-----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, HZKgIpShJ6BFCANgLNQFsztoCqZkt7ZShzWtp5G8vc7rxEXkpqWXG97mVS2HNH0x B0bbqGAYCTao/5w+r5ufpQ== 0000950123-06-005901.txt : 20060509 0000950123-06-005901.hdr.sgml : 20060509 20060508195045 ACCESSION NUMBER: 0000950123-06-005901 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060509 DATE AS OF CHANGE: 20060508 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15787 FILM NUMBER: 06818338 BUSINESS ADDRESS: STREET 1: 200 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10166 BUSINESS PHONE: 2125782211 MAIL ADDRESS: STREET 1: 200 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10166 10-Q 1 y20450e10vq.txt FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006 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.) 200 PARK AVENUE, NEW YORK, NY 10166-0188 (Address of principal (Zip Code) executive offices)
(212) 578-2211 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] At May 1, 2006, 758,638,225 shares of the registrant's common stock, $0.01 par value per share, were outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS.............................. 4 Interim Condensed Consolidated Balance Sheets at March 31, 2006 (Unaudited) and December 31, 2005................. 4 Interim Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2006 and 2005 (Unaudited)............................................ 5 Interim Condensed Consolidated Statement of Stockholders' Equity for the Three Months Ended March 31, 2006 (Unaudited)............................................ 6 Interim Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Unaudited)............................................ 7 Notes to Interim Condensed Consolidated Financial Statements (Unaudited)................................. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 56 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 113 ITEM 4. CONTROLS AND PROCEDURES........................... 117 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS................................. 118 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS............................................... 123 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 123 ITEM 6. EXHIBITS.......................................... 125 SIGNATURES................................................ 126 EXHIBIT INDEX............................................. E-1
2 NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q, including the Management's Discussion and Analysis of Financial Condition and Results of Operations, contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to trends in the operations and financial results and the business and the products of MetLife, Inc. and its subsidiaries, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and other similar expressions. Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects on MetLife, Inc. and its subsidiaries. Such forward-looking statements are not guarantees of future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS METLIFE, INC. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2006 (UNAUDITED) AND DECEMBER 31, 2005 (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31, 2006 2005 ------------ --------------- ASSETS Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $238,140 and $223,926, respectively)... $239,828 $230,050 Trading securities, at fair value (cost: $886 and $830, respectively)........................................... 883 825 Equity securities available-for-sale, at fair value (cost: $3,012 and $3,084, respectively)........................ 3,356 3,338 Mortgage and consumer loans............................... 37,351 37,190 Policy loans.............................................. 9,987 9,981 Real estate and real estate joint ventures held-for-investment..................................... 4,677 4,643 Real estate held-for-sale................................. 23 22 Other limited partnership interests....................... 4,514 4,276 Short-term investments.................................... 3,368 3,306 Other invested assets..................................... 8,386 8,078 -------- -------- Total investments....................................... 312,373 301,709 Cash and cash equivalents................................... 5,144 4,018 Accrued investment income................................... 3,145 3,036 Premiums and other receivables.............................. 12,731 12,186 Deferred policy acquisition costs and value of business acquired.................................................. 20,245 19,641 Goodwill.................................................... 4,797 4,797 Other assets................................................ 8,145 8,389 Separate account assets..................................... 132,522 127,869 -------- -------- Total assets............................................ $499,102 $481,645 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Future policy benefits.................................... $122,748 $123,204 Policyholder account balances............................. 129,860 128,312 Other policyholder funds.................................. 8,620 8,331 Policyholder dividends payable............................ 918 917 Policyholder dividend obligation.......................... 814 1,607 Short-term debt........................................... 1,360 1,414 Long-term debt............................................ 9,932 9,888 Junior subordinated debt securities underlying common equity units............................................ 