purposes of calculating such average; and (3) if the Effective Date is on or prior to December 31, 2003, the average of the long-term incentive compensation amounts awarded or granted to the Executive with respect to each of the last three performance periods (or, if the Executive participated in the long-term compensation program in respect to a lesser number of such performance periods, such lesser number) ended prior to the Effective Date for which the amount awarded or granted had been determined by the Board (or any committee thereof) prior to the Effective Date; provided, however, that, the amount determined under this subclause (3) shall be reduced (but not below zero) by the "Determined Value" (as defined below) of any vested stock options, restricted stock or similar equity-based award or grant relating to the Company's common equity on the earlier to occur of the Executive's Date of Termination or the date on which a Change of Control occurs. For purposes of this Agreement, Determined Value shall mean the excess of the "Equity Value" over the price, if any, payable by the Executive in respect of such stock option or other award and Equity Value shall be determined to be (x) in the case of a Change of Control occurring by reason of a merger, recapitalization or similar transaction or as a result of a tender offer, the value received by the Company's equity holders in such transaction or the price paid in such tender offer (with the value of any non-cash consideration to be determined in good faith by the Compensation Committee of the Board as constituted immediately prior to the Effective Date) and (y) in the case of any other Change of Control or where the date as of which such Determined Value is measured is the Executive's Date of Termination, the average of the high and low reported sales prices of such equity on the principal securities market on which such equity is traded on the relevant date; and (C) the Accrued Obligations. The Earned Salary and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 30 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. 9 (ii) Continuation of Benefits and Additional Pension Credit. The Executive (and, to the extent applicable, the Executive's dependents) shall be entitled, after the Date of Termination until the third anniversary of the Date of Termination (the "End Date"), to continue participation in all of the Company's (or Affiliate's, as applicable) employee and executive plans providing medical, dental and long-term disability benefits (collectively, the "Continuing Benefit Plans"); provided, however, that the participation by the Executive (and, to the extent applicable, the Executive's dependents) in any Continuing Benefit Plan shall cease on the date, if any, prior to the End Date on which the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer ("Prior Date"). The Executive's participation in the Continuing Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company (or Affiliate, as applicable) through the End Date or the Prior Date. To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. In addition, the Company (or Affiliate, as applicable) shall grant the Executive service credit, for purposes of all pension and defined benefit plans and arrangements of the Company and any Affiliate in which the Executive participates, through the earlier of (x) the third anniversary of the effective date of the Notice of Termination, or (y) the sixty-fifth birthday of the Executive, such that when the Executive's pension or defined benefit is determined such credited service will be taken into account. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d) hereof, the amounts payable to the Executive pursuant to this Section 7 following termination of the Executive's employment shall be in full and complete satisfaction of the Executive's rights under this Agreement and any other claims the Executive may have in respect of the Executive's employment by the Company or any of its Affiliates. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Affiliates. (e) Modification of Payments by the Company. (i) Application of Section 7(e) Hereof. In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any Affiliate under any other plan, agreement, or arrangement that would be taken into account for purposes of determining if an "excess parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, as amended, has been made (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and would thereby subject the Executive to the tax (the "Excise Tax") imposed under Section 10 4999 of the Code (or any similar tax that may hereafter be imposed), the Company shall pay to the Executive an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local (including foreign) income tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(e), but before deduction for any Federal, state or local (including foreign) income or employment tax withholding on such Covered Payments, shall be equal to the aggregate value of the Covered Payments; provided, however, that if the aggregate value of all Covered Payments exceeds the maximum amount which can be paid to the Executive without the Executive incurring an Excise Tax (the "Cap Amount") by less than ten per cent (10%) of the Cap Amount, the amounts payable to the Executive under this Section 7 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax as a result of all Covered Payments (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, the Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. (ii) Calculation of Benefits. Promptly after delivery of any Notice of Termination, the Company shall notify the Executive of the aggregate present value of all Covered Payments to which the Executive would be entitled under this Agreement and any other plan, program or arrangement as of the projected Date of Termination, together with the projected maximum payments, determined as of such projected Date of Termination that could be paid without the Executive being subject to the Excise Tax. (iii) Application of Section 280G. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, or any amounts or benefits otherwise paid or distributed to the Executive by the Company or any Affiliate under any other plan, agreement, or arrangement (in whole or in part), either do not constitute "parachute payments" or represent reasonable compensation for 11 personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the portion of the "base amount allocable to such Covered Payments," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iv) Adjustments in Respect of the Payment Cap. If the Executive receives reduced payments and benefits under this Section 7(e) (or this Section 7(e) is determined not to be applicable to the Executive because the Accountants conclude that Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to the Executive or for the Executive's benefit are in an amount that would result in the Executive being subject an Excise Tax, then the Accountants shall determine whether the Executive should have received the Tax Reimbursement Payment described in Section 7(e)(i), or whether the amounts payable to the Executive hereunder would still have been reduced pursuant to Section 7(e)(i). If the Tax Reimbursement Payment would have been due, the Accountants shall determine the amount of any interest and penalties that may be imposed on the Executive by reason having failed to have timely paid any Excise Tax (the "Penalty Amount"), and the amount of the Tax Reimbursement Payment due, treating the Penalty Amount as a Covered Payment. In the event a Tax Reimbursement Payment is due, the Company shall promptly (but in no event later than ten (10) business days after the Accountants have determined and informed the Company of the amounts due hereunder) pay the Executive such Tax Reimbursement Payment (as calculated in accordance with the immediately preceding sentence) and the Penalty Amount. If the Executive would still be subject to a reduction in the Covered Payments due hereunder, the Accountants shall determine the amount by which the Covered Payments exceeded the Cap Amount and such excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If the Executive receives reduced payments and benefits by reason of this Section 7(e) and it is established pursuant to a Final Determination that the Executive could have received a greater amount without exceeding the Cap Amount, then the Company shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the Cap Amount, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. For 12 greater clarity, if the Executive receives increased payments and benefits under this Section 7(e)(i), then this Section 7(e)(iv) shall not apply. (f) Notwithstanding anything else in this Section 7 to the contrary, nothing in this Section 7 shall be construed to release the Company from (or to otherwise waive or modify) the Company's obligation to indemnify the Executive pursuant to Section 5(f) hereof. 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any Affiliate and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company or any Affiliate, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any Affiliate at or subsequent to the Date of Termination shall be paid in accordance with such plan or program. 9. No Offset; Deferrals. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be diminished or otherwise affected by any circumstances, including, but not limited to, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. For purposes of this Agreement, except for Section 7(e), the value of an amount or property awarded, granted, or paid to the Executive shall be determined notwithstanding any elective deferrals of payment. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, but not limited to, the Executive's reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if the Executive shall not prevail, in whole or in part, as to at least one material issue as to the validity, enforceability or interpretation of any provision of this Agreement. 11. Surviving Agreements. The Agreement to Protect Corporate Property previously executed by the Executive, any written stock option agreement into which the Executive entered with the Company, and any Compensation Protection Agreement into which the Executive entered with the Company are incorporated herein and made a part hereof. The Executive and the Company hereby reaffirm their respective commitments under the agreements to which reference is made in this Section 11, and again agree to be 13 bound by each of the covenants contained therein for the benefit of the Company and Affiliates in consideration of the benefits made available to the Executive hereby. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall cause each Affiliate, as applicable, to comply with the terms of this Agreement. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would have been required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c) hereof, any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in New York City and except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity; provided for greater clarity, however, that in no event shall the arbitrator(s) be bound to follow the rules of evidence, discovery, or procedure that would applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified other than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein, and completely supersedes and replaces any prior Employment Continuation Agreement (including any such amended and restated agreement) between the Executive and the Company and/or an Affiliate. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those 14 that are expressly contained herein. The Executive acknowledges entering into this Agreement of the Executive's own free will and accord, and with no duress, that the Executive has read this Agreement and understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: MetLife, Inc. One Madison Avenue New York, New York 10010 Attn.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or the Executive's rights hereunder on any occasion or series of occasions. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 15 (j) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and the Company has caused this Agreement to be executed in its name on its behalf. METLIFE, INC. By: /s/ Lisa M. Weber -------------------------------------- Title: Sr. Executive VP & Chief Administrative Officer WITNESSED: /s/ Ana Molina - ---------------------------- EXECUTIVE: /s/ William J. Wheeler ------------------------------------------ WITNESSED: /s/ Lily Salzberg - ---------------------------- 16 EX-10.9 5 y94438exv10w9.txt AGREEMENT DATED AUGUST 26, 2003 EXHIBIT 10.9 Human Resources Service Center 500 Schoolhouse Road, Johnstown, PA 15904-2914 [METLIFE(R) LOGO] AGREEMENT, WAIVER AND GENERAL RELEASE This Agreement sets forth the entire agreement and understanding which has been reached relative to the cessation of your (Gerald Clark) employment with MetLife Group, Inc. ("MetLife"). It is fully agreed and understood as follows: 1. As a material inducement to MetLife to enter into this Agreement, you agree for yourself and your relatives, heirs, executors, administrators, successors, and assigns that you hereby fully and forever release and discharge MetLife, its parents, subsidiaries, affiliates, and agents and its past, present, and future directors, officers, and employees, agents, representatives, employee benefits plans or funds and the fiduciaries thereof, successors, and assigns (collectively, "the Company") from any and all claims, charges, demands, actions, liability, damages, sums of money, back pay, attorneys' fees, or rights of any and every kind or nature, accrued or unaccrued, which you ever had, now have or may have, whether known or unknown, against the Company arising out of any act, omission, transaction, or occurrence up to and including the date you execute this Agreement including, but not limited to, (i) any claim arising out of or related to your employment by the Company or the cessation thereof, (ii) any alleged violations of any federal, state, or local fair employment practice or benefits laws, including the Age Discrimination in Employment Act, as amended, or the Older Workers Benefit Protection Act, or other employee relations statute, executive order, law, or ordinance, (iii) any alleged violations of any duty or other employment-related obligation or other obligations arising out of contract, tort, tortious course of conduct, libel or slander, defamation, public policy, law, or equity, and (iv) any claim on your behalf in any action brought by any administrative agency or other party (including claims for damages, in whatever form, and for reinstatement). You acknowledge that, prior to your execution of this Agreement, you have agreed that your employment with MetLife will end effective December 30, 2003 and you have indicated that you will retire from active service with MetLife effective December 31, 2003, and that any and all claims arising from the cessation of your active employment and your decision to retire are included in this release. This Agreement does not affect any rights that you may have arising out of events that occur after you have executed this Agreement or affect any vested benefits or rights under employee benefit plans under ERISA. 2. As a further material inducement to MetLife to enter into this Agreement, you agree to cooperate with and provide information to or at the request of the Company, its attorneys or representatives, upon reasonable notice, at reasonable times and in reasonable places, including but not limited to, being available for consultation, preparation for testimony or as a witness in connection with any investigation, administrative proceeding or litigation relating to any matter in which you were involved or of which you have knowledge as a result of or in connection with your employment at the Company. This undertaking is subject to the Company's obligation to pay you the reasonable and documented out-of-pocket expenses actually incurred in complying with your obligations under this Section. 3. In consideration for the release set forth in this Section 1, MetLife agrees to provide you with a lump sum payment under the Annual Variable Incentive Plan in an amount approved by the Board of Directors. To this end, the Company will recommend to the Board of Directors that the amount of this payment be $675,000.00. The approved payment amount will be subject to required tax withholding and will be paid at the time payments are made to all other Plan participants. In addition, MetLife agrees to pay you a special enhancement to your pension benefit. Along these lines, you will receive this special enhancement in addition to the benefits to which you are otherwise entitled under the terms of the Metropolitan Life Retirement Plan for United States Employees ("Qualified Plan") and the MetLife Auxiliary Pension Plan ("Nonqualified Plan"). Your special enhancement benefit will be your total pension benefit under the Qualified Plan and the Nonqualified Plan (combined), calculated as if you had two additional years of Company service at the time of your retirement and as if you were two years older than your actual age at the time of your retirement, less the amount of your pension benefit determined under the Qualified Plan and Nonqualified Plan (combined) without any enhancement to your age and service. This special enhancement benefit will be paid to you at the same time and under the same method as you elect with regard to the payment of your benefit under the Nonqualified Plan. You acknowledge that the lump sum payment amount which the Company will recommend to the Board of Directors and the ultimate payment amount approved by such Board, in addition to the special pension arrangement provided for in this Section 3 exceed anything to which you would otherwise be entitled under any policy, plan, and/or procedure or any agreement with the Company, and that they represent full and complete consideration for the release you are giving the Company in this Agreement. If that release is upheld in an action by you seeking additional consideration for those claims, you will be in breach of this Agreement. Further, neither this Agreement nor the payment nor special arrangements to be provided pursuant to this Section 3 in any way constitutes an admission on the part of the Company as to the violation of any law or any obligation to you. 4. By executing this Agreement, you acknowledge that the Company shall have no obligation to rehire you at any time. 5. You further agree, except for the provision of information to governmental agencies, that neither you nor your agents, attorneys, or representatives will publish, publicize, or reveal any Company information obtained by you, your agents, attorneys, or representatives that relates to: (i) your employment with the Company or the cessation of your employment with MetLife, (ii) any claims that were raised or could have been raised in any action as of the date you execute this Agreement, or (iii) the facts underlying any such claims. You further agree, except for the provision of information to governmental agencies, that neither you nor your agents, attorneys, or representatives will communicate in any way to any former, present, or future employees of the Company or to any person or corporation any information that relates to your employment with the Company or to any claims which could have been raised in any action in connection with the cessation of your employment with MetLife unless required by law to do so. 6. You will continue as a Vice-Chairman and member of the Board of Directors of MetLife, Inc. through December 30, 2003, and you will resign from your Vice-Chairmanship and membership effective with your discontinuance of your active employment with MetLife. In the event that you remain as a director or an officer of any Company entity up to the time of your discontinuance of your active employment with MetLife, you hereby resign from such capacity effective upon the discontinuance of your active employment with the Company. Your agree to execute any additional, more specific document the Company may request to effect any or all of these resignations. 7. If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, void or unenforceable, such provision shall be of no force and effect. However, the illegality or unenforceability of such provision shall have no effect upon, and shall not impair the enforceability of any other provision of this Agreement; provided, however, that upon any finding by a court of competent jurisdiction that the covenant and release provided in Section 1 above is illegal, void, or unenforceable, you agree to execute a release and/or waiver of the same scope as the release provided in Section 1 that is legal and enforceable within 45 days of MetLife offering you such a release and/or waiver, and that if you fail to do so that you will return promptly to MetLife any additional money that became available to you by virtue of the special arrangements made for you by MetLife pursuant to this Agreement. 8. Moreover, you further agree that you will not make any disparaging comments or statements to the press, to present or former employees of MetLife (or of its parents, subsidiaries or affiliates), to any individual or entity with whom or which MetLife or any of its parents, subsidiaries or affiliates has or has had a business relationship, including present and former clients or customers, or to others, about any MetLife employee or 2 officer or comments which could affect adversely the conduct of MetLife's business or its reputation or the conduct of business or the reputation of any of MetLife's parents, subsidiaries or affiliates. MetLife agrees that it will use its best efforts to ensure that the Company's senior and executive officers do not make any disparaging comments or statement to the press, to present or former employees of MetLife (or of its parents, subsidiaries or affiliates) about you that could affect adversely your reputation. In an event of a breach of this Section 8, the non-breaching party may seek appropriate legal relief for damages, including attorneys' fees and costs, in a court of competent jurisdiction. However, such breach, in and of itself, will not relieve the parties from any of their other obligations under this Agreement. 9. If, on or prior to the date that your active employment with MetLife ceases ("date of discontinuance"), you should die, become disabled, or for any other reason, your employment is not discontinued by that date, this Agreement will automatically be null and void. 10. You acknowledge that MetLife has advised you in writing that you have twenty-one (21) days in which to review this Agreement and fully consider its terms prior to signing it and that you should consult with legal counsel prior to signing this Agreement. You may accept this Agreement by fully executing it and returning it to MetLife in accordance with the return instructions provided with this Agreement by no later than 5:00 p.m. on the twenty-first (21st) day after your receipt of it. After you have executed this Agreement, you will have seven (7) days to revoke this Agreement, which you may do by indicating your desire to do so in writing directed to MetLife in accordance with the return instructions provided with this Agreement which must be received by MetLife no later than 5:00 p.m. on the seventh (7th) day following the date on which you executed this Agreement. This Agreement will become effective on the eighth (8th) day (the "Effective Date") following your execution of this Agreement, provided you have not revoked it. In the event that you do not accept this Agreement as set forth above, or in the event that you revoke this Agreement prior to its Effective Date, this Agreement, including but not limited to the obligation of MetLife to provide any enhanced benefit pursuant to Section 3, shall automatically be null and void. 11. You affirm that this Agreement has been executed voluntarily by you, and may not be changed except in a writing that specifically references this Agreement and that is signed by you and an officer of MetLife. With the exception of the Agreement to Protect Corporate Property attached hereto as Exhibit A, or any written stock option agreement into which you may have entered during your employment with the Company, which remain in full force and effect, this Agreement constitutes the full understanding between us. You affirm that no other promises or agreements of any kind have been made to you by any person or entity whatsoever to cause you to sign this Agreement, and that you fully understand the meaning and intent of this Agreement. 12. Pursuant to section 13(c) of the Amended and Restated Employment Continuation Agreement dated November 30, 2001 between MetLife, Inc. and yourself ("Employment Continuation Agreement"), you and MetLife, Inc. agree that your Employment Continuation Agreement shall terminate upon the effective date 3 of this Agreement and you will thereafter no longer be covered by the Employment Continuation Agreement nor entitled to receive any payments or benefits pursuant to its terms. /s/ Gerald Clark 8/26/03 - ----------------------------- ----------------------- Signature Date STATE OF NEW JERSEY) ): COUNTY OF MORRIS) On this 26 day of August, 2003, before me personally came Gerald Clark, to me known and known to me to be the person described in and who executed this Agreement, Waiver, and General Release, and he duly acknowledged to me that he executed the same. /s/ Jeanne Troup ----------------------------- Notary Public JEANNE TROUP NOTARY PUBLIC OF NEW JERSEY MY COMMISSION EXPIRES NOV. 25, 2006 MetLife Group, Inc. By: /s/ Lisa M. Weber August 8, 2003 ------------------------------------- ----------------------- Lisa M. Weber Date Senior Executive Vice-President and Chief Administrative Officer 4 EX-10.25 6 y94438exv10w25.txt FIRST AMENDMENT TO THE THREE-YEAR CREDIT AGREEMENT EXHIBIT 10.25 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of December 19, 2003 (this "Amendment"), amends the Credit Agreement, dated as of April 23, 2002 (the "Credit Agreement"), among METLIFE, INC., METROPOLITAN LIFE INSURANCE COMPANY and METLIFE FUNDING, INC., as borrowers, certain Lenders party hereto (the "Lenders"), BANK ONE, NA, CITIBANK N.A., JP MORGAN CHASE BANK AND WACHOVIA BANK, N.A., as Co-Syndication Agents, and BANK OF AMERICA, N.A., as Administrative Agent (the "Administrative Agent") for the Lenders. Terms defined in the Credit Agreement are, unless otherwise defined herein or the context otherwise requires, used herein as defined therein. WHEREAS, the parties hereto have entered into the Credit Agreement, which provides for the Lenders to extend certain credit facilities to the Borrowers from time to time; and WHEREAS, the parties hereto desire to amend the Credit Agreement in certain respects as hereinafter set forth; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto agree as follows: SECTION 1. AMENDMENT. Effective as of the date hereof, 1.1 Definition. The definition of "L/C Commitment" in Section 1.1 of the Credit Agreement is hereby amended to state in its entirety as follows: "L/C Commitment" means the commitment of each Lender to severally Issue Letters of Credit from time to time under Article III, in an amount not to exceed at any time outstanding the amount set forth on Schedule 2.1, as reduced pursuant to Section 2.7 or changed by one or more assignments under Section 10.4. The combined L/C Commitments on the date of the First Amendment hereto are $500,000,000." 1.2 Schedule 2.1. Schedule 2.1 of the Credit Agreement is hereby amended to state in its entirety as set forth in Schedule 2.1 hereto. SECTION 2. CONDITIONS PRECEDENT. This Amendment shall become effective when the Administrative Agent shall have received all of the following documents duly executed, dated the date hereof or such other date as shall be acceptable to the Administrative Agent, and in form and substance satisfactory to the Administrative Agent: (a) Amendment. This Amendment, duly executed by the Borrowers, the Issuing Lender, the Administrative Agent and the Required Lenders. (b) Secretary's Certificate. A certificate of the secretary or an assistant secretary of each Borrower, as to (i) resolutions of the Board of Directors of such Borrower then in full force and effect authorizing the execution, delivery and performance of this Amendment and each other document described herein, and (ii) the incumbency and signatures of those officers of such Borrower authorized to act with respect to this Amendment and each other document described herein. SECTION 3. REPRESENTATIONS AND WARRANTIES. To induce the Lenders and the Administrative Agent to enter into this Amendment, the Borrowers hereby represent and warrant to the Administrative Agent and each Lender as follows: 3.1 Due Authorization, Non-Contravention, etc. The execution, delivery and performance by the Borrowers of this Amendment are within the Borrowers corporate powers, have been duly authorized by all necessary corporate action, and do not (a) contravene the Borrowers' charters, by-laws or other organizational documents; (b) contravene any contractual restriction, law or governmental regulation or court decree or order binding on or affecting the Borrowers; or (c) result in, or require the creation or imposition of, any Lien on any of the Borrowers' properties. 3.2 Government Approval, Regulation, etc. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person is required for the due execution, delivery or performance by the Borrowers of this Amendment. 3.3 Validity, etc. This Amendment constitutes the legal, valid and binding obligation of the Borrowers enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. SECTION 4. MISCELLANEOUS. 4.1 Continuing Effectiveness, etc. This Amendment shall be deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as amended hereby, shall remain in full force and effect and is hereby ratified, approved and confirmed in each and every respect. After the effectiveness of this Amendment in accordance with its terms, all references to the Credit Agreement in the Loan Documents or in any other document, instrument, agreement or writing shall be deemed to refer to the Credit Agreement as amended hereby. 4.2 Payment of Costs and Expenses. The Borrower agrees to pay on demand all expenses of the Administrative Agent (including the fees and out-of-pocket expenses of counsel to the Administrative Agent) in connection with the negotiation, preparation, execution and delivery of this Amendment. 2 4.3 Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment or affecting the validity or enforceability of such provision in any other jurisdiction. 4.4 Headings. The various headings of this Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this Amendment or any provisions hereof. 4.5 Execution in Counterparts. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. 4.6 Governing Law. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK. 4.7 Successors and Assigns. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. METLIFE, INC. /s/ Anthony J. Williamson ------------------------------------------ By: Anthony J. Williamson Title: Senior Vice President and Treasurer METROPOLITAN LIFE INSURANCE COMPANY /s/ Anthony J. Williamson ------------------------------------------ By: Anthony J. Williamson Title: Senior Vice President and Treasurer METLIFE FUNDING, INC. /s/ Anthony J. Williamson ------------------------------------------ By: Anthony J. Williamson Title: Chairman, President and Chief Executive Officer S-1 BANK OF AMERICA, N.A., individually and as Administrative Agent, By: /s/ Leslie Nannen -------------------------------------- Title: Vice President S-2 BANK ONE, NA By: /s/ Gretchen Roetzer --------------------------- Title: Director S-3 CITIBANK, N.A. By: /s/ David A. Dodge --------------------------- Title: Managing Director S-4 JPMORGAN CHASE BANK /s/ Heather Lindstrom ------------------------------ By: Heather Lindstrom Title: Vice President S-5 WACHOVIA BANK, NATIONAL ASSOCIATION /s/ Kimberly Shaffer ----------------------------- By: Kimberly Shaffer Title: Director S-6 THE NORTHERN TRUST COMPANY /s/ Eric Dybing ------------------------------------ By: Eric Dybing Title: Second Vice President The Northern Trust Company S-7 DEUTSCHE BANK AG, NEW YORK BRANCH By: Title: By: Title: S-8 ROYAL BANK OF CANADA /s/ A. Birr ----------------------------- By: Alexander Birr Title: Authorized Signatory S-9 CREDIT SUISSE FIRST BOSTON Acting through its Cayman Islands Branch /s/ Jay Chall ------------------------------- By: Jay Chall Title: Director /s/ Cassandra Droogan ------------------------------- By: Cassandra Droogan Title: Associate S-10 U.S. BANK NATIONAL ASSOCIATION By: Title: S-11 FLEET NATIONAL BANK /s/ Marcio Chapina ------------------------------ By: Marcio Chapina Title: Vice President S-12 MELLON BANK, N.A. /s/ Carrie Burnham ------------------------------- By: Carrie Burnham Title: Assistant Vice President S-13 BNP PARIBAS /s/ Laurent Vanderzyppe ---------------------------- By: Laurent Vanderzyppe Title: Director /s/ Phil Truesdale ---------------------------- By: Phil Truesdale Title: Director S-14 PNC BANK, NATIONAL ASSOCIATION /s/ Kirk Seagers ------------------------------- By: Kirk Seagers Title: Vice President & Director S-15 STATE STREET BANK AND TRUST COMPANY By: /s/ Illegible Title: Vice President S-16 LEHMAN COMMERCIAL PAPER, INC. /s/ Jane E. Gillard -------------------------------- By: Jane E. Gillard Title: Authorized Signatory S-17 Schedule 2.1 COMMITMENTS AND L/C COMMITMENTS
Lender Commitment L/C Commitment - ----------------------------------- --------------- -------------- Bank of America, N.A. $ 110,000,000 $ 44,000000 Bank One, NA $ 97,500,000 $ 39,000,000 Citibank, N.A. $ 97,500,000 $ 39,000,000 JPMorgan Chase Bank $ 97,500,000 $ 39,000,000 Wachovia Bank, NA $ 97,500,000 $ 39,000,000 BNP Paribas $ 85,000,000 $ 34,000,000 Credit Suisse First Boston $ 85,000,000 $ 34,000,000 Deutsche Bank AG, New York Branch $ 85,000,000 $ 34,000,000 Lehman Commercial Paper, Inc. $ 85,000,000 $ 34,000,000 Fleet National Bank $ 70,000,000 $ 28,000,000 Mellon Bank, N.A. $ 70,000,000 $ 28,000,000 The Northern Trust Company $ 70,000,000 $ 28,000,000 State Street Bank and Trust Company $ 50,000,000 $ 20,000,000 U.S. Bank National Association $ 50,000,000 $ 20,000,000 Royal Bank of Canada $ 50,000,000 $ 20,000,000 PNC Bank, NA $ 50,000,000 $ 20,000,000 COMMITMENTS $ 1,250,000,000 $ 500,000,000
1 EX-10.39 7 y94438exv10w39.txt METRO. LIFE SUPPLEMENTAL AUX. SAV. AND INV. PLAN EXHIBIT 10.39 METROPOLITAN LIFE AUXILIARY SAVINGS AND INVESTMENT PLAN METROPOLITAN LIFE AUXILIARY SAVINGS AND INVESTMENT PLAN (Restated Effective Through December 15, 2003) Metropolitan Life Insurance Company, with respect to its own employees, and Metropolitan Property and Casualty Insurance Company, MetLife Credit Corp., MetLife Funding, Inc., MetLife Group, Inc., MetLife Securities, Inc., MetLife Bank, National Association (limited to employees of the MetLife Bank Division) and Texas Life Insurance Company, for whom all obligations under this Plan for their respective employees are assumed by Metropolitan Life Insurance Company, hereby amend and restate this Plan effective December 15, 2003. Article 1 - Purpose of Plan The purpose of this Plan is to provide Company matching contributions on behalf of employees and their beneficiaries whose Company matching contributions under the Savings and Investment Plan are reduced or eliminated solely because of Sections 415(c) and/or 401(a)(17) of the Internal Revenue Code of 1986, as amended ("Code"). Article 2 - Definitions 2.1 "Beneficiary" means one or more persons designated by a Participant or otherwise determined under Section 4.5 to receive that portion of the Participant's vested account balance which has not been distributed as a result of his or her death. 2.2 "Company" means Metropolitan Life Insurance Company, Metropolitan Property and Casualty Insurance Company, MetLife Credit Corp., MetLife Funding, Inc., MetLife Group, Inc., MetLife Securities, Inc., MetLife Bank, National Association (limited to employees of the MetLife Bank Division) and Texas Life Insurance Company. 2.3 "Participant" means any employee of the Company participating in the Savings and Investment Plan who satisfies the requirements of Article 3. 2.4 "Plan" means the Metropolitan Life Auxiliary Savings and Investment Plan. 2.5 "Plan Administrator" means Metropolitan Life Insurance Company. 2.6 "Plan Year" means the calendar year. 2.7 "Savings and Investment Plan" means the Savings and Investment Plan for Employees of Metropolitan Life and Participating Affiliates, a qualified 401(k) plan. 2.8 "Termination of Employment" means the voluntary or involuntary severance of the employment relationship between the Participant and the Company or any illness or injury for which the Participant, who has one or more years of continuous service, is receiving disability benefits (including short-term and long-term disability) from the Company's disability plans for a continuous period of 24 months. Article 3 - Participation Each participant in the Savings and Investment Plan whose compensation exceeds the limitation of Section 401(a)(17) of the Code and whose Company matching contributions under the Savings and Investment Plan are reduced or eliminated because of the application of (i) - 2 - section 415(c) of the Code and/or (ii) section 401(a)(17) of the Code shall be a Participant under this Plan. Article 4 - Vesting and Payment of Benefits 4.1 Company Matching Contributions. (a) In General. Except as provided in subsection (b), for each Plan Year, the Company shall contribute to this Plan, on behalf of each Participant, the amount of Company Matching Contributions that would have been made to the Savings and Investment Plan had the limitations of Sections 401(a)(17) and/or 415(c) of the Code not applied to the Participant's account under the Savings and Investment Plan. (b) Suspension for Savings and Investment Plan Withdrawals. Notwithstanding subsection (a), no Company Matching Contributions shall be made for the six-month period beginning on the first day of the second month after the date that the Participant receives (1) a hardship withdrawal of his or her 401(k) contributions under the provisions of the Savings and Investment Plan or (2) a withdrawal of Company matching contributions under the provisions of the Savings and Investment Plan. 4.2. Vesting of Company Matching Contributions. Company Matching Contributions under this Plan shall vest in accordance with the vesting schedule applicable to Company matching contributions under the Savings and Investment Plan. 4.3 Elections and Tracking of Investment Performance. Subject to the Company's consent, a Participant may make an election with respect to the investment allocation of future Company contributions as well as existing balances. Such allocation shall be pegged to the performance of - 3 - one or more of the following funds set forth under the Savings and Investment Plan: the Fixed Income Fund, the Equity Fund, the Common Stock Index Fund, the Small Company Stock Fund, the International Equity Fund, the Emerging Markets Equity Fund, the Value Equity Fund, the Blended Small Company Stock Fund and/or the MetLife Company Stock Fund thereunder. No investment allocation election shall represent an actual investment in any such fund, but shall merely reflect the performance of such fund. Thus, the Participant's account balance under this Plan shall be adjusted for income, gains and losses in the same manner as if such Participant had directed the investment of his or her account balance among one or more of the aforementioned funds under the Savings and Investment Plan. The Participant's ability to change the investment allocation of future contributions and existing balances shall be subject to the same rules and restrictions as apply under the Savings and Investment Plan; however, no Participant shall have the right to: (i) exercise voting, tender or exchange rights with respect to amounts treated as if they were invested in the MetLife Company Stock Fund or (ii) receive any distribution from the Plan in a form other than cash. If a Participant fails to specify the investment allocation of contributions to this Plan, then earnings, gains and/or losses on such contributions shall be determined using the returns from the Fixed Income Fund until changed by the Participant or Beneficiary. Notwithstanding the foregoing, it will be within the discretion of the Company whether contributions are actually invested according to each Participant's stated preferences. 