2,134 2,134 Shares subject to mandatory redemption.................... 278 278 Current income taxes payable.............................. 88 69 Deferred income taxes payable............................. 1,199 1,706 Payables for collateral under securities loaned and other transactions............................................ 47,059 34,515 Other liabilities......................................... 13,003 12,300 Separate account liabilities.............................. 132,522 127,869 -------- -------- Total liabilities....................................... 470,535 452,544 -------- -------- Stockholders' Equity: Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 84,000,000 shares issued and outstanding at March 31, 2006 and December 31, 2005; $2,100 aggregate liquidation preference................... 1 1 Common stock, par value $0.01 per share; 3,000,000,000 shares authorized; 786,766,664 shares issued at March 31, 2006 and December 31, 2005; 758,157,941 shares outstanding at March 31, 2006 and 757,537,064 shares outstanding at December 31, 2005......................................... 8 8 Additional paid-in capital.................................. 17,327 17,274 Retained earnings........................................... 11,579 10,865 Treasury stock, at cost; 28,608,723 shares at March 31, 2006 and 29,229,600 shares at December 31, 2005................ (938) (959) Accumulated other comprehensive income (loss)............... 590 1,912 -------- -------- Total stockholders' equity.............................. 28,567 29,101 -------- -------- Total liabilities and stockholders' equity.............. $499,102 $481,645 ======== ========
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 METLIFE, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ------------------- 2006 2005 -------- ------- REVENUES Premiums.................................................... $ 6,428 $5,966 Universal life and investment-type product policy fees...... 1,175 791 Net investment income....................................... 4,239 3,216 Other revenues.............................................. 328 299 Net investment gains (losses)............................... (585) (15) ------- ------ Total revenues......................................... 11,585 10,257 ------- ------ EXPENSES Policyholder benefits and claims............................ 6,405 5,926 Interest credited to policyholder account balances.......... 1,215 795 Policyholder dividends...................................... 421 415 Other expenses.............................................. 2,498 1,971 ------- ------ Total expenses......................................... 10,539 9,107 ------- ------ Income from continuing operations before provision for income taxes.............................................. 1,046 1,150 Provision for income taxes.................................. 296 350 ------- ------ Income from continuing operations........................... 750 800 Income (loss) from discontinued operations, net of income taxes..................................................... (3) 187 ------- ------ Net income.................................................. 747 987 Preferred stock dividends................................... 33 -- ------- ------ Net income available to common shareholders................. $ 714 $ 987 ======= ====== Income from continuing operations available to common shareholders per common share Basic.................................................. $ 0.94 $ 1.09 ======= ====== Diluted................................................ $ 0.93 $ 1.08 ======= ====== Net income available to common shareholders per common share Basic.................................................. $ 0.94 $ 1.34 ======= ====== Diluted................................................ $ 0.93 $ 1.33 ======= ======
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 METLIFE, INC. INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2006 (UNAUDITED) (IN MILLIONS)
ADDITIONAL TREASURY PREFERRED COMMON PAID-IN RETAINED STOCK AT STOCK STOCK CAPITAL EARNINGS COST --------- ------ ---------- -------- -------- Balance at January 1, 2006.............. $1 $8 $17,274 $10,865 $ (959) Treasury stock transactions, net........ 53 21 Dividends on preferred stock............ (33) Comprehensive income (loss): Net income............................ 747 Other comprehensive income (loss): Unrealized gains (losses) on derivative instruments, net of income taxes...................... Unrealized investment gains (losses), net of related offsets and income taxes.................. Other comprehensive income (loss)... Comprehensive income (loss)........... -- -- ------- ------- ------- Balance at March 31, 2006............... $1 $8 $17,327 $11,579 $ (938) == == ======= ======= ======= ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ----------------------------------------- NET FOREIGN MINIMUM UNREALIZED CURRENCY PENSION INVESTMENT TRANSLATION LIABILITY GAINS (LOSSES) ADJUSTMENT ADJUSTMENT TOTAL -------------- ----------- ---------- ------- Balance at January 1, 2006.............. $ 1,942 $11 $(41) $29,101 Treasury stock transactions, net........ 74 Dividends on preferred stock............ (33) Comprehensive income (loss): Net income............................ 747 Other comprehensive income (loss): Unrealized gains (losses) on derivative instruments, net of income taxes...................... 1 1 Unrealized investment gains (losses), net of related offsets and income taxes.................. (1,323) (1,323) ------- Other comprehensive income (loss)... (1,322) ------- Comprehensive income (loss)........... (575) ------- --- ---- ------- Balance at March 31, 2006............... $ 620 $11 $(41) $28,567 ======= === ==== =======