4.4. Participant's Election of Time and Form of Benefit Distribution. (a) In General. Except as otherwise provided in this Section, a Participant may elect, subject to the consent of the Company, to receive benefits in the form of a single sum, - 4 - installments or an annuity subject to the same duration, terms and conditions under which such methods of distribution are payable under the Savings and Investment Plan. Such election shall be made on a form prescribed by the Company and shall require the Participant to designate the mode of payment requested and the date on which benefits will commence to be paid. Benefits shall become payable on the date elected by the Participant in the election form which date shall not be earlier than the later of (i) twelve (12) months subsequent to the date on which the Participant files the election form with the Company; and (ii) the day before the date on which the Participant has a Termination of Employment. If the Participant has a Termination of Employment prior to attaining age 70 1/2, and no benefit election form is received from a Participant by April 1st of the calendar year following the calendar year in which the Participant attained age 70 1/2, such Participant will be deemed to have elected to receive his or her account balance in the form of a single sum by April 1st of the calendar year following the calendar year in which he or she attains age 71 1/2, and such amount shall be paid accordingly. (b) Cash-out of a Participant's Account Balance. If, as of the date of such Participant's Termination of Employment or such other date which is established by the Plan Administrator and communicated to the affected Participants, such Participant's vested account balance does not exceed $20,000, such Participant's vested account balance will be distributed in a single sum as soon as practicable following his or her death or Termination of Employment, notwithstanding any election that such Participant may have made under subsection (a) regarding the form and time of commencing distribution of his or her vested account balance. - 5 - (c) No In-Service Withdrawals or Loans. Notwithstanding any provision in this Plan to the contrary, no benefits under this Plan will be eligible for any in-service withdrawal by a Participant or any loans to a Participant. (d) Distributions after Participant's Death. If, at the time of the Participant's death, benefits had commenced but amounts remained undistributed to such Participant, then benefit payments shall continue to be made to the Participant's Beneficiary (determined in accordance with Section 4.5) in accordance with the method by which benefit payments were being made to the Participant. If, at the time of the Participant's death, benefit payments had not commenced to be made to him or her, then, except as otherwise provided in this Article, the Participant's Beneficiary may elect, subject to the consent of the Company, to receive benefits in the form of a single sum, installments or an annuity subject to the same duration, terms and conditions under which such methods of distribution are payable to beneficiaries under the Savings and Investment Plan. Such election shall be made on a form prescribed by the Company and shall require the Beneficiary to designate the mode of payment requested and the date on which benefits will commence to be paid. Benefits payable in any form shall become payable on the date elected by the Beneficiary in the election form which date shall not be earlier than twelve (12) months subsequent to the date on which the Beneficiary files the election form with the Plan Administrator; however, the benefit selected must require the entire account balance to be paid to the Beneficiary no later than the December 31 of the year which is the fifth anniversary of the Participant's death. If no such election is made, the attempted election is deemed by the Plan Administrator to be ineffective, or the Company does not consent to the time or method of - 6 - distribution elected by the Beneficiary, then the Participant's vested account balance shall be distributed to the Beneficiary in the form of a single sum as soon as practicable. 4.5 Beneficiary. Except as provided below, the Participant's Beneficiary shall be the beneficiary designated by the Participant under the Savings and Investment Plan. However, if the Participant filed a beneficiary designation under this Plan, such designation shall supersede the Participant's beneficiary designation under the Savings and Investment Plan and upon the Participant's death, benefits shall be payable to the primary Beneficiary(ies) designated under this Plan. If there is more than one beneficiary under the Savings and Investment Plan or more than one primary Beneficiary under this Plan and the beneficiary designation does not specify the percentage of the Participant's benefit to be paid to each such Beneficiary, each Beneficiary shall share equally in the benefits under the Plan. If one or more Beneficiaries predecease the Participant, the surviving Beneficiary(ies) shall share equally in the deceased Beneficiary's portion of the Plan benefits. If all primary Beneficiaries predecease the Participant, benefits shall be payable to the contingent Beneficiary(ies) upon the Participant's death. If there is more than one contingent Beneficiary(ies), and the contingent Beneficiary designation does not specify the percentage of the Participant's benefit to be paid to each such Beneficiary, each contingent Beneficiary shall share equally in the benefits under the Plan. If one or more contingent Beneficiaries predecease the Participant, the surviving contingent Beneficiary(ies) shall share equally in the deceased contingent Beneficiary's portion of the Plan benefits. If all contingent Beneficiaries predecease the Participant, or if there is no beneficiary designation in effect on the - 7 - date of the Participant's death, benefits will be payable to the Participant's surviving spouse or, in the absence of such spouse, to the Participant's estate. 4.6 No Duplication of Benefits. Notwithstanding any provision in this Plan to the contrary, no similar benefit that is paid under this Plan shall be paid under any other deferred compensation plan(s) created by the Company or any of its affiliates. 4.7 Transfer of Auxiliary Pension Plan Benefit into this Plan. In the event that a Participant of the Metropolitan Life Retirement Plan for United States Employees ("Retirement Plan") directs his or her accrued Personal Retirement Account ("PRA") benefit under the Retirement Plan or his or her pension lump sum (as determined under the GenAmerica Performance Pension Plan formula of the Retirement Plan) under the Retirement Plan to be transferred to the Savings and Investment Plan and the Participant has a vested account balance under this Plan which exceeds $20,000, then such Participant's accrued PRA benefit and/or pension lump sum benefit under the MetLife Auxiliary Pension Plan will be transferred to this Plan and will be payable in accordance with the terms of this Plan. - 8 - Article 5 - Unfunded Plan The Plan is completely unfunded, and payment of benefits is supported only by the general assets of each Company. This Plan is entirely separate from the Savings and Investment Plan and participation in this Plan gives a Participant no right to any funds or assets of the Savings and Investment Plan or of the Company. The fact that contracts or certificates of the Company may be distributed to recipients of benefits under the Savings and Investment Plan in discharge of the Company's obligations thereunder shall in no way entitle a Participant in this Plan to receive any such contract or certificate in discharge of the Company's obligations hereunder. Article 6 - Nontransferability of Participant's Interest No Participant shall have any power or right to transfer, assign, mortgage, commute or otherwise encumber any of the benefits payable hereunder, nor shall such benefits be subject to seizure for the payment of any debts or judgments, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Article 7 - Effect of Taxes In making payments under this Plan, the Company shall withhold any Federal, state or local income or other taxes it determines that it is legally obligated to withhold. In the event the payments received by the Participant result in greater tax burdens (whether income, estate or other tax burdens) than they would if such payments had been able to be received under the Savings and Investment Plan, the Company shall have no obligation to reimburse the Participant for such greater tax burdens. - 9 - Article 8 - Administration of the Plan 8.1. Plan Administrator's Interpretation Binding The Plan Administrator is empowered to take all actions it deems appropriate in administering this Plan. In the event of a difference of opinion between a Participant and the Plan Administrator with respect to the meaning or application of the provisions of the Plan, the Plan Administrator's final interpretation shall be set forth in writing to the Participant and shall be binding and conclusive. However, once a Change of Control (as defined in Article 11) has occurred, this Article 8 shall no longer apply to differences of opinion between the Plan Administrator and a Participant regarding the application of Article 11 of this Plan to a Participant or with regard to any rights or benefits protected under Article 11 of this Plan or otherwise accrued prior to the Change of Control including the vesting thereof. 8.2. Claims and Review Procedure. Claims for benefits and appeals of denied claims under the Plan shall be administered in accordance with Section 503 of ERISA, the regulations thereunder (and any other law that amends, supplements or supersedes said Section of ERISA), and the procedures adopted by the Plan Administrator, or its delegate, as appropriate. The claims procedures referenced above are incorporated herein by reference. The Plan shall provide adequate notice to any claimant whose claim for benefits under the Plan has been denied, setting forth the reasons for such denial, and afford a reasonable opportunity to such claimant for a full and fair review by the Plan Administrator of the decision denying the claim. Benefits will be paid under the Plan only if the - 10 - Plan Administrator, or its delegate, determines in its discretion that the applicant is entitled to them. Article 9 - Governing Law To the extent not inconsistent with Federal law, the validity of the Plan and its provisions shall be construed according to the laws of the State of New York. Article 10 - Amendment and Termination of Plan 10.1 Amendment or Termination of the Plan. Except to the extent required by law, the Plan Administrator may amend or terminate this Plan at any time without the consent of any Participant or of any other person. However, any such amendment or termination will not affect adversely the benefit entitlements of: (a) any Participant receiving benefits under the Plan at or prior to the time of such amendment or termination, or (b) any employee who is a Participant in the Savings and Investment Plan to the extent of the account balance under this Plan prior to the time of such amendment or termination. However, amendments may be made to all other aspects of this Plan including, but not limited to: (i) amendments impacting the timing under which the Participant's entire account balance is paid, or, (ii) amendments impacting the optional forms of distribution available for payment of the Participant's entire account. - 11 - Notwithstanding the above, any amendment or group of amendments made effective on the same date, which would increase or decrease the annual cost of Plan benefits for active Plan Participants and former Plan Participants by ten million dollars or more in the aggregate, as determined in good faith by the Plan Administrator, shall take effect only after the action is authorized or ratified by the Board of Directors of Metropolitan Life Insurance Company. 10.2 Effect of Change of Control. Notwithstanding the provisions of Section 10.1 above, or any other provision of this Plan, on or after a Change of Control (as defined in Article 11), (a) amendments can no longer be made to or have any impact upon Article 8, Section 10.2 of Article 10 or Article 11 of this Plan; and (b) Participants who: (i) accrued rights or benefits under this Plan prior to a Change of Control (as defined in Article 11), and, (ii) whose rights or benefits are not vested at the time of the Change of Control cannot have the vesting schedule under Section 4.2, applicable on the day prior to the Change of Control, amended with regard to such rights or benefits, and cannot forfeit, or be deprived of, their right to vest in these accrued benefits due to any amendment or termination of this Plan. Article 11. Change of Control 11.1. Definitions. - 12 - (a) Change of Control. For the purposes of this Plan, a "Change of Control" shall be deemed to have occurred if: (i) any Person acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities of the Corporation representing 25% or more of the combined Voting Power of the Corporation's securities; (ii) within any 24-month period, the persons who were directors of the Corporation at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board of Directors of the Corporation (the "Board") or the board of directors of any successor to the Corporation; provided, however, that any director elected or nominated for election to the Board by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this Section 11.1(a)(ii); (iii) the stockholders of the Corporation approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Corporation which is consummated (a "Corporate Event"), and immediately following the consummation of which the stockholders of the Corporation immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the Voting Power of (A) in the case of a merger or consolidation, the surviving or resulting corporation, (B) in the case of a share exchange, the acquiring corporation, or (C) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation - 13 - which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the Corporation immediately prior to such Corporate Event; or (iv) any other event occurs which the Board declares to be a Change of Control. (b) Corporation. For the Purposes of this Article, "Corporation" means MetLife, Inc. (c) Person. For purposes of the definition of Change of Control, "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as supplemented by Section 13(d)(3) of the Exchange Act, and shall include any group (within the meaning of Rule 13d-5(b) under the Exchange Act); provided, however, that "Person" shall not include (A) the Corporation or any Affiliate, (B) the MetLife Policyholder Trust (or any person(s) who would otherwise be described herein solely by reason of having the power to control the voting of the shares held by that trust), or (C) any employee benefit plan (including an employee stock ownership plan) sponsored by the Corporation, Company or any Affiliate. (d) Voting Power. For purposes of the definition of Change of Control, "Voting Power" shall mean such number of Voting Securities as shall enable the holders thereof to cast all the votes which could be cast in an annual election of directors of a company, and "Voting Securities" shall mean all securities entitling the holders thereof to vote in an annual election of directors of a company. (e) Affiliate. For the purposes of this article, an "Affiliate" shall mean any corporation, partnership, limited liability company, trust or other entity which directly, or indirectly through one or more intermediaries, controls, or is controlled by, the Corporation. (f) Cause. For the purposes of this article, "Cause" means either: - 14 - (i) the Participant's conviction or plea of nolo contendere to a felony, or, (ii) any act or acts of dishonesty or gross misconduct on the Participant's part which results or is intended to result in material damage to the business or reputation of MetLife. (g) Good Reason. For the purposes of this article, "Good Reason" means any of: (i) any reduction by the Corporation or an Affiliate in the Participant's base salary rate below the rate in effect immediately before the date of the Change of Control; (ii) any relocation by the Corporation or an Affiliate of the Participant's usual base work location to any other office or location more than 50 miles from the Participant's usual base work location immediately prior to a Change of Control, except for travel reasonably required in the performance of the Participant's responsibilities; (iii) if the Participant is a party to an Employment Continuation Agreement with the Corporation or an Affiliate, any circumstance or occurrence constituting "Good Reason" under that Employment Continuation Agreement; or (iv) the failure of the Corporation or an Affiliate to pay the Employee's base salary or employee benefits as required by law. 11.2. Vesting and Other Rights on and After a Change of Control Subject to Conditions In the event that: (a) there is a Change of Control as defined in Section 11.1(a) of this Article, and, - 15 - (b) on the date of the Change of Control or on a date before the second anniversary of the Change of Control, a Participant in this Plan: (i) is involuntarily terminated from employment by the Corporation or any Affiliate (other than directly in connection with a transfer of employment to or from the Corporation or any Affiliate) without Cause, or (ii) voluntarily terminates employment with the Corporation or any Affiliate for Good Reason, then the Participant's benefits and rights accrued as of the Change of Control under the Savings and Investment Plan and this Plan will vest immediately under this Plan, notwithstanding any other provision of the Savings and Investment Plan or this Plan, or any amendment or termination of this Plan taking place on or after a Change of Control. - 16 - These account balances will be paid under this Plan according to the ordinary distribution rules of this Plan. The ordinary distribution rules of this Plan are described in Article 4 as it existed immediately prior to the Change of Control. December 19, 2003 METROPOLITAN LIFE INSURANCE COMPANY - ---------------------------------- Date /s/ Teresa Porochnia /s/ James N. Heston - ---------------------------------- ------------------------------------ Witness James N. Heston Senior Vice President and Plan Administrator - 17 - EX-10.46 8 y94438exv10w46.txt METRO. LIFE SUPPLEMENTAL AUX. SAV. AND INV. PLAN EXHIBIT 10.46 METROPOLITAN LIFE SUPPLEMENTAL AUXILIARY SAVINGS AND INVESTMENT PLAN (As Amended and Restated as of December 15, 2003) METROPOLITAN LIFE SUPPLEMENTAL AUXILIARY SAVINGS AND INVESTMENT PLAN Metropolitan Life Insurance Company, with respect to its own employees, and Metropolitan Property and Casualty Insurance Company, MetLife Credit Corp., MetLife Funding, Inc., MetLife Group, Inc., MetLife Securities, Inc., MetLife Bank, National Association (limited to employees of the MetLife Bank Division) and Texas Life Insurance Company, for whom all obligations under this Plan for their respective employees are assumed by Metropolitan Life Insurance Company, hereby amends and restates this Plan, effective December 15, 2003. Article 1 - Purpose of Plan The purpose of this Plan is to provide Company matching contributions on behalf of employees and their beneficiaries whose Company matching contributions under the Savings and Investment Plan are reduced or eliminated solely because Section 1.415-2(d)(2) of the Internal Revenue Regulations does not take into account the Company's contribution to a deferred compensation plan to the extent such contributions are not includible in the participant's gross income for the taxable year in which contributed in determining a participant's compensation under the Savings and Investment Plan, for purposes of Section 415(c) of the Code. Article 2 - Definitions 2.1 "Beneficiary" means one or more persons designated by a Participant or otherwise determined under Section 4.5 to receive that portion of the Participant's vested account balance which has not been distributed as a result of his or her death. 2.2 "Company" means Metropolitan Life Insurance Company, Metropolitan Property and Casualty Insurance Company, MetLife Credit Corp., MetLife Funding, Inc., MetLife Group, Inc., MetLife Securities, Inc., MetLife Bank, National Association (limited to employees of the MetLife Bank Division) and Texas Life Insurance Company. 2.3 "Participant" means any employee of the Company participating in the Savings and Investment Plan who satisfies the requirements of Article 3. 2.4 "Plan" means the Metropolitan Life Supplemental Auxiliary Savings and Investment Plan. 2.5 "Plan Administrator" means Metropolitan Life Insurance Company. 2.6 "Plan Year" means the calendar year. 2.7 "Savings and Investment Plan" means the Savings and Investment Plan for Employees of Metropolitan Life and Participating Affiliates, a qualified 401(k) plan. 2.8 "Termination of Employment" means the voluntary or involuntary severance of the employment relationship between the Participant and the Company or any illness or injury for which the Participant, who has one or more years of continuous service, is receiving disability benefits (including short-term and long-term disability) from the Company's disability plans a continuous period of 24 months. 2 Article 3 - Participation Each participant in the Savings and Investment Plan whose compensation exceeds the limitation of Section 401(a)(17) of the Code and whose Company matching contributions under the Savings and Investment Plan are reduced or eliminated because of the application of Section 1.415-2(d)(2) of the Treasury Regulations shall be a Participant in this Plan. Article 4 - Vesting and Payment of Benefits 4.1 Company Matching Contributions. (a) In General. Except as otherwise provided in subsection (b), for each Plan Year, the Company shall contribute to this Plan, on behalf of each Participant, the amount of Company Matching Contributions that would have been made to the Savings and Investment Plan had the limitation of Section 1.415-2(d)(2) of the Treasury Regulations not applied to such Participant's account under the Savings and Investment Plan. (b) Suspension for Savings and Investment Plan Withdrawals. Notwithstanding subsection (a), no Company Matching Contributions shall be made for the six-month period beginning on the first day of the second month following the date that the Participant receives (1) a hardship withdrawal under the provisions of the Savings and Investment Plan or (2) a withdrawal of Company matching contributions under the provisions of the Savings and Investment Plan. 3 4.2. Vesting of Company Matching Contributions. Company Matching Contributions under this Plan shall vest in accordance with the vesting schedule applicable to Company matching contributions under the Savings and Investment Plan. 4.3. Elections and Tracking of Investment Performance. Subject to the Company's consent, a Participant may make an election with respect to the investment allocation of future Company contributions as well as existing balances. Such allocation shall be pegged to the performance of one or more of the following funds set forth under the Savings and Investment Plan: the Fixed Income Fund, the Equity Fund, the Common Stock Index Fund, the Small Company Stock Fund, the International Equity Fund, the Emerging Markets Equity Fund, the Value Equity Fund and/or the Blended Small Company Stock Fund thereunder. No investment allocation election shall represent an actual investment in any such fund, but shall merely reflect the performance of such fund. Thus, the Participant's account balance under this Plan shall be adjusted for income, gains and losses in the same manner as if such Participant had directed the investment of his or her account balance among one or more of the aforementioned funds under the Savings and Investment Plan. The Participant's ability to change the investment allocation of future contributions and existing balances shall be subject to the same rules and restrictions as apply under the Savings and Investment Plan. If a Participant fails to specify the allocation of contributions to this Plan, then earnings, gains and/or losses on such contributions shall be determined using the returns from the Fixed Income Fund until changed by the Participant or Beneficiary. Notwithstanding the foregoing, it will be within the discretion of the Company whether contributions are actually invested according to each Participant's stated preferences. 4 4.4. Participant's Election of Time and Form of Benefit Distributions. (a) In General. Except as otherwise provided in this Section, a Participant may elect, subject to the consent of the Company, to receive benefits under this Plan in the form of a single sum, installments or an annuity subject to the same duration, terms and conditions under which such methods of distribution are payable under the Savings and Investment Plan. Such election shall be made on a form prescribed by the Company and shall require the Participant to designate the mode of payment requested and the date on which benefits will commence to be paid. Benefits shall become payable on the date elected by the Participant in the election form which date shall not be earlier than the later of (i) twelve (12) months subsequent to the date on which the Participant files the election form with the Company; and (ii) the day before the date on which the Participant has a Termination of Employment. If the Participant has a Termination of Employment prior to attaining age 70 1/2, and no benefit election form is received from the Participant by April 1st of the calendar year following the calendar year in which the Participant attained age 70 1/2, such Participant will be deemed to have elected to receive his or her account balance in the form of a single sum by April 1st of the calendar year following the calendar year in which he or she attains age 71 1/2, and such amount shall be paid accordingly. (b) Cash-out of a Participant's Account Balance. If, as of the date of the Participant's Termination of Employment or such other date which is established by the Plan Administrator and communicated to the affected Participants, a Participant's vested account balance does not exceed $20,000, such Participant's vested account balance will be distributed in a single sum as soon as practicable following his or her death or Termination of Employment, notwithstanding 5 any election that such Participant may have made under subsection (a) regarding the form and time of commencing distribution of his or her vested account balance. (c) No In-Service Withdrawals or Loans. Notwithstanding any provision in this Plan to the contrary, no benefits under this Plan will be eligible for any in-service withdrawal by a Participant or any loans to a Participant. (d) Distributions after Participant's Death. If, at the time of the Participant's death, benefits had commenced but amounts remained undistributed to such Participant, then benefit payments shall continue to be made to the Participant's Beneficiary (determined in accordance with Section 4.5) in accordance with the method by which benefit payments were being made to the Participant. If, at the time of the Participant's death, benefit payments had not commenced to be made to him or her, then, except as otherwise provided in this Article, the Participant's Beneficiary may elect, subject to the consent of the Company, to receive benefits in the form of a single sum, installments or an annuity subject to the same duration, terms and conditions under which such methods of distribution are payable to beneficiaries under the Savings and Investment Plan. Such election shall be made on a form prescribed by the Company and shall require the Beneficiary to designate the mode of payment requested and the date on which benefits will commence to be paid. Benefits payable in any form shall become payable on the date elected by the Beneficiary in the election form, which date shall not be earlier than twelve (12) months subsequent to the date on which the Beneficiary files the election form with the Plan Administrator, however, the benefit selected must require the entire account balance to be paid to the Beneficiary no later than the December 31 of the year which is the fifth anniversary of the Participant's death. If no such election is made, the attempted election is deemed by the Plan 6 Administrator to be ineffective, or the Company does not consent to the time or method of distribution elected by the Beneficiary, then the Participant's vested account balance shall be distributed to the Beneficiary in the form of a single sum as soon as practicable. 4.5 Beneficiary. Except as provided below, the Participant's Beneficiary shall be the beneficiary designated by the Participant under the Savings and Investment Plan. However, if the Participant filed a beneficiary designation under this Plan, such designation shall supersede the Participant's beneficiary designation under the Savings and Investment Plan and upon the Participant's death, benefits shall be payable to the primary Beneficiary(ies) designated under this Plan. If there is more than one beneficiary under the Savings and Investment Plan or more than one primary Beneficiary under this Plan and the beneficiary designation does not specify the percentage of the Participant's benefit to be paid to each such Beneficiary, each Beneficiary shall share equally in the benefits under the Plan. If one or more Beneficiaries predecease the Participant, the surviving Beneficiary(ies) shall share equally in the deceased Beneficiary's portion of the Plan benefits. If all primary Beneficiaries predecease the Participant, benefits shall be payable to the contingent Beneficiary(ies) upon the Participant's death. If there is more than one contingent Beneficiary(ies), and the contingent Beneficiary designation does not specify the percentage of the Participant's benefit to be paid to each such Beneficiary, each contingent Beneficiary shall share equally in the benefits under the Plan. If one or more contingent Beneficiaries predecease the Participant, the surviving contingent Beneficiary(ies) shall share equally in the deceased contingent Beneficiary's portion of the Plan benefits. If all contingent Beneficiaries predecease the Participant, or if there is no beneficiary designation in effect on the 7 date of the Participant's death, benefits will be payable to the Participant's surviving spouse or, in the absence of such spouse, to the Participant's estate. 4.6. No Duplication of Benefits. Notwithstanding any provision in this Plan to the contrary, no benefit shall be payable under this Plan with respect to any year in which a Participant defers compensation under the MetLife Deferred Compensation Plan for Officers, or any other plan under which employer matching contributions are made on account of deferred compensation. Except as provided in the preceding sentence, no similar benefit that is paid under this Plan shall be paid under any other deferred compensation plan(s) created by the Company or any of its affiliates, notwithstanding any provision in this Plan to the contrary. Article 5 - Unfunded Plan The Plan is completely unfunded, and payment of benefits is supported only by the general assets of each Company. This Plan is entirely separate from the Savings and Investment Plan and participation in this Plan gives a Participant no right to any funds or assets of the Savings and Investment Plan or of the Company. The fact that contracts or certificates of the Company may be distributed to recipients of benefits under the Savings and Investment Plan in discharge of the Company's obligations thereunder shall in no way entitle a Participant in this Plan to receive any such contract or certificate in discharge of the Company's obligations hereunder. Article 6 - Nontransferability of Participant's Interest No Participant shall have any power or right to transfer, assign, mortgage, commute or otherwise encumber any of the benefits payable hereunder, nor shall such benefits be subject to 8 seizure for the payment of any debts or judgments, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Article 7 - Effect of Taxes In making payments under this Plan, the Company shall withhold any Federal, state or local income or other taxes it determines that it is legally obligated to withhold. In the event the payments received by the Participant result in greater tax burdens (whether income, estate or other tax burdens) than they would if such payments had been able to be received under the Savings and Investment Plan, the Company shall have no obligation to reimburse the Participant for such greater tax burdens. Article 8 - Administration of the Plan 8.1. Plan Administrator's Interpretation Binding The Plan Administrator is empowered to take all actions it deems appropriate in administering this Plan. In the event of a difference of opinion between a Participant and the Plan Administrator with respect to the meaning or application of the provisions of the Plan, the Plan Administrator's final interpretation shall be set forth in writing to the Participant and shall be binding and conclusive. However, once a Change of Control (as defined in Article 11) has occurred, this Article 8 shall no longer apply to differences of opinion between the Plan Administrator and a Participant regarding the application of Article 11 of this Plan to a Participant or with regard to any rights or benefits protected under Article 11 of this Plan or otherwise accrued prior to the Change of Control including the vesting thereof. 9 8.2. Claims and Review Procedure. Claims for benefits and appeals of denied claims under the Plan shall be administered in accordance with Section 503 of ERISA, the regulations thereunder (and any other law that amends, supplements or supersedes said Section of ERISA), and the procedures adopted by the Plan Administrator, or its delegate, as appropriate. The claims procedures referenced above are incorporated herein by reference. The Plan shall provide adequate notice to any claimant whose claim for benefits under the Plan has been denied, setting forth the reasons for such denial, and afford a reasonable opportunity to such claimant for a full and fair review by the Plan Administrator of the decision denying the claim. Benefits will be paid under the Plan only if the Plan Administrator, or its delegate, determines in its discretion that the applicant is entitled to them. Article 9 - Governing Law To the extent not inconsistent with Federal law, the validity of the Plan and its provisions shall be construed according to the laws of the State of New York. 10 Article 10 - Amendment and Termination of Plan 10.1 Amendment or Termination of the Plan. Except to the extent required by law, the Plan Administrator may amend or terminate this Plan at any time without the consent of any Participant or of any other person. However, any such amendment will not affect adversely the benefit entitlements of: (a) Any Participant receiving benefits under the Plan at or prior to the time of such amendment or termination, or (b) Any employee who is a participant in the Savings and Investment Plan to the extent of the account balance under this Plan prior to the time of such amendment or termination. However, amendments may be made to all other aspects of this Plan including, but not limited to: (i) amendments impacting the timing under which the Participant's entire account balance is paid, or, (ii) amendments impacting the optional forms of distributions for payment of the Participant's entire account. Notwithstanding the above, any amendment or group of amendments made effective on the same date, which would increase or decrease the annual cost of Plan benefits for active Plan Participants and former Plan Participants by ten million dollars or more in the aggregate, as determined in good faith by the Plan Administrator, shall take effect only after the action is authorized or ratified by the Board of Directors of Metropolitan Life Insurance Company. 