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 METLIFE, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED) (IN MILLIONS)
THREE MONTHS ENDED MARCH 31, ---------------------- 2006 2005 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 2,306 $ 1,656 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Sales, maturities and repayments of: Fixed maturities........................................ 36,090 35,075 Equity securities....................................... 511 231 Mortgage and consumer loans............................. 2,250 1,302 Real estate and real estate joint ventures.............. 155 126 Other limited partnership interests..................... 330 216 Purchases of: Fixed maturities........................................ (50,229) (42,311) Equity securities....................................... (300) (576) Mortgage and consumer loans............................. (2,500) (997) Real estate and real estate joint ventures.............. (450) (104) Other limited partnership interests..................... (503) (318) Net change in short-term investments...................... (63) 210 Proceeds from sales of businesses, net of cash disposed of $0 and $33, respectively................................ -- 252 Net change in other invested assets....................... (312) (133) Other, net................................................ (35) 10 -------- -------- Net cash used in investing activities....................... (15,056) (7,017) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits................................................ 14,072 11,215 Withdrawals............................................. (12,748) (8,785) Net change in payables for collateral under securities loaned and other transactions........................... 12,544 3,035 Net change in short-term debt............................. (54) (325) Long-term debt issued..................................... 100 162 Long-term debt repaid..................................... (23) (134) Dividends on preferred stock.............................. (33) -- Stock options exercised................................... 18 19 Other, net................................................ -- (7) -------- -------- Net cash provided by financing activities................... 13,876 5,180 -------- -------- Change in cash and cash equivalents......................... 1,126 (181) Cash and cash equivalents, beginning of period.............. 4,018 4,106 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 5,144 $ 3,925 ======== ======== Cash and cash equivalents, subsidiaries held-for-sale, beginning of period....................................... $ -- $ 58 ======== ======== CASH AND CASH EQUIVALENTS, SUBSIDIARIES HELD-FOR-SALE, END OF PERIOD................................................. $ -- $ 5 ======== ======== Cash and cash equivalents, from continuing operations, beginning of period....................................... $ 4,018 $ 4,048 ======== ======== CASH AND CASH EQUIVALENTS, FROM CONTINUING OPERATIONS, END OF PERIOD................................................. $ 5,144 $ 3,920 ======== ======== Supplemental disclosures of cash flow information: Net cash paid during the period for: Interest................................................ $ 76 $ 38 ======== ======== Income taxes............................................ $ 87 $ 154 ======== ======== Non-cash transactions during the period: Business Dispositions: Assets disposed....................................... $ -- $ 331 Less: liabilities disposed............................ -- 236 -------- -------- Net assets disposed................................... $ -- $ 95 Plus: equity securities received...................... -- 43 Less: cash disposed................................... -- 33 -------- -------- Business disposition, net of cash disposed............ $ -- $ 105 ======== ========
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 7 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF ACCOUNTING POLICIES BUSINESS "MetLife" or the "Company" refers to MetLife, Inc., a Delaware corporation incorporated in 1999 (the "Holding Company"), and its subsidiaries, including Metropolitan Life Insurance Company ("Metropolitan Life"). MetLife, Inc. is a leading provider of insurance and other financial services to millions of individual and institutional customers throughout the United States. Through its subsidiaries and affiliates, MetLife, Inc. offers life insurance, annuities, automobile and homeowners insurance and retail banking services to individuals, as well as group insurance, reinsurance and retirement & savings products and services to corporations and other institutions. Outside the United States, the MetLife companies have direct insurance operations in Asia Pacific, Latin America and Europe. BASIS OF PRESENTATION The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the unaudited interim condensed consolidated financial statements. The most critical estimates include those used in determining: (i) investment impairments; (ii) the fair value of investments in the absence of quoted market values; (iii) application of the consolidation rules to certain investments; (iv) the fair value of and accounting for derivatives; (v) the capitalization and amortization of deferred policy acquisition costs ("DAC") and the establishment and amortization of value of business acquired ("VOBA"); (vi) the measurement of goodwill and related impairment, if any; (vii) the liability for future policyholder benefits; (viii) accounting for reinsurance transactions; (ix) the liability for litigation and regulatory matters; and (x) accounting for employee benefit plans. The application of purchase accounting requires the use of estimation techniques in determining the fair value of the assets acquired and liabilities assumed -- the most significant of which relate to the aforementioned critical estimates. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company's businesses and operations. Actual results could differ from these estimates. The accompanying unaudited interim condensed consolidated financial statements include the accounts of (i) the Holding Company and its subsidiaries; (ii) partnerships and joint ventures in which the Company has control; and (iii) variable interest entities ("VIEs") for which the Company is deemed to be the primary beneficiary. Closed block assets, liabilities, revenues and expenses are combined on a line-by-line basis with the assets, liabilities, revenues and expenses outside the closed block based on the nature of the particular item. See Note 5. Intercompany accounts and transactions have been eliminated. The Company uses the equity method of accounting for investments in equity securities in which it has more than a 20% interest and for real estate joint ventures and other limited partnership interests in which it has more than a minor equity interest or more than minor influence over the partnership's operations, but does not have a controlling interest and is not the primary beneficiary. The Company uses the cost method of accounting for real estate joint ventures and other limited partnership 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 $1,378 million and $1,291 million at March 31, 2006 and December 31, 2005, respectively. Certain amounts in the prior year periods' unaudited interim condensed consolidated financial statements have been reclassified to conform with the 2006 presentation. Such reclassifications include $332 million relating to net bank deposits reclassified from net cash provided by operating activities to cash flows from financing activities for the three months ended March 31, 2005. This reclassification resulted from the 8 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) reclassification of bank deposit balances from other liabilities to policyholder account balances on the consolidated balance sheet during 2005. In addition, $3,035 million relating to the net change in payables for collateral under securities loaned and other transactions was reclassified from cash flows from investing activities to cash flows from financing activities on the interim condensed consolidated statements of cash flows for the three months ended March 31, 2005. On July 1, 2005, the Holding Company completed the acquisition of The Travelers Insurance Company, excluding certain assets, most significantly, Primerica, from Citigroup Inc. ("Citigroup"), and substantially all of Citigroup's international insurance businesses (collectively, "Travelers"), which is more fully described in Note 2. The acquisition was accounted for using the purchase method of accounting. Travelers' assets, liabilities and results of operations are included in the Company's results beginning July 1, 2005. The accounting policies of Travelers were conformed to those of MetLife upon the acquisition. The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company at March 31, 2006, its consolidated results of operations for the three months ended March 31, 2006 and 2005, its consolidated cash flows for the three months ended March 31, 2006 and 2005 and its consolidated statement of stockholders' equity for the three months ended March 31, 2006, in conformity with GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2005 condensed balance sheet data was derived from audited financial statements included in MetLife, Inc.'s 2005 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") ("2005 Annual Report") and includes all disclosures required by GAAP. Therefore, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in the 2005 Annual Report. Federal Income Taxes Federal income taxes for interim periods have been computed using an estimated annual effective income tax rate. This rate is revised, if necessary, at the end of each successive interim period to reflect the current estimate of the annual effective income tax rate. Stock-Based Compensation Stock-based compensation grants prior to January 1, 2003 were accounted for using the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees, and related interpretations. Compensation expense, if any, was recorded based upon the excess of the quoted market price at grant date over the amount the employee was required to pay to acquire the stock. Under the provisions of APB 25, there was no compensation expense resulting from the issuance of stock options as the exercise price was equivalent to the fair market value at the date of grant. Compensation expense was recognized under the Long-Term Performance Compensation Plan ("LTPCP"), as described more fully in Note 8. Stock-based awards granted after December 31, 2002 but prior to January 1, 2006 were accounted for on a prospective basis using the fair value accounting method prescribed by Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), as amended by SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure ("SFAS 148"). The fair value method of SFAS 123 required compensation expense to be measured based on the fair value of the equity instrument at the grant or award date. Stock-based compensation was accrued over the vesting period of the grant or award, including grants or awards to retirement-eligible employees. As required by SFAS 148, the Company discloses the pro forma impact as if the stock options granted prior to January 1, 2003 had been accounted for using the fair value provisions of SFAS 123 rather than the intrinsic value method prescribed by APB 25. See Note 8. 