10.2 Effect of Change of Control. Notwithstanding the provisions of Section 10.1 above, or any other provision of this plan, on or after a Change of Control (as defined in Article 11), 11 (a) amendments can no longer be made to or have any impact upon Article 8, Section 10.2 of Article 10 or Article 11 of this Plan; and (b) Participants who: (i) accrued rights or benefits under this Plan prior to a Change of Control (as defined in Article 11), and, (ii) whose rights or benefits are not vested at the time of the Change of Control cannot have the vesting schedule, applicable on the day prior to the Change of Control, amended with regard to such rights or benefits, and cannot forfeit, or be deprived of, their right to vest in these accrued benefits due to any amendment or termination of this Plan. Article 11. Change of Control 11.1. Definitions. (a) Change of Control. For the purposes of this Plan, a "Change of Control" shall be deemed to have occurred if: (i) any Person acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities of the Corporation representing 25% or more of the combined Voting Power of the Corporation's securities; (ii) within any 24-month period, the persons who were directors of the Corporation at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board of Directors of the Corporation (the "Board") or the board of directors of any successor to the Corporation; 12 provided, however, that any director elected or nominated for election to the Board by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this Section 11.1(a)(ii); (iii) the stockholders of the Corporation approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Corporation which is consummated (a "Corporate Event"), and immediately following the consummation of which the stockholders of the Corporation immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the Voting Power of (A) in the case of a merger or consolidation, the surviving or resulting corporation, (B) in the case of a share exchange, the acquiring corporation, or (C) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the Corporation immediately prior to such Corporate Event; or (iv) any other event occurs which the Board declares to be a Change of Control. (b) Corporation. For the purposes of this Article, "Corporation" means MetLife, Inc. (c) Person. For purposes of the definition of Change of Control, "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as supplemented by Section 13(d)(3) of the Exchange Act, and shall include any group (within the meaning of Rule 13d-5(b) under the Exchange Act); provided, however, that "Person" shall not include (A) the 13 Corporation or any Affiliate, (B) the MetLife Policyholder Trust (or any person(s) who would otherwise be described herein solely by reason of having the power to control the voting of the shares held by that trust), or (C) any employee benefit plan (including an employee stock ownership plan) sponsored by the Corporation, Company or any Affiliate. (d) Voting Power. For purposes of the definition of Change of Control, "Voting Power" shall mean such number of Voting Securities as shall enable the holders thereof to cast all the votes which could be cast in an annual election of directors of a company, and "Voting Securities" shall mean all securities entitling the holders thereof to vote in an annual election of directors of a company. (e) Affiliate. For the purposes of this article, an "Affiliate" shall mean any corporation, partnership, limited liability company, trust or other entity which directly, or indirectly through one or more intermediaries, controls, or is controlled by, the Corporation. (f) Cause. For the purposes of this article, "Cause" means either: (i) the Participant's conviction or plea of nolo contendere to a felony, or, (ii) any act or acts of dishonesty or gross misconduct on the Participant's part which results or is intended to result in material damage to the business or reputation of MetLife. (g) Good Reason. For the purposes of this article, "Good Reason" means any of: (i) any reduction by the Corporation or an Affiliate in the Participant's base salary rate below the rate in effect immediately before the date of the Change of Control; 14 (ii) any relocation by the Corporation or an Affiliate of the Participant's usual base work location to any other office or location more than 50 miles from the Participant's usual base work location immediately prior to a Change of Control, except for travel reasonably required in the performance of the Participant's responsibilities; (iii) if the Participant is a party to an Employment Continuation Agreement with the Corporation or an Affiliate, any circumstance or occurrence constituting "Good Reason" under that Employment Continuation Agreement; (iv) the failure of the Corporation or an Affiliate to pay the Employee's base salary or employee benefits as required by law. 11.2. Vesting and Other Rights on and After a Change of Control Subject to Conditions In the event that: (a) there is a Change of Control as defined in Section 11.1(a) of this Article, and, (b) on the date of the Change of Control or on a date before the second anniversary of the Change of Control, a Participant in this Plan: (i) is involuntarily terminated from employment by the Corporation or any Affiliate (other than directly in connection with a transfer of employment to or from the Corporation or any Affiliate) without Cause, (ii) voluntarily terminates employment with the Corporation or any Affiliate for Good Reason, then the Participant's benefits and rights accrued as of the Change of Control under the Savings and Investment Plan and this Plan, will vest immediately under this Plan, notwithstanding any 15 other provision of the Savings and Investment Plan or this Plan, or any amendment or termination of this Plan taking place on or after a Change of Control. These account balances will be paid under this Plan according to the ordinary distribution rules of this Plan. The ordinary distribution rules of this Plan are described in Article 4 as it existed immediately prior to the Change of Control. 12/19/03 METROPOLITAN LIFE INSURANCE COMPANY - --------- Date /s/ Teresa Porochnia /s/ James N. Heston - ----------------------- ------------------------------- Witness James N. Heston Senior Vice President and Plan Administrator 16 EX-10.55 9 y94438exv10w55.txt DEFERRED COMPENSATION PLAN 2004 EXHIBIT 10.55 THE METLIFE DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRECTORS 2004 IMPORTANT NOTICES This Program Description provides an overview of the MetLife Deferred Compensation Plan for Outside Directors (the "Plan"). It is also the official plan document that legally governs the Plan. This plan document will govern in every respect and instance. This Program Description may be updated from time to time to implement changes in the Plan. Fund performance data will be updated periodically. These updates will constitute part of the Prospectus distributed with respect to the Plan. The Plan Administrator may amend, alter or terminate the Plan in accordance with its terms at any time and for any reason. MetLife, Inc. will have the obligation to pay amounts deferred under the Plan from and after January 1, 2003. MetLife, Inc.'s obligations have been registered under the Securities Act of 1933, as amended. Since this is an unfunded plan, your rights or claims against assets or property are no greater than those of a general creditor (see "Liability" on page 8). This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933, as amended. The date of this Prospectus is December 2003. Page 2 PLAN AT-A-GLANCE PURPOSE To provide eligible directors with the opportunity to defer their compensation payable in cash, thereby deferring payment of federal and most state income taxes on that amount. ELIGIBILITY Directors of MetLife, Inc. who are not employees of MetLife, Inc. or any of its affiliates. ELECTION OPTIONS - Deferral amount - Investment tracking funds - Distribution date - Number of distribution payments ENROLLMENT PERIOD December 9, 2003 - December 31, 2003. CHANGES TO DISTRIBUTION You may change either or both the date of payment (to DATE AND/OR NUMBER OF a later date) and number of payments, but may do so PAYMENTS only once for each year's deferrals and must do so no later than 12 months prior to the date of payment you originally selected. INVESTMENT CREDITS Your deferred compensation account will be credited with gains and losses reflecting the performance of the investment tracking funds you select. CHANGES IN AMOUNTS None allowed, except for hardship. DEFERRED INVESTMENT TRACKING Limited to a total of six times per year for either FUND CHANGES future deferrals or existing account balances. DISTRIBUTION - NUMBER Lump-sum payment or up to 15 annual installments. - TIMING Beginning upon earlier of 60 days after termination of service as a director or on a designated future date. - ACCELERATED Immediate lump-sum payment, 10% penalty. - HARDSHIP Immediate lump-sum payment (availability strictly limited). TAXES Deferred compensation is taxable as ordinary income at the time of distribution. Rollover to an IRA, qualified plan or non-qualified plan is not permitted. BENEFICIARY Upon your death, any existing account balance will be paid to your designated beneficiary in a lump sum. PLAN FUNDING The Plan is a non-qualified, unfunded plan. Your account is maintained for record-keeping purposes only. Page 3 METLIFE DEFERRED COMPENSATION PLAN FOR OUTSIDE DIRECTORS The MetLife Deferred Compensation Plan for Outside Directors (the "Plan") allows eligible directors to defer receiving a portion of their annual retainer, committee chair, and meeting fees payable in cash, thereby deferring payment of federal and most state income taxes until a later date when the deferred payments are received. Participation in the Plan is completely voluntary. ELIGIBILITY Members of the Board of Directors of MetLife, Inc. (the "Board") who are not employees of MetLife, Inc. or any of its affiliates ("Non-Management Directors") are eligible to participate. In this Program Description, "you" refers to a director who is eligible to participate in the Plan. HOW THE PLAN WORKS Prior to the year in which your cash fees would be payable, you may designate all or a portion of those fees for deferral. Deferrals begin with the first fees payable in cash during a calendar year and end with the last fees payable during the calendar year. Designations do not carry over from year to year; you must make a new designation each year. If you were elected to the Board before October 1 of a given year, you may designate all or a portion of your cash fees payable in that calendar year by submitting a deferral election before the earlier of (1) the first meeting for which you earn fees that you attend; or (2) the thirtieth day after you become eligible to participate in the Plan. If you choose to defer any of your cash fees, you must defer at least $10,000. To defer your compensation, you need to complete a deferral election form specifying: - - The percentage of your cash fees you want deferred; - - The investment tracking funds that will be used to adjust the value of your deferred compensation account; - - A future distribution date; and - - The number of distribution payments. The form must be submitted within the enrollment period. The MetLife Deferred Compensation Plan for Outside Directors is a non-qualified plan that is unfunded and subject to the risks described in this document. Amounts credited to an account are solely for record-keeping purposes. The Plan is not subject to protection under the Employee Retirement Income Security Act of 1974 (ERISA). See also "Liability" on page 8. Page 4 Before making your elections, you may wish to consult a tax or personal financial advisor. All deferrals are subject to the terms of the Plan, which are contained in this document. TAXES Deferred compensation is not subject to current taxation under federal and most state income tax laws until payment is made to you. DEFERRAL AMOUNTS Annually, you may elect to defer all or a portion of your fees payable in cash in the following year for services as a director of MetLife, Inc., including retainer fees, meeting fees, and committee chair fees. If you choose to defer any of your cash fees, you must defer at least $10,000. Once you elect your deferral amount, you may not change it except for suspension of deferrals in cases of extreme hardship as provided in the Plan. DEFERRED COMPENSATION ACCOUNT A deferred cash account in your name will be established for record-keeping purposes. You will receive account statements quarterly. Your account will be credited on the date on which your deferred cash fees are payable. INVESTMENT TRACKING FUNDS Investment tracking funds are used as a device for adjusting the value of your account based on fund performance. Each investment tracking fund reflects the investment returns of the actual fund or index, which are measured on a daily basis. Gains or losses will be credited or debited from your account, in effect "mirroring" the performance of the specified fund or index. Your deferrals will not actually be invested in the funds. If the aggregate performance of the funds mirrored by the investment tracking funds you choose is positive, the value of your account will increase; if it is negative, the value of your account will decrease. The Plan may be amended in accordance with its terms to eliminate or replace any investment tracking fund at any time. You can select for your account one or more of 13 investment tracking funds, each of which mirrors the performance of one of the following actual funds or indexes. Page 5 ACTIVELY MANAGED FUNDS MetLife SIP Fixed Income Fund Lord Abbett Bond Debenture Fund Oakmark Fund(R) MetLife SIP Small Company Stock Fund Oakmark International Fund SINGLE-STOCK FUND MetLife Common Stock Fund MARKET INDEXES S&P 500(R)Index Russell 2000(R)Index Nasdaq Composite(R)Index MSCI EAFE(R)Index Lehman Brothers(R)Aggregate Bond Index Merrill Lynch US High Yield Master II Index MSCI EMF Index(SM) Fund allocations must be made in multiples of 5%. You may change your investment tracking funds - either with regard to future deferrals or existing account - at any time during the year by contacting Nonqualified Plan Services (NQPS) at (phone) (877) 855-6777, (fax) (314) 444-0428; however, you may make no more than six changes per year. You will receive confirmation of your changes shortly after they are made. Allocations into and out of the MetLife Common Stock Fund must be pre-cleared with the MetLife Corporate Secretary in accordance with the MetLife Inside Trading Policy. See page 10 for information about the investment tracking funds. THE DISTRIBUTION DATE You may choose to have your distributions begin either (1) on a specific date no less than three years after the year of deferral (for example: for 2004, the date you will choose may not be earlier than 2008), or (2) upon the termination of your service as a Non-Management Director of MetLife, Inc. If you choose to receive your account on a specific date, your account will be paid to you at the earlier of (a) the date you selected, and (b) within 60 days following the termination of your service as a director. Once you have designated a distribution date, you cannot change it except as described below under "Changing the Distribution Date And/Or Number of Payments." NUMBER OF PAYMENTS You may elect to receive your account balance in either a lump-sum payment or up to 15 annual installments. Each annual installment will be a fraction of the account balance with one being the numerator and the number of payments remaining being the denominator. For example, if you elect to receive 10 annual payments, the first payment is equal to 1/10th of the account balance; the second payment is equal to 1/9th of the account balance; and so on until final payment is made. Page 6 FORM OF PAYMENTS All payments will be made in cash. TAXATION OF PAYMENTS Payments are subject to deductions in accordance with federal, state and local tax laws and regulations. Rollover to an IRA, qualified plan or non-qualified plan is not permitted. CHANGING THE DISTRIBUTION DATE AND/OR NUMBER OF PAYMENTS You may make changes only once for each year's deferrals, at which time you may change either or both: (1) the date you have selected to receive payment of your deferred compensation; and/or (2) the number of payments you have chosen to receive, so long as: - - such changes are made at the same time at least 12 months before the original date selected for payment; and - - if you select a new date for payment, that date must be later than the original date selected for payment. OTHER PLAN FEATURES PAYMENT TO BENEFICIARIES If you die before commencement or completion of distributions, the balance in your account will be paid as a single lump sum to your beneficiary. If you have not designated a beneficiary, or your beneficiary dies before you do, your account will be paid to your surviving spouse or, if you are not married at the time, to your estate. A domestic partner is not considered a surviving spouse under the Plan. You may designate an individual, a trustee or your estate as your beneficiary, and you may change your beneficiary at any time. Your beneficiary designation will apply to current and all prior year deferrals under the Plan. You may designate your beneficiary(ies) during each annual enrollment period. If you wish to change your beneficiary designations during the year, contact NQPS at (877) 855-6777. NQPS will send you a form on which you can make your new beneficiary elections. LOANS No loans may be taken from your account. Page 7 HARDSHIP EXCEPTIONS In cases of extreme hardship, the Plan Administrator may suspend deferrals or make payments to you, reducing the value of your account. However, the total amount suspended and advanced cannot exceed the amount required to satisfy the financial consequences of the hardship and tax withholding requirements. ACCELERATED DISTRIBUTION You may take a lump-sum distribution of your account at any time. However, you will be charged a 10% penalty by the Plan Administrator. LIABILITY Deferrals under the Plan are unfunded and unsecured obligations of MetLife, Inc. Your rights are those of a general creditor of MetLife, Inc. ASSIGNMENT No assignment or pledge of the right to receive the payment of amounts deferred or any other rights under the Plan may be made. INTENTIONALLY LEFT BLANK Page 8 CHANGE OF CONTROL PROTECTION You will have the opportunity to choose to have your deferred compensation account paid to you if your service as a Non-Management Director ends within two years of a change of control of MetLife, Inc.(*) Payment would be made shortly after your service ends, and this election would take precedence over your usual deferral payment election. You will have the opportunity to make this election only once for your entire deferred compensation account. PLAN ADMINISTRATOR The Plan is administered by a Plan Administrator who may establish, amend or rescind rules and regulations relating to the Plan. The Plan Administrator of this Plan is also the Plan Administrator of the Metropolitan Life Retirement Plan for U.S. Employees. The Employee Benefits Committee of the Metropolitan Life Insurance Company appoints the Plan Administrator of the Retirement Plan, who serves until such time as the Committee appoints a new Plan Administrator. The Plan Administrator may amend, modify, suspend, or terminate the Plan at any time and for any reason, except as otherwise required by law. The Plan Administrator, however, may not amend, modify or terminate the Plan in a way that will reduce the - ---------- * "Change of Control" shall mean the occurrence of any of: a. any Person acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended ("Exchange Act")), directly or indirectly, of securities of MetLife, Inc. representing 25% or more of the combined Voting Power of MetLife, Inc.'s securities; b. within any 24-month period, the persons who were directors of MetLife, Inc. at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board of Directors of MetLife, Inc. (the "Board") or the board of directors of any successor to MetLife, Inc.; provided, however, that any director elected or nominated for election to the Board of Directors of MetLife, Inc. by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this subsection 21.3.2; c. the stockholders of MetLife, Inc. approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of MetLife, Inc. which is consummated (a "Corporate Event"), and immediately following the consummation of which the stockholders of MetLife, Inc. immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the Voting Power of (1) in the case of a merger or consolidation, the surviving or resulting corporation, (2) in the case of a share exchange, the acquiring corporation, or (3) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the MetLife, Inc. immediately prior to such Corporate Event; or d. any other event occurs which the Board of Directors of MetLife, Inc. declares to be a Change of Control. For purposes of the definition of Change of Control: 1) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as supplemented by Section 13(d)(3) of the Exchange Act, and shall include any group (within the meaning of Rule 13d-5(b) under the Exchange Act); provided, however, that "Person" shall not include (i) MetLife, Inc. or any Affiliate of MetLife, Inc., (ii) the MetLife Policyholder Trust (and any person(s) who would otherwise be described herein solely by reason of having the power to control the voting of the shares held by that trust), or (iii) any employee benefit plan (including an employee stock ownership plan) sponsored by MetLife, Inc. or any Affiliate of MetLife, Inc.; 2) "Voting Power" shall mean such number of Voting Securities as shall enable the holders thereof to cast all the votes which could be cast in an annual election of directors of a company; 3) "Voting Securities" shall mean all securities entitling the holders thereof to vote in an annual election of directors of a company; and 4) "Affiliate" shall mean any corporation, partnership, limited liability company, trust or other entity which directly, or indirectly through one or more intermediaries, controls, or is controlled by, MetLife, Inc. Page 9 amount that has been accrued in your deferred compensation account prior to the effective date of the amendment, modification or termination. The determinations and interpretations of the Plan made by the Plan Administrator shall be final, binding, and conclusive for all purposes under the Plan. The Plan Administrator may prescribe forms for participants to take action authorized or allowed under the Plan and may appoint agents and consult legal counsel and other professionals to assist in administration of the Plan. The Plan Administrator may, in his or her sole discretion, adjust the value of a deferred compensation account on a basis other than as prescribed in deferral or reallocation elections, including but not limited to the use of investment tracking funds other than those selected by the participant. INVESTMENT TRACKING FUNDS - ADDITIONAL INFORMATION Each investment tracking fund mirrors the performance of the actual fund or index it respectively tracks. Following are descriptions and performance data for the actual funds and indexes. There is no guarantee that any of the funds will achieve its objectives or increase in value. Unless you choose the investment tracking fund for the MetLife SIP Fixed Income Fund, your deferrals may lose value. Each actively managed fund has investment management fees and/or other expenses associated with it. The descriptions below are derived from information provided by the funds or other sources deemed to be reliable. ACTIVELY MANAGED FUNDS METLIFE SIP FIXED INCOME FUND: This fund is an individually managed separate account available under a Metropolitan Life Insurance Company group annuity contract. The fund seeks to achieve the highest possible current income consistent with the preservation of capital and predictable growth through a stable interest rate by investing in Guaranteed Interest Contract Alternatives or similar contracts. LORD ABBETT BOND DEBENTURE FUND: This fund (the Lord Abbett Bond Debenture Portfolio of the Met Investor Series Trust) is a mutual fund investment choice available under various variable insurance contracts issued by Metropolitan Life Insurance Company and its affiliates. The fund seeks to provide high current income and the opportunity for capital appreciation to produce a high total return. Under normal circumstances, the fund invests at least 80% of its net assets in debt securities. The fund normally invests substantially all of its assets in high-yield and investment-grade debt securities. It may invest in convertible securities. Up to 80% of the fund's assets may be invested in high-yield/high-risk debt securities ("junk bonds"). At least 20% of the fund's assets must be invested in any combination of investment-grade debt securities, U.S. Government securities and cash equivalents. The fund may also invest up to 20% of its net assets in equity securities of large cap companies. The fund may also invest up to 20% of its net assets in foreign debt and equity securities. (1,3) Page 10 OAKMARK FUND(R): This fund is a mutual fund and seeks to achieve long-term capital appreciation following a value style by investing primarily in the common stocks of U.S. companies. METLIFE SIP SMALL COMPANY STOCK FUND: This fund is an individually managed separate account available under a Metropolitan Life Insurance Company group annuity contract. The fund seeks to achieve long-term growth of capital by investing in the stocks of smaller U.S. companies with strong growth potential and to outperform the Russell 2000(R) Growth Index. This index measures the performance of Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.(2) OAKMARK INTERNATIONAL FUND: This fund is a mutual fund and seeks to achieve long-term capital appreciation following a value style by investing primarily in the common stocks of non-U.S. companies in mature and less-developed markets. There are no limits on the geographic asset distribution, but the fund does not expect to invest more than 5% of its assets in securities of companies in emerging markets.(3) MARKET INDEXES S&P 500(R)INDEX: This index includes some of the 500 largest capitalized stocks in the U.S. and is one of the most widely recognized used benchmarks of U.S. equity performance. Stocks that are not included among the 500 largest are included in the index for diversification purposes. RUSSELL 2000(R)INDEX: This index measures stock performance of 2,000 smaller U.S. companies with market capitalization under $1.3 billion.(2) NASDAQ COMPOSITE(R)INDEX: The Nasdaq Composite Index measures all Nasdaq domestic and international-based common-type stocks listed on the Nasdaq Stock Market. The Nasdaq Composite includes over 4,000 companies. (3, 4) MSCI EAFE(R)INDEX: The Morgan Stanley Capital International Europe, Australasia, Far East Index is a benchmark of developed stock market performance, excluding the United States and Canada.(3) LEHMAN BROTHERS(R) AGGREGATE BOND INDEX: A benchmark index comprised of the Lehman Brothers Government/Credit Bond Index, the Lehman Brothers Mortgage-Backed Securities Index, the Lehman Brothers Asset-Backed Securities Index and the Lehman Brothers Commercial Mortgage-Backed Securities Index. Fixed income securities in the index include debt obligations issued or guaranteed by the U.S. government or its agencies and instrumentalities, debt issued or guaranteed by U.S. corporations, foreign companies, municipalities, asset-backed government and international agencies and mortgage-backed securities. Page 11 MERRILL LYNCH US HIGH YIELD MASTER II INDEX: The Merrill Lynch U.S. High Yield Master II Index tracks the performance of below investment-grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. (1) MSCI EMF INDEX(SM): The MSCI EMF (Emerging Markets Free) Index is designed to measure equity market performance in global emerging markets. As of April 2002, the MSCI EMF Index consisted of the following 26 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela.(3) SINGLE-STOCK FUND METLIFE COMMON STOCK FUND: The performance of this fund will depend on the price of MetLife, Inc. common stock, which is affected by market conditions and other factors, such as declared dividends. Like other individual stock funds, the MetLife Common Stock Fund is anticipated to have a relatively high risk profile. The performance of this fund includes the value of reinvested dividends, if any. - ---------- (1) Lower rated high-yield, high-risk securities generally involve more credit risk. These securities also may be subject to greater market price fluctuations than lower yielding higher rated debt. (2) Investments in small capitalization and emerging growth companies involve greater than average risk. Such securities may have limited marketability and the issues may have limited product lines, markets and financial resources. The value of such investments may fluctuate more widely than investments in larger, more established companies. (3)International stocks contain additional risks that are not associated with U.S. domestic issues, such as changes in currency exchange rates, different governmental regulations, economic conditions and accounting standards. (4)This index is comprised to a significant degree in technology issues. The technology industry can be significantly affected by obsolescence, short product cycles, falling profits and prices, and competition from new market participants. A choice that is weighted in one sector is more volatile than those that diversify across many industry sectors. Page 12 HISTORIC FUND & INDEX PERFORMANCE BY CALENDAR YEAR As of September 30, 2003 Past performance is not a guarantee of future results. Note: Unit values fluctuate and amounts received upon distribution may be more or less than deferrals and any matching contributions.
ACTIVELY MANAGED FUNDS YEAR-TO-DATE 2002 2001 2000 1999 - ---------------------------------------------- ------------ ------ ------ ------ ------ MetLife SIP Fixed Income Fund(1) 3.72% 5.80% 7.00% 6.70% 6.45% Lord Abbett Bond Debenture Fund(2) 13.38% -9.63% -1.32% -0.95% 17.82% Oakmark Fund(R)(3) 12.53% -14.72% 18.29% 11.78% -10.47% MetLife SIP Small Company Stock Fund(1) 28.15% -19.98% -9.82% -11.36% 46.89% Oakmark International Fund(3) 19.25% -9.32% -5.13% 12.50% 39.47% MARKET INDEXES S&P 500(R)Index(4) 13.20% -23.37% -11.89% -9.11% 20.88% Russell 2000(R)Index(5) 27.30% -21.58% 2.49% -3.02% 21.26% Nasdaq Composite(R)Index(5) 33.80% -31.53% -21.05% -39.29% 85.59% MSCI EAFE(R)Index(6) 15.82% -17.52% -22.33% -15.52% 25.27% Lehman Brothers(R)Aggregate Bond Index(7) 4.15% 11.38% 8.44% 11.63% -0.82% Merrill Lynch US High Yield Master II Index(6) 20.40% -1.89% 4.34% -5.00% 2.51% MSCI EMF Index(SM)(6) 29.29% -7.97% -4.78% -31.89% 63.70% METLIFE COMMON STOCK FUND(8) 3.74% -14.55% -9.40% 145.56% --
- ---------- (1) MetLife SIP Fixed Income Fund has declared that its rate for 2003 is 5.00%. Both the MetLife SIP Fixed Income Fund and Small Company Stock Fund are individually managed separate accounts available under Metropolitan Life Insurance Company group annuity contracts. All performance is shown net of investment management fees and other expenses. (2) The Lord Abbett Bond Debenture Fund (Lord Abbett Bond Debenture Portfolio of the Met Investors Series Trust) is a mutual fund investment choice available under various variable insurance contracts issued by Metropolitan Life Insurance Company and its affiliates. The Loomis Sayles High Yield Bond Portfolio of the Metropolitan Series Fund was merged into the Lord Abbett Bond Debenture Portfolio after the close of business on April 26, 2002. Performance for the Lord Abbett Bond Debenture Portfolio includes performance of the Loomis Sayles High Yield Bond Portfolio prior to April 27, 2002, and performance of the Lord Abbett Debenture Portfolio after April 26, 2002. All performance is shown net of the Lord Abbett Bond Debenture Portfolio's investment management fees and other expenses. (3) The Oakmark Fund and the Oakmark International Fund are mutual funds. All performance is shown net of investment management fees and other expenses. (4) Performance data for all years are based on the records of Nonqualified Plan Services (NQPS), except 2001, which is from a public source. (5) Performance data for 2002 is based on the records of NQPS. All other data are from public sources. (6) Performance data are based on the records of NQPS. (7) Performance data are based on information from a public source. (8) Performance data obtained from MetLife, Inc. 2000 performance is shown from April 5, 2000, the date of the Initial Public Offering. The performance data provided here for all periods presented includes the reinvestment of dividends. Page 13 PROSPECTUS INFORMATION In connection with the obligations of MetLife, Inc. under the Plan, the following constitute the prospectus meeting the requirements of Section 10(a) of the Securities Act of 1933, as amended: 1. The information set forth in this Program Description; 2. Any other written documents delivered to participants updating or revising the information in item 1 above. Those documents will contain a legend indicating that they constitute a part of the prospectus covering the obligations being offered as permitted by the Plan; 3. Each of the following documents filed by MetLife, Inc. with the Securities and Exchange Commission (the "Commission"), which are incorporated by reference in this prospectus: a) MetLife, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002; b) All other reports filed by MetLife, Inc. with the Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, since December 31, 2002; and c) All documents subsequently filed by MetLife, Inc. pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended, prior to the filing of a post-effective amendment which indicates that all securities offered have been sold or which de-registers all securities then remaining unsold. You may obtain a copy of the above filings described in items 1 and 2, at no cost, by calling Nonqualified Plan Services at 1-877-855-6777. Filings described in item 3 and any other documents MetLife, Inc. provides to its shareholders may be obtained, at no cost, at www.metlife.com (by clicking on Investor Relations) or by calling 1-800-649-3593. You may also request copies of any of the above documents by writing to the MetLife Corporate Secretary, 1 Madison Avenue, New York, NY 10010. Page 14 IN WITNESS WHEREOF, the Plan Administrator has executed this amended and restated this MetLife Deferred Compensation Plan for Outside Directors, effective December 9, 2003. PLAN ADMINISTRATOR /s/ James N. Heston - ------------------------- James N. Heston Date: 12/12/03 - ------------------- Witness: /s/ Teresa Porochnia ---------------------------- Page 15 EX-10.59 10 y94438exv10w59.txt AUXILIARY PENSION PLAN EXHIBIT 10.59 METLIFE AUXILIARY PENSION PLAN Metropolitan Life Insurance Company ("the Company") hereby amends and restates the MetLife Auxiliary Pension Plan ("the Plan") effective January 1, 2003. Article 1. Purpose of Plan. The purpose of the Plan is to provide to certain participants employed by the Company, other employers (each a "Subsidiary") participating under the Metropolitan Life Retirement Plan for United States Employees ("Retirement Plan") and their beneficiaries, the excess amount that would have been payable under the Retirement Plan in the absence of the limitations under (i) section 415 of the Internal Revenue Code of 1986 (as amended) ("Internal Revenue Code"), (ii) section 401(a)(17) of the Internal Revenue Code, or such lesser limit as in effect under the Retirement Plan and (iii) section 1.415-2(d)(2) of the Income tax Regulations, that excludes compensation deferred under the Company's or a Subsidiary's deferred compensation arrangements. Article 2. Participation A Participant in the Plan is any employee that qualifies under Section 2.1, 2.2 or 2.3 below: 2.1. A Company or Subsidiary (including, but not limited to, a MetLife Group, Inc.) employee participating in the Retirement Plan: (a) whose benefits are reduced because of the application of Section 401(a)(17) of the Internal Revenue Code (or such lesser limit as in effect under the Retirement Plan), or, (b) whose benefits are reduced because of the application of section 415 of the Internal Revenue Code, including Treasury Regulation 1.415-2. shall be eligible to participate in the Plan as stated in all Articles except Section 4.2 of Article 4 and Article 4A. 2.2. A Company or Subsidiary (including, but not limited to, a MetLife Group Inc.) employee participating in the Retirement Plan who: (a) is in a compensation grade of 36 or higher (or an equivalent compensation grade), or, (b) is a member of the Chairman's Council for 3 consecutive years, or, (c) is listed in Appendix A, or, 1 (d) has been inducted into the Sales Representative Hall of Fame and has attained the age of 65 shall be eligible to participate in the Plan as stated in all Articles. If an employee is an eligible Participant in the Plan under Section 2.1 of this Article, and on or after January 1, 1995, he/she qualifies as a Participant under Section 2.2 of this Article, then the entire benefit that has accrued to that employee shall be payable as if the employee always qualified as a Participant under Section 2.2 of this Article. If, after qualifying as a Participant under Section 2.2 of this Article, an individual's compensation grade drops below level 36 (or its equivalent), or the individual ceases to qualify for the Chairman's Council, then that individual shall continue to be treated as if he or she meets the requirements of Section 2.2 of this Article. 2.3. A Company or Subsidiary employee participating in the Retirement Plan: (i) who participated and accrued benefits in the New England Life Insurance Company's non-qualified Plans, i.e.: - The New England Life Insurance Company Select Employee's Supplemental Retirement Plan, or - New England Life Insurance Company Supplemental Retirement Plan, and, (ii) who, on December 31, 2000, was actively employed by New England Life Insurance Company, the Company or a Subsidiary, shall be eligible, on January 1, 2001, to participate in this Plan, except Section 4.2 of Article 4 and Article 4A. These individuals shall have their entire auxiliary defined benefit (including amounts previously accrued under the New England plans named above) paid under this Plan, in accordance with the terms of this Plan. These individuals shall be eligible to participate in this Plan as stated in Section 4.2 of Article 4 and Article 4A if they independently qualify as a Participant under Section 2.2 of this Article after December 31, 2000. (i) who participated and accrued benefits in the GenAmerica Corporation Augmented Benefit Plan, (only insofar as it relates to benefits on compensation that exceeded the limits imposed by or upon the GenAmerica Corporation Performance Pension Plan and Trust.) and, (ii) who, on December 31, 2002, was actively employed by General American Life Insurance Company, the Company or a Subsidiary, shall be eligible, on January 1, 2003, to participate in this Plan, except Section 4.2 of Article 4 and Article 4A. These individuals shall have their entire auxiliary defined benefit (including amounts previously accrued under the Augmented Benefit Plan) paid under this Plan, in accordance with the terms of this Plan. These individuals shall be eligible to participate in Section 4.2 of Article 4 and Article 4A of this Plan if they 2 independently qualify as a Participant under Section 2.2 of this Article after December 31, 2002. Article 3. Vesting Participants will vest in their accrued benefit under this Plan in accordance with the vesting schedule under the Retirement Plan. All benefits accrued by Participants under this Plan, prior to a Change of Control as defined in Article 8, shall vest if the Participant satisfies the vesting schedule that existed under the Retirement Plan immediately prior to the Change of Control. Article 4. Payment of Benefits 4.1. Benefits under this Plan shall be payable to a Participant in an amount equal to the difference between: (a) the largest amount (without duplication of amount) that would have been payable to the Participant under the Retirement Plan, had the Retirement Plan not been subject to the limitations of Internal Revenue Code Sections: (i) 415, (ii) 401(a)(17) or such lesser limit as stated in the Retirement Plan, and (iii) Regulation Section 1. 