9 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Effective January 1, 2006, the Company adopted, using the modified prospective transition method, SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123(r)"), which replaces SFAS 123 and supersedes APB 25. The adoption of SFAS 123(r) did not have a significant impact on the Company's financial position or results of operations. SFAS 123(r) requires that the cost of all stock-based transactions be measured at fair value and recognized over the period during which a grantee is required to provide goods or services in exchange for the award. Although the terms of the Company's stock-based plans do not accelerate vesting upon retirement, or the attainment of retirement eligibility, the requisite service period subsequent to attaining such eligibility is considered nonsubstantive. Accordingly, the Company recognizes compensation expense related to stock-based awards over the shorter of the requisite service period or the period to attainment of retirement eligibility. SFAS 123(r) also requires an estimation of future forfeitures of stock-based awards to be incorporated into the determination of compensation expense when recognizing expense over the requisite service period. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS As described previously, effective January 1, 2006, the Company adopted SFAS 123(r) -- including supplemental application guidance issued by the Securities and Exchange Commission in Staff Accounting Bulletin No. 107, Share-Based Payment ("SAB 107") -- using the modified prospective transition method. In accordance with the modified prospective transition method, results for prior periods have not been restated. SFAS 123(r) requires that the cost of all stock-based transactions be measured at fair value and recognized over the period during which a grantee is required to provide goods or services in exchange for the award. The Company had previously adopted the fair value method of accounting for stock-based awards as prescribed by SFAS 123 on a prospective basis effective January 1, 2003, and prior to January 1, 2003, accounted for its stock-based awards to employees under the intrinsic value method prescribed by APB 25. The Company did not modify the substantive terms of any existing awards prior to adoption of SFAS 123(r). Under the modified prospective transition method, compensation expense recognized in the three months ended March 31, 2006 includes: (a) compensation expense for all stock-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all stock-based awards granted beginning January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(r). The adoption of SFAS 123(r) did not have a significant impact on the Company's financial position or results of operations as all stock-based awards accounted for under the intrinsic value method prescribed by APB 25 had vested prior to the adoption date and the Company had adopted the fair value recognition provisions of SFAS 123 on January 1, 2003. As required by SFAS 148, and carried forward in the provisions of SFAS 123(r), the Company discloses the pro forma impact as if stock-based awards accounted for under APB 25 had been accounted for under the fair value method in Note 8. SFAS 123 allowed forfeitures of stock-based awards to be recognized as a reduction of compensation expense in the period in which the forfeiture occurred. Upon adoption of SFAS 123(r), the Company changed its policy and now incorporates an estimate of future forfeitures into the determination of compensation expense when recognizing expense over the requisite service period. The impact of this change in accounting policy was not significant to the Company's financial position or results of operations. Additionally, for awards granted after adoption, the Company changed its policy from recognizing expense for stock-based awards over the requisite service period to recognizing such expense over the shorter of the requisite service period or the period to attainment of retirement eligibility. The pro forma impact of this change in expense recognition policy for stock-based compensation is detailed in Note 8. 10 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Prior to the adoption of SFAS 123(r), the Company presented tax benefits of deductions resulting from the exercise of stock options within operating cash flows in the unaudited interim condensed consolidated statements of cash flow. SFAS 123(r) requires tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options ("excess tax benefits") be classified and reported as a financing cash inflow upon adoption of SFAS 123(r). The Company has adopted guidance relating to derivative financial instruments as follows: - Effective January 1, 2006, the Company adopted prospectively SFAS No. 155, Accounting for Certain Hybrid Instruments ("SFAS 155"). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging ("SFAS 133") and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140"). SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole, eliminating the need to bifurcate the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. In addition, among other changes, SFAS 155 (i) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133; (ii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (iii) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (iv) eliminates the prohibition on a qualifying special-purpose entity ("QSPE") from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial interest. The adoption of SFAS 155 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. - Effective January 1, 2006, the Company adopted prospectively SFAS 133 Implementation Issue No. B38, Embedded Derivatives: Evaluation of Net Settlement with Respect to the Settlement of a Debt Instrument through Exercise of an Embedded Put Option or Call Option ("Issue B38") and SFAS 133 Implementation Issue No. B39, Embedded Derivatives: Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor ("Issue B39"). Issue B38 clarifies that the potential settlement of a debtor's obligation to a creditor occurring upon exercise of a put or call option meets the net settlement criteria of SFAS No. 133. Issue B39 clarifies that an embedded call option, in which the underlying is an interest rate or interest rate index, that can accelerate the settlement of a debt host financial instrument should not be bifurcated and fair valued if the right to accelerate the settlement can be exercised only by the debtor (issuer/borrower) and the investor will recover substantially all of its initial net investment. The adoption of Issues B38 and B39 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective January 1, 2006, the Company adopted prospectively Emerging Issues Task Force ("EITF") Issue No. 05-7, Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues ("EITF 05-7"). EITF 05-7 provides guidance on whether a modification of conversion options embedded in debt results in an extinguishment of that debt. In certain situations, companies may change the terms of an embedded conversion option as part of a debt modification. The EITF concluded that the change in the fair value of an embedded conversion option upon modification should be included in the analysis of EITF Issue No. 96-19, Debtor's Accounting for a Modification or Exchange of Debt Instruments, to determine whether a modification or extinguishment has occurred and that a change in the fair value of a conversion option should be recognized upon the modification as a discount (or premium) associated with the debt, and an increase (or decrease) in additional paid-in capital. The adoption of EITF 05-7 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective January 1, 2006, the Company adopted EITF Issue No. 05-8, Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature ("EITF 05-8"). EITF 05-8 concludes that (i) the issuance of convertible debt with a beneficial conversion feature results in a basis difference that 11 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) should be accounted for as a temporary difference; and (ii) the establishment of the deferred tax liability for the basis difference should result in an adjustment to additional paid-in capital. EITF 05-8 was applied retrospectively for all instruments with a beneficial conversion feature accounted for in accordance with EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments. The adoption of EITF 05-8 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective January 1, 2006, the Company adopted SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"). The statement requires retrospective application to prior periods' financial statements for a voluntary change in accounting principle unless it is deemed impracticable. It also requires that a change in the method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate rather than a change in accounting principle. The adoption of SFAS 154 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. In June 2005, the EITF reached consensus on Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights ("EITF 04-5"). EITF 04-5 provides a framework for determining whether a general partner controls and should consolidate a limited partnership or a similar entity in light of certain rights held by the limited partners. The consensus also provides additional guidance on substantive rights. EITF 04-5 was effective after June 29, 2005 for all newly formed partnerships and for any pre-existing limited partnerships that modified their partnership agreements after that date. For all other limited partnerships, EITF 04-5 required adoption by January 1, 2006 through a cumulative effect of a change in accounting principle recorded in opening equity or applied retrospectively by adjusting prior period financial statements. The adoption of the provisions of EITF 04-5 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective November 9, 2005, the Company prospectively adopted the guidance in Financial Accounting Standards Board ("FASB") Staff Position ("FSP") FAS 140-2, Clarification of the Application of Paragraphs 40(b) and 40(c) of FAS 140 ("FSP 140-2"). FSP 140-2 clarified certain criteria relating to derivatives and beneficial interests when considering whether an entity qualifies