415-2(d)(2) (with respect to deferred compensation arrangements); and, (b) the amount of benefits payable under the Retirement Plan and any predecessor Auxiliary Plan. 4.2. Only for those individuals who qualify as Participants in the Plan under Section 2.2, final average compensation used to determine the largest amount that would have been payable under Section 4.1(a) above, will be based on the following rules, notwithstanding the actual provisions of the Retirement Plan. For qualifying Participants that are not compensated on a commission basis, Final Average Compensation will be the sum of (a) and (b) below: (a) The base salary component of the Participant's final average compensation, determined using the average of the Participant's base salary for the 60 highest consecutive months during the 120 months preceding the Participant's date of retirement or termination, and, (b) The component of the Participant's final average compensation representing the Annual Variable Incentive Compensation Plan or successor annual cash bonus plan or program ("AVIP") award will be determined using the average of the Participant's highest 5 AVIP payments, (not necessarily consecutive) with respect to, the 10 calendar years preceding such Participant's date of retirement or termination, (including any projected payment(s) to be made beyond the Participant's date of retirement or termination). 3 The AVIP award, as set forth in subsection (b) immediately above, projected to be made beyond the Participant's date of retirement or termination will be deemed equal to: (i) the highest of the last 3 bonuses/awards paid while the Participant was in active Company service multiplied by (ii) a fraction, the numerator of which is the number of months (or part thereof) that the Participant was actively employed in the calendar year(s) for which the bonus/award would be payable and the denominator of which is 12. (iii) If the fraction determined under (ii) immediately above, is less than 1, then, the fractional amount determined under (ii) shall replace an equivalent fractional amount in the lowest of the 5 highest AVIP payments used in (b) above. This replacement shall occur only if the fractional amount determined under (ii) is greater than the fractional amount it is replacing in the lowest of the 5 highest AVIP payments. Notwithstanding (b)(i), (ii) and (iii), if a specific amount of bonus/award was already approved under the AVIP, prior to the Participant's date of retirement or termination, such amount shall be used instead of the deemed estimate, and such amount shall also be taken into account in determining the highest of the Participant's last 3 bonuses/awards with regard to any bonus/award payable for the Participant's year of retirement or termination. If, at the time of retirement or termination, less than 5 AVIP payments have been made to a Participant, then the AVIP component of final average pay shall be the average of: all AVIP payments actually made to the Participant and the projected payment (described above) for the year of retirement or termination. For qualifying Participants that are compensated on a commission basis, Final Average Compensation will be the amount described in appropriate provisions of the Retirement Plan. 4.3. Except as described in (a) through (e) immediately below, benefits payable under this Plan shall be payable in the same form(s) and at the same times as benefits are payable under the Retirement Plan. (a) Alternative Distributions under Article 4A shall be paid in the form, and at the time, stated in the election form completed by the Participant and approved by the Committee. (b) Pre-Distribution Death Benefits as described in Article 4A.5 shall be paid in accordance with the terms of that Article. 4 (c) If a Participant directs his or her accrued, Personal Retirement Account ("PRA") or Performance Pension Account ("PPA"), benefit under the Retirement Plan to be transferred to the Savings and Investment Plan, and, at the time the request is made, the Participant has an accrued benefit under the Auxiliary Savings and Investment Plan, then the Participant's accrued PRA or PPA benefit under this Plan will be transferred to the Auxiliary Savings and Investment Plan and will be payable in accordance with the terms of the Auxiliary Savings and Investment Plan. If a Participant directs his or her accrued PRA or PPA benefit under the Retirement Plan to be transferred to the Savings and Investment Plan, and at the time the request is made, the Participant has no accrued benefit under the Auxiliary Savings and Investment Plan, then the Participant's accrued PRA or PPA benefit, under this Plan, will be paid to the Participant in a lump sum. The transfer discussed in the preceding sentence does not apply to a Participant's traditional formula benefit under the Retirement Plan or this Plan. (d) Individuals who: (i) had accrued benefits under the New England Life Insurance Company's non-qualified Plans listed in Section 2.3, (ii) terminated employment on or before December 31, 2000, and, (iii) did not become employees of the Company or a Subsidiary upon that termination of employment, will have their benefits paid from this Plan in the amounts, at the times and in the form provided for under the provisions of those prior plans. (e) Individuals who: (i) had accrued benefits under the GenAmerica Corporation Augmented Benefit Plan, (ii) terminated employment on or before December 31, 2002, and, (iii) did not become employees of the Company or a Subsidiary upon that termination of employment, will have their entire auxiliary defined benefit paid from this Plan in the amounts, at the times, and in the form provided for under the provisions of that prior plan. Individuals described in Section 2.3 shall have their entire auxiliary defined benefit (including amounts previously accrued under the plans named in Section 2.3) paid under this Plan, in accordance with the terms of this Plan. Notwithstanding any provision to the contrary, the payment of benefits under this Plan shall not be affected by, or be subject to, the qualified pre-retirement survivor annuity and qualified joint and survivor annuity rules under the Retirement Equity Act of 1984. 5 Article 4A. Alternative Distribution Alternative forms of distribution are available only to those Participants in the Plan as defined in Section 2 of Article 2. 4A.1 Definitions (a) Alternative Distribution. "Alternative Distribution" means one of the following modes of payment: (i) Single Sum: Payment in a single sum. (ii) Installment Payments for a Specific Period: Monthly or annual payments are made to the Participant for a specified number of years selected (not exceeding 20 years). If the Participant dies before the expiration of the specified period, installment payments will continue to be made for the remainder of the period chosen by the Participant to a beneficiary designated by the Participant. (iii) Other Distribution: Any other form of payment that is mutually agreed upon by the Participant and the Committee. (b) Committee. "Committee" means the Compensation Committee of the Board of Directors of Metropolitan Life Insurance Company or their designated agent(s). (c) Election Date. "Election Date" means the date on which the Participant files his/her request for an Alternative Distribution. For Participants who are retirement eligible, as defined in the Retirement Plan, ("Retirement Eligible") when they separate from service with the Company or a Subsidiary, this date can be no later than the day before the Participant's retirement or termination date. For Participants who are not Retirement Eligible when they separate from service with the Company or a Subsidiary, this date can be no later than 12 months before the Distribution Date. (d) Distribution Date. "Distribution Date" means the date distributions commence under the mode of payment elected by the Participant. For Participants who are Retirement Eligible when they separate from service with the Company or a Subsidiary, this date cannot be earlier than the Participant's retirement or termination date. For Participants who are not Retirement Eligible when they separate from service with the Company or a Subsidiary, this date cannot be earlier than the later of: (i) 12 months following the Participant's Election Date, and (ii) the earliest date the Participant becomes eligible for a distribution from the Retirement Plan. 6 4A.2. Payment in the Form of an Alternative Distribution. Auxiliary retirement benefits under this Plan shall be payable in whole or in part to a Participant in the form of an Alternative Distribution provided (i) a request form is duly filed by the Participant in compliance with both the provisions of this Article 4A and the procedures as set forth from time to time by the Committee and (ii) consent thereto is given by the Committee. 4A.3. Election of Alternative Distribution. A form requesting that auxiliary retirement benefits under this Plan be paid in the form of an Alternative Distribution must be submitted by the Participant to the Committee no later than the day before the Participant's retirement date. For Participants who are separating from service with the Company or a Subsidiary before they are Retirement Eligible, the form requesting an Alternative Distribution must be submitted by the Participant to the Committee no later than 12 months before the Distribution Date indicated on the election form. All requests must be in writing, signed by the Participant, and follow the format prescribed by the Committee. On the request form the Participant must also designate (i) the mode of payment requested and (ii) the Participant's retirement or Distribution Date. A request form shall be deemed submitted by the Participant to the Committee on the day that such form is received by the Committee. Prior to the Participant's retirement date, the request form can be revoked by the Participant. Any revocation must be in writing and comply with the procedures of the Committee. A request form submitted by the Participant shall become irrevocable and binding as to all elections and designations made by the Participant as of the retirement date. In the event that a Participant's request form is not filed before his/her retirement date, the Participant's Plan benefits will be paid in the same form as the benefits paid to the Participant under the Retirement Plan. For Participants who separate from service before they are Retirement Eligible, the request form shall become irrevocable and binding, as to all elections and designations, 12 months before the Distribution Date. 4A.4. Consent of the Committee. Payment in the form of an Alternative Distribution shall require the consent of the Committee. The Committee shall have full and complete discretion to approve or reject any request for an Alternative Distribution. The decision of the Committee on the Participant's request form shall be made known to the Participant in writing. 4A.5. Death of Participant Before Distribution Date. (a) A Participant under Section 2.2, who accrued benefits in this Plan under the traditional formula before death, shall have 50% of the present value of his/her undistributed traditional formula benefit, (valued as a single sum under Section 4A.6(a) below and actuarially adjusted for payment at the Participant's earliest retirement date), paid to his/her designated beneficiary. This pre-distribution death 7 benefit will be payable in the form designated by the Participant and approved by the Committee. A Participant may file with the Committee a form (which will become irrevocable only upon death) designating a beneficiary or changing their existing designation. This form will also allow the Participant to choose the form in which the pre-distribution death benefit will be paid. All optional forms of benefit available to the Participant under this Plan and the Retirement Plan will be available for payment of this death benefit. (b) For salaried Participants covered under Section 2.2, a single sum, equivalent to the full value of a Participant's undistributed traditional formula benefit on the date of the Participant's death, (valued under Section 4A.6(a)), shall be paid to the Participant's designated beneficiary if: (i) the Participant notifies the Committee in a request form in effect on the Election Date of his or her anticipated retirement date, the Committee gives its consent to the payment of a Single Sum or Installment Payments for a Specific Period before the Distribution Date is reached, the Participant agrees to defer actual retirement at the Company's written request, the Distribution Date for payment of the Single Sum or Installment Payments for a Specific Period is deferred to the Participant's actual retirement date, and the Participant dies after such anticipated retirement date but before actual retirement. In the absence of a designation by the Participant, the death benefit, under (a) or (b) immediately above, shall be paid to the Participant's surviving spouse in a single sum. If the Participant has no surviving spouse at the time of death, then the death benefit shall be paid to the Participant's estate. 4A.6. Valuation of Alternative Benefit (a) The actuarial equivalent value of the Single Sum shall be determined using the UP 84 Mortality Table, set forward one year for the Participant and set back four years for the Participant's spouse, (if applicable), and the Pension Benefit Guaranty Corporation immediate interest rate. (b) The actuarial equivalent benefit amount for the Installment Payments for a Specific Period will be determined by converting the Single Sum benefit amount, determined under Article 4A.6(a), using the interest rate basis for the immediate annuity purchase rates offered under the Metropolitan Savings and Investment Plan and its successors. 8 (c) The interest rates referenced in Article 4A.6, (a) and (b) above shall be the rates in effect at the following times: (i) For Participants who are Retirement Eligible when they separate from service with the Company or a Subsidiary, the rate in effect, on their Election Date, but in no event earlier than one year before the Participant's retirement date. (ii) For Participants who are not Retirement Eligible when they separate from service with the Company or a Subsidiary, the rate in effect 12 months before their Distribution Date. 4A.7. Power of Committee. The Committee shall have the discretionary power to make any and all administrative decisions regarding the election and payment of an Alternative Distribution, including but not limited to, (i) the design and format of request forms, (ii) the approval or rejection of requests for an Alternative Distribution, (iii) the design and format of revocation forms and (iv) the sending of notices. Article 5. Unfunded Plan. The Plan is completely unfunded. This Plan is entirely separate from the Retirement Plan and any other plan. Participation in this Plan gives a Participant no right to any funds or assets of the Retirement Plan, or any other plan. The fact that contracts or certificates may be distributed to recipients of benefits under the Retirement Plan in discharge of obligations thereunder shall in no way entitle a Participant in this Plan to receive any such contract or certificate in discharge of obligations under this Plan. Article 6. Non-transferability of Participant's Interest No Participant shall have any power or right to transfer, assign, mortgage, commute or otherwise encumber any of the benefits payable hereunder, nor shall such benefits be subject to seizure for the payment of any debts or judgments, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Article 7. Effect of Taxes In making payments under this Plan, the Company and the Subsidiary shall withhold any Federal, state or local income, employment or other taxes, it determines that it is legally obligated to withhold. All tax liabilities arising out of benefits under this Plan are the sole obligation of the Plan Participant(s) or their beneficiary. In the event that a Participant or beneficiary incurs greater tax burdens from payments under this plan (whether income, employment, estate or other tax burdens) than they would if such payments had been made from the Retirement Plan, the Company and the Subsidiary shall have no obligation to reimburse the Participant or beneficiary for such greater tax burdens. 9 Article 8. Change of Control 8.1. Definitions. (a) Change of Control. For the purposes of this Plan, a "Change of Control" shall be deemed to have occurred if: (i) any Person acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities of the Corporation representing 25% or more of the combined Voting Power of the Corporation's securities; within any 24-month period, the persons who were directors of the Corporation at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board of Directors of the Corporation (the "Board") or the board of directors of any successor to the Corporation; provided, however, that any director elected or nominated for election to the Board by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this Section 8.1(a)(ii); the stockholders of the Corporation approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Corporation which is consummated (a "Corporate Event"), and immediately following the consummation of which the stockholders of the Corporation immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the Voting Power of (A) in the case of a merger or consolidation, the surviving or resulting corporation, (B) in the case of a share exchange, the acquiring corporation, or (C) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the Corporation immediately prior to such Corporate Event; or any other event occurs which the Board declares to be a Change of Control. (b) Corporation. For the Purposes of this Article, "Corporation" means MetLife, Inc. (c) Person. For purposes of the definition of Change of Control, "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as supplemented by Section 13(d)(3) of the Exchange Act, and shall include any group (within the meaning of Rule 13d-5(b) under the Exchange Act); provided, however, that "Person" shall not include (A) the Corporation or any Affiliate, (B) the MetLife Policyholder Trust (or any person(s) who would otherwise be described herein solely by reason of having the power to control the voting of the shares held by that trust), or 10 (C) any employee benefit plan (including an employee stock ownership plan) sponsored by the Corporation, Company or any Affiliate. (d) Voting Power. For purposes of the definition of Change of Control, "Voting Power" shall mean such number of Voting Securities as shall enable the holders thereof to cast all the votes which could be cast in an annual election of directors of a company, and "Voting Securities" shall mean all securities entitling the holders thereof to vote in an annual election of directors of a company. (e) Affiliate. For the purposes of this article, an "Affiliate" shall mean any corporation, partnership, limited liability company, trust or other entity which directly, or indirectly through one or more intermediaries, controls, or is controlled by, the Corporation. (f) Cause. For the purposes of this article, "Cause" means either: (i) the Participant's conviction or plea of nolo contendere to a felony, or, any act or acts of dishonesty or gross misconduct on the Participant's part which results or is intended to result in material damage to the business or reputation of MetLife. (g) Good Reason. For the purposes of this article, "Good Reason" means any of: (i) any reduction by the Corporation or an Affiliate in the Participant's base salary rate below the rate in effect immediately before the Change of Control; any relocation by the Corporation or an Affiliate of the Participant's usual base work location to any other office or location more than 50 miles from the Participant's usual base work location immediately prior to a Change of Control, except for travel reasonably required in the performance of the Participant's responsibilities; if the Participant is a party to an Employment Continuation Agreement with the Corporation or an Affiliate, any circumstance or occurrence constituting "Good Reason" under that Employment Continuation Agreement; the failure of the Corporation or an Affiliate to pay the Employee's base salary or employee benefits as required by law. 8.2. Vesting and Other Rights on and After a Change of Control Subject to Conditions In the event that: (a) there is a Change of Control as defined in Section 8.1(a) of this Article, and, 11 (b) on the date of the Change of Control or on a date before the second anniversary of the Change of Control, a Participant in this Plan: (i) is involuntarily terminated from employment by the Corporation or any Affiliate (other than directly in connection with a transfer of employment to or from the Corporation or any Affiliate) without Cause, (ii) voluntarily terminates employment with the Corporation or any Affiliate for Good Reason, then the Participant's unvested benefits and rights accrued as of the Change of Control in each, the Retirement Plan and this Plan, will vest immediately under this Plan, notwithstanding any other provision of the Retirement Plan or this Plan, or any amendment or termination of this Plan taking place on or after a Change of Control. These accrued benefits will be paid under this Plan according to the ordinary distribution rules of this Plan. The ordinary distribution rules of this Plan are described in Article 4 and where applicable, Article 4A as they existed immediately prior to the Change of Control. If this Section 8.2 is triggered, a Participant under Section 2.2 does not have to obtain Committee approval for an Alternate Distribution in the form of a Single Sum or Installment Payments for a Specific Period. Article 9. Interpretation of the Plan The Committee is empowered to take all actions it deems appropriate in administering this Plan. Claims for benefits and appeals of denied claims under the Plan shall be administered in accordance with Section 503 of ERISA, the regulations thereunder (and any other law that amends, supplements or supersedes said Section of ERISA), and the procedures adopted by the Committee, or its delegate, as appropriate. The claims procedures referenced above are incorporated herein by reference. The Plan shall provide adequate notice to any claimant whose claim for benefits under the Plan has been denied, setting forth the reasons for such denial, and afford a reasonable opportunity to such claimant for a full and fair review by the appropriate administrator of the decision denying the claim. Benefits will be paid under the Plan only if the Committee, or its delegate, determines in its discretion that the applicant is entitled to them. In the event of a difference of opinion between a Participant and the Committee with respect to the meaning or application of the provisions of the Plan, the Committee's final interpretation shall be binding and conclusive. However, once a Change of Control (as defined in Article 8) has occurred, this Article 9 shall no longer apply to differences of opinion between the Committee and a Participant regarding the application of Article 8 of this Plan to a Participant or with regard to any rights or benefits protected under Article 8 of this Plan or otherwise accrued prior to the Change of Control including the vesting thereof. 12 Article 10. Governing Law To the extent not inconsistent with Federal law, the validity of the Plan and its provisions shall be construed according to the laws of the State of New York. Article 11. Amendment and Termination of Plan 11.1. Except to the extent required by law, the Committee may amend or terminate this Plan at any time without the consent of any Participant or of any other person. However, any such amendment or termination will not adversely affect the benefit entitlements of: (a) any Participant receiving benefits under the Plan at or prior to the time of such amendment or termination, or, (b) any employee who is a Participant in the Retirement Plan to the extent of the present value of their accrued benefit under this Plan prior to the time of such amendment or termination. However, amendments may be made to all other aspects of this Plan including, but not limited to: (i) amendments impacting the timing under which the Participant's entire accrued benefit is paid, or, amendments impacting the optional forms of benefit available for payment of the Participant's entire accrued benefit. Notwithstanding the above, any amendment or group of amendments made effective on the same date, which would increase or decrease the annual cost of Plan benefits for active Plan Participants and former Plan Participants by ten million dollars or more in the aggregate, as determined in good faith by the Committee, shall take effect only after the action is authorized or ratified by the Board of Directors of Metropolitan Life Insurance Company. 11.2. (a) Notwithstanding the provisions of Section 11.1 above, or any other provision of this plan, on or after a Change of Control (as defined in Article 8), amendments can no longer be made to Article 8, Article 9 or Section 11.2 of Article 11 of this Plan; and (b) Participants who: (i) accrued rights or benefits under this Plan prior to a Change of Control (as defined in Article 8), and, whose rights or benefits are not vested at the time of the Change of Control cannot have the vesting schedule, applicable on the day prior to the Change of Control, amended with regard to such rights or benefits, and cannot forfeit, or be deprived of, 13 their right to vest in these accrued benefits due to any amendment or termination of this Plan. METROPOLITAN LIFE INSURANCE COMPANY By /s/ James N. Heston -------------------------------------------- Date October 31, 2003 -------------------------------------------- Witness /s/ Teresa Porochnia -------------------------------------------- 14 Appendix A. List of Additional Individuals Covered Under This Plan. The following additional individuals, who were covered under this Plan as of January 1, 1995, are grandfathered as Participants under Section 2.2 of this Plan: Anthony E. Amodeo Oliver N. Greeves Sibyl C. Jacobson William D. Kerrigan Alan E. Lazarescu Felix Schirripa Anthony F. Trani 15 EX-12.1 11 y94438exv12w1.txt COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHANGES . . . EXHIBIT 12.1 METLIFE, INC. RATIO OF EARNINGS TO FIXED CHARGES
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS) Income from continuing operations before provision for income taxes $ 2,630 $ 1,636 $ 570 $ 1,257 $ 1,047 Minority interests 110 73 57 115 55 Undistributed income and losses of investees 144 153 (102) (200) (162) -------- -------- -------- -------- -------- ADJUSTED EARNINGS 2,884 1,862 525 1,172 940 ======== ======== ======== ======== ======== ADD FIXED CHARGES: Interest 478 403 332 436 405 Estimated interest component of rent expense (1) 59 86 82 59 45 Interest credited to bank deposits 17 7 3 -- -- Interest credited to policyholder account balances 3,035 2,950 3,084 2,935 2,442 -------- -------- -------- -------- -------- TOTAL FIXED CHARGES 3,589 3,446 3,501 3,430 2,892 ======== ======== ======== ======== ======== -------- -------- -------- -------- -------- TOTAL EARNINGS $ 6,473 $ 5,307 $ 4,025 $ 4,603 $ 3,832 ======== ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES 1.80 1.54 1.15 1.34 1.33 ======== ======== ======== ======== ========
(1) 23.1% for 2003, 29.1% for 2002 and 2001, and 25.9% for all previous periods EX-21.1 12 y94438exv21w1.txt SUBSIDIARIES EXHIBIT 21.1 METLIFE, INC. As of December 31, 2003 Wholly-Owned Active Subsidiaries - -------------------------------- 23RD STREET INVESTMENTS, INC.(DE) 334 MADISON EURO INVESTMENTS, INC. (DE) 334 MADISON AVENUE BTP-D HOLDINGS, LLC (DE) 334 MADISON AVENUE BTP-E HOLDINGS, LLC (DE) ALTERNATIVE FUEL I, LLC (DE) BENEFIT SERVICES CORPORATION (GA) BOND TRUST ACCOUNT A (MA) CBNJ, INC. (NJ) COATING TECHNOLOGIES INTERNATIONAL, INC. (DE) CONVENT STATION EURO INVESTMENTS FOUR COMPANY (UNITED KINGDOM) COVA CORPORATION (MO) COVA LIFE MANAGEMENT COMPANY (DE) CRB CO., INC. (MA) CRH CO., INC. (MA) CROSS & BROWN COMPANY (NY) ECONOMY FIRE & CASUALTY COMPANY (IL) ECONOMY PREFERRED INSURANCE COMPANY (IL) ECONOMY PREMIER ASSURANCE COMPANY (IL) EQUITY INTERMEDIARY COMPANY (MO) EXETER REASSURANCE COMPANY, LTD. (BERMUDA) FAIRFIELD INSURANCE AGENCY OF TEXAS, INC. (TX) FIRST METLIFE INVESTORS INSURANCE COMPANY (NY) GA HOLDING CORP. (MA) GENAMERICA CAPITAL I (DE) GENAMERICA FINANCIAL CORPORATION (MO) GENAMERICA MANAGEMENT CORPORATION (MO) KRISMAN, INC. (MO) GENERAL AMERICAN DISTRIBUTORS, INC. (MO) GENERAL AMERICAN LIFE INSURANCE COMPANY (MO) HEREFORD INSURANCE AGENCY, INC. (MA) HYATT LEGAL PLANS, INC. (DE) HYATT LEGAL PLANS OF FLORIDA, INC. (FL) HPZ ASSETS LLC (DE) JEFFERSON PILOT OMEGA SEGUROS DE VIDA S.A. (URUGUAY) L/C DEVELOPMENT CORPORATION (CA) METDENT, INC. (DE) MET P&C MANAGING GENERAL AGENCY, INC. (TX) MET INVESTORS ADVISORY, LLC (DE) METLIFE ADVISERS, LLC (MA) METLIFE AFJP S.A. (ARGENTINA) METLIFE AUTO & HOME INSURANCE AGENCY, INC. (RI) METLIFE BANK, NATIONAL ASSOCIATION (USA) METLIFE CAPITAL CFLI HOLDINGS, LLC (DE) METLIFE CAPITAL CFLI LEASING, LLC (DE) METLIFE CAPITAL CREDIT L.P. (DE) METLIFE CAPITAL, LIMITED PARTNERSHIP (DE) METLIFE CENTRAL EUROPEAN SERVICES SPOLKA Z ORGANICZONA ODPOWIEDZIALMOSCIA (POLAND) METLIFE CHILE ADMINISTRADORA DE MUTUOS HIPOTECARIOS S.A.(CHILE) METLIFE CHILE INVERSIONES LIMITADA (CHILE) METLIFE CHILE SEGUROS DE VIDA S.A. (CHILE) METLIFE CREDIT CORP.(DE) METLIFE FUNDING, INC. (DE) METLIFE GENERAL INSURANCE AGENCY, INC. (DE) METLIFE GENERAL INSURANCE AGENCY OF MASSACHUSETTS, INC.(MA) METLIFE GENERAL INSURANCE AGENCY OF TEXAS, INC. (DE) METLIFE GROUP, INC. (NY) METLIFE HOLDINGS, INC. (DE) METLIFE IBERIA, S.A. (SPAIN) METLIFE (INDIA) PRIVATE LTD. (INDIA) METLIFE INTERNATIONAL HOLDINGS, INC. (DE) METLIFE INVESTMENTS ASIA LIMITED (HONG KONG) METLIFE INVESTMENTS IRELAND LIMITED (IRELAND) METLIFE INVESTMENTS LIMITED (UNITED KINGDOM) METLIFE INVESTMENTS, S.A. (ARGENTINA) METLIFE INVESTORS DISTRIBUTION COMPANY (DE) METLIFE INVESTORS GROUP, INC. (DE) METLIFE INVESTORS FINANCIAL AGENCY, INC. (TX) METLIFE INVESTORS INSURANCE COMPANY (MO) METLIFE INVESTORS INSURANCE COMPANY OF CALIFORNIA (CA) METLIFE INVESTORS USA INSURANCE COMPANY (DE) METLIFE LATIN AMERICA ASESORIAS E INVERSIONES LIMITADA (CHILE) METLIFE MEXICO S.A. (MEXICO) (MEXICO) METLIFE PENSIONES S.A. (MEXICO) METLIFE PRIVATE EQUITY HOLDINGS, LLC (DE) METLIFE SAENGMYOUNG INSURANCE COMPANY LTD. (SOUTH KOREA)- (also known as MetLife Insurance Company of Korea Limited) METLIFE SECURITIES, INC. (DE) METLIFE SERVICES COMPANY CZECHIA S.R.O (CZECH REPUBLIC) METLIFE TAIWAN INSURANCE COMPANY LIMITED (TAIWAN) METPARK FUNDING, INC. (DE) METROPOLITAN ASSET MANAGEMENT CORPORATION (DE) METROPOLITAN CASUALTY INSURANCE COMPANY (RI) METROPOLITAN DIRECT PROPERTY AND CASUALTY INSURANCE COMPANY (RI) METROPOLITAN GENERAL INSURANCE COMPANY (RI) METROPOLITAN GROUP PROPERTY AND CASUALTY INSURANCE COMPANY (RI) METROPOLITAN INSURANCE AND ANNUITY COMPANY (DE) METROPOLITAN INSURANCE SERVICES LIMITED (UNITED KINGDOM) METROPOLITAN LIFE HOLDINGS, NETHERLANDS BV (NETHERLANDS) METROPOLITAN LIFE INSURANCE COMPANY (NY) METROPOLITAN LIFE INSURANCE COMPANY OF HONG KONG LIMITED (HONG KONG) METROPOLITAN LIFE SEGUROS DE RETIRO S.A. (ARGENTINA) METROPOLITAN LIFE SEGUROS DE VIDA S.A. (ARGENTINA) METROPOLITAN LIFE SEGUROS DE VIDA S.A. (URUGUAY) METROPOLITAN LLOYDS, INC. (TX) METROPOLITAN LLOYDS INSURANCE COMPANY OF TEXAS (TX) METROPOLITAN LIFE SEGUROS E PREVIDENCIA PRIVADA S.A. (BRAZIL) METROPOLITAN MARINE WAY INVESTMENTS LIMITED (CANADA) METROPOLITAN PROPERTY AND CASUALTY INSURANCE COMPANY (RI) METROPOLITAN REALTY MANAGEMENT, INC. (DE) METROPOLITAN REINSURANCE COMPANY (U.K.) LIMITED (UNITED KINGDOM) METROPOLITAN TOWER LIFE INSURANCE COMPANY (DE) METROPOLITAN TOWER REALTY COMPANY, INC.(DE) MEZZANINE INVESTMENT LIMITED PARTNERSHIP-BDR (DE) MEZZANINE INVESTMENT LIMITED PARTNERSHIP-LG (DE) MISSOURI REINSURANCE (BARBADOS), INC. (BARBADOS) NATHAN & LEWIS ASSOCIATES-ARIZONA, INC. (AZ) NATHAN & LEWIS ASSOCIATES, INC.(NY) NATHAN AND LEWIS ASSOCIATES OHIO, INCORPORATED (OH) NATHAN AND LEWIS ASSOCIATES OF TEXAS, INC.(TX) NATHAN AND LEWIS INSURANCE AGENCY OF MASSACHUSETTS, INC.(MA) NATILOPORTEM HOLDINGS, INC. (DE) NEW ENGLAND FINANCIAL DISTRIBUTORS LLC (DE) NEW ENGLAND LIFE INSURANCE COMPANY (MA) NEW ENGLAND PENSION AND ANNUITY COMPANY (DE) NEW ENGLAND SECURITIES CORPORATION (MA) NEWBURY INSURANCE COMPANY, LIMITED (BERMUDA) N.L. HOLDING CORP. (DEL) (NY) OMEGA REINSURANCE CORPORATION (AZ) ONE MADISON INVESTMENTS (CAYCO) LIMITED (CAYMAN ISLANDS) ONE MADISON MERCHANDISING L.L.C.(CT) PARAGON LIFE INSURANCE COMPANY (MO) PARK TWENTY THREE INVESTMENTS COMPANY (UNITED KINGDOM) PARTNERS TOWER, L.P. (DE) SERVICIOS ADMINISTRATIVOS GEN, S.A. DE C.V. (MEXICO) TEXAS LIFE INSURANCE COMPANY (TX) TEXAS LIFE AGENCY SERVICES, INC. (TX) TEXAS LIFE AGENCY SERVICES OF KANSAS, INC. (KS) THORNGATE, LLC (DE) TH TOWER LEASING, LLC (DE) TH TOWER NGP, LLC (DE) TRANSMOUNTAIN LAND & LIVESTOCK COMPANY (MT) WALNUT STREET ADVISERS, INC. (MO) WALNUT STREET SECURITIES, INC. (MO) WHITE OAK ROYALTY COMPANY (OK) WSS INSURANCE AGENCY OF MASSACHUSETTS, INC.(MA) WSS INSURANCE AGENCY OF NEVADA, INC. (NV) METLIFE, INC. AS OF DECEMBER 31, 2003 Companies of which MetLife, Inc. directly or indirectly has actual ownership (for its own account) of 10% through 99% of the total outstanding voting stock(1) - ---------------------------------------------------------------------------- DIGITAL LIGHTHOUSE CORP. (f/k/a ETINUUM)(14.1%)(DE) ECLIPSE CLAIM SERVICES INC. (25%) (CANADA) EUROPEAN MARKETING SERVICES S.r.l. (ITALY) 95% FAIRFIELD MANAGEMENT GROUP, INC. (51.9%)(MO) GRAND CATHAY SECURITIES INVESTMENT TRUST CO., LTD. (20%) (TAIWAN) GENERAL AMERICAN ARGENTINA SEGUROS DE VIDA, S.A. (51.9%) (ARGENTINA) GENESIS SEGUROS GENERALES, SOCIEDAD ANONIMA DE SEGUROS Y REASEGUROS (80%)(SPAIN) GREAT RIVERS REINSURANCE MANAGEMENT, INC. (48.13%)(MO) LONG TERM CARE PARTNERS, LLC (50%) (DE) MALAYSIA LIFE REINSURANCE GROUP BERHAD (17.55%) (MALAYSIA) METLIFE INDIA INSURANCE COMPANY PRIVATE LIMITED (26%) (INDIA) METRIC ASSIGNOR, INC. (99.26%) (CA) METRIC CAPITAL CORPORATION (99.26%) (CA) METRIC MANAGEMENT, INC. (99.26%) (DE) METRIC PROPERTY MANAGEMENT, INC. (99.26%) (DE) METROPOLITAN LLOYDS INSURANCE COMPANY OF TEXAS(2) (TX) METROPOLITAN STRUCTURES (50%) (IL) P.T. METLIFE SEJAHTERA (94.3%)(INDONESIA) REGAL ATLANTIC COMPANY (BERMUDA) LTD. (51.9%) (BERMUDA) REINSURANCE COMPANY OF MISSOURI, INCORPORATED (51.9%)(MO) REINSURANCE GROUP OF AMERICA, INCORPORATED (51.9%)(MO) REINSURANCE PARTNERS, INC. (51.9%)(MO) RGA AMERICAS REINSURANCE COMPANY, LTD. (51.9%)(BARBADOS) RGA ARGENTINA S.A. (51.9%)(ARGENTINA) RGA ASIA PACIFIC PTY, LIMITED (AUSTRALIA) RGA AUSTRALIAN HOLDINGS PTY LIMITED (51.9%)(AUSTRALIA) RGA CAPITAL LIMITED (U.K.)(51.9%)(UNITED KINGDOM) RGA CAPITAL TRUST I (DE) (51.9%) RGA FINANCIAL GROUP, L.L.C. (51.9%)(DE) RGA FINANCIAL PRODUCTS LIMITED (51.9%)(CANADA) RGA HOLDINGS LIMITED (U.K.) (51.9%)(UNITED KINGDOM) RGA INTERNATIONAL REINSURANCE COMPANY (IRELAND) RGA INTERNATIONAL CORPORATION (51.9%) (NOVA SCOTIA) RGA LIFE REINSURANCE COMPANY OF CANADA (51.9%)(CANADA) RGA REINSURANCE COMPANY (51.9%) (MO) RGA REINSURANCE COMPANY (BARBADOS) LTD. (51.9%)(BARBADOS) RGA REINSURANCE COMPANY OF AUSTRALIA LIMITED (51.9%)(AUSTRALIA) - ---------- (1) Does not include real estate joint ventures and partnerships of which MetLife, Inc. and/or its subsidiaries is an investment partner. (2) Affiliate RGA REINSURANCE COMPANY OF SOUTH AFRICA LIMITED (51.9%)(SOUTH AFRICA) RGA REINSURANCE (UK) LIMITED (51.9%) (UNITED KINGDOM) RGA SIGMA REINSURANCE SPC (51.9%) (CAYMAN ISLANDS) RGA SOUTH AFRICAN HOLDINGS (PTY) LTD. (51.9%)(SOUTH AFRICA) RGA TECHNOLOGY PARTNERS, INC. (MO) RGA UK SERVICES LIMITED (51.9%) (UNITED KINGDOM) RGA (U.K.) UNDERWRITING AGENCY LIMITED (51.9%)(UNITED KINGDOM) SEGUROS GENESIS, S.A. (SPAIN) (80%)(SPAIN) SSR AV, INC. (99.26%) (DE) SSR AVF III LLC (99.26%) (DE) SSR DEVELOPMENT PARTNERS LLC (99.26%) (DE) SSR REALTY ADVISORS, INC. (99.26%) (DE) STATE STREET RESEARCH INVESTMENT SERVICES, INC. (99.26%) (MA) STATE STREET RESEARCH & MANAGEMENT COMPANY (99.26%) (DE) SSRM HOLDINGS, INC. (99.26%)(DE) ST. JAMES FLEET INVESTMENTS TWO LIMITED (34%)(CAYMAN ISLANDS) STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE(4) (63.9%)(MA) STATE STREET RESEARCH STRATEGIC INCOME PLUS(4) (71.9%)(MA) STATE STREET RESEARCH INTELLIQUANT PORTFOLIOS: SMALL CAP VALUE(4)(99.2%)(MA) TRIAD RE, LTD. (67%)(BARBADOS) - ---------- (4) Mutual Fund METLIFE, INC. AS OF DECEMBER 31, 2003 Publicly-Held Companies of which MetLife, Inc. directly or indirectly has actual ownership (for its Own Account) of 10% through 99% of the total outstanding voting stock or control: - ------------------------ DAN RIVER, INC. (GA) REINSURANCE GROUP OF AMERICA, INCORPORATED (MO) EX-23.1 13 y94438exv23w1.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-112073, 333-112073-01 and 333-112073-02 on Form S-3 and 333-37108, 333-59134, 333-101291 and 333-102306 on Form S-8, of MetLife, Inc., of our report dated March 5, 2004 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to a change in accounting for embedded derivatives), appearing in this Annual Report on Form 10-K of MetLife, Inc. for the year ended December 31, 2003. We also consent to the reference to us under the heading "Experts" in such registration statements. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP New York, New York March 5, 2004 EX-31.1 14 y94438exv31w1.txt CERTIFICATION OF CEO EXHIBIT 31.1 CERTIFICATION ------------- I, Robert H. Benmosche, Chief Executive Officer of MetLife, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of MetLife, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2004 /s/ Robert H. Benmosche ------------------------- Robert H. Benmosche Chairman, President and Chief Executive Officer EX-31.2 15 y94438exv31w2.txt CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATION ------------- I, William J. Wheeler, Chief Financial Officer of MetLife, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of MetLife, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2004 /s/ William J. Wheeler -------------------------------- William J. Wheeler Executive Vice President and Chief Financial Officer EX-32.1 16 y94438exv32w1.txt CERTIFICATION OF CEO EXHIBIT 32.1 SECTION 906 CERTIFICATION CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE I, Robert H. Benmosche, the Chief Executive Officer of MetLife, Inc. (the "Company"), certify that (i) the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (the "Form 10-K") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 5, 2004 By: /s/ Robert H. Benmosche -------------------------- Robert H. Benmosche Chairman, President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to MetLife, Inc. and will be retained by MetLife, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 17 y94438exv32w2.txt CERTIFICATION OF CFO EXHIBIT 32.2 SECTION 906 CERTIFICATION CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE I, William J. Wheeler, the Chief Financial Officer of MetLife, Inc. (the "Company"), certify that (i) the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (the "Form 10-K") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 5, 2004 By: /s/ William J. Wheeler -------------------------- William J. Wheeler Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to MetLife, Inc. and will be retained by MetLife, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----