as a QSPE. Under FSP 140-2, the criteria must only be met at the date the QSPE issues beneficial interests or when a derivative financial instrument needs to be replaced upon the occurrence of a specified event outside the control of the transferor. The adoption of FSP 140-2 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective July 1, 2005, the Company adopted SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 ("SFAS 153"). SFAS 153 amended prior guidance to eliminate the exception for nonmonetary exchanges of similar productive assets and replaced it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS 153 were required to be applied prospectively for fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective July 1, 2005, the Company adopted EITF Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements ("EITF 05-6"). EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease 12 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) inception. As required by EITF 05-6, the Company adopted this guidance on a prospective basis which had no material impact on the Company's unaudited interim condensed consolidated financial statements. In June 2005, the FASB completed its review of 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 accounting guidance regarding the determination of when an impairment of debt and marketable equity securities and investments accounted for under the cost method should be considered other-than-temporary and recognized in income. EITF 03-1 also requires 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 FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment but has issued FSP 115-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments ("FSP 115-1"), which nullifies the accounting guidance on the determination of whether an investment is other-than-temporarily impaired as set forth in EITF 03-1. As required by FSP 115-1, the Company adopted this guidance on a prospective basis, which had no material impact on the Company's unaudited interim condensed consolidated financial statements, and has provided the required disclosures. In December 2004, the FASB issued FSP 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 ("FSP 109-2"). The American Jobs Creation Act of 2004 ("AJCA") introduced a one-time dividend received deduction on the repatriation of certain earnings to a U.S. taxpayer. FSP 109-2 provides companies additional time beyond the financial reporting period of enactment to evaluate the effects of the AJCA on their plans to repatriate foreign earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes. As of March 31, 2005, the Company was evaluating the impacts of the repatriation provision of the AJCA and during the second half of 2005, the Company recorded a $27 million income tax benefit related to the repatriation of foreign earnings pursuant to Internal Revenue Code Section 965 for which a U.S. deferred income tax provision had previously been recorded. FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets -- an amendment of FASB Statement No. 140 ("SFAS 156"). SFAS 156 amends the guidance in SFAS 140. Among other requirements, SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations. SFAS 156 will be applied prospectively and is effective for fiscal years beginning after September 15, 2006. SFAS 156 is not expected to have a material impact on the Company's consolidated financial statements. In September 2005, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts ("SOP 05-1"). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Under SOP 05-1, modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. A replacement contract that is substantially changed will be accounted for as an extinguishment of the replaced contract resulting in a release of unamortized deferred acquisition costs, unearned revenue and deferred sales inducements associated with the replaced contract. The guidance 13 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) in SOP 05-1 will be applied prospectively and is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of SOP 05-1 and does not expect that the pronouncement will have a material impact on the Company's consolidated financial statements. 2. ACQUISITIONS AND DISPOSITIONS TRAVELERS On July 1, 2005, the Holding Company completed the acquisition of Travelers for $12.0 billion. The results of Travelers' operations were included in the Company's unaudited interim condensed consolidated financial statements beginning July 1, 2005. As a result of the acquisition, management of the Company increased significantly the size and scale of the Company's core insurance and annuity products and expanded the Company's presence in both the retirement & savings domestic and international markets. The distribution agreements executed with Citigroup as part of the acquisition will provide the Company with one of the broadest distribution networks in the industry. Consideration paid by the Holding Company for the purchase consisted of approximately $10.9 billion in cash and 22,436,617 shares of the Holding Company's common stock with a market value of approximately $1.0 billion to Citigroup and approximately $100 million in other transaction costs. Consideration paid to Citigroup will be finalized subject to review of the June 30, 2005 financial statements of Travelers by both the Company and Citigroup and interpretation of the provisions of the acquisition agreement by both parties. In addition to cash on-hand, the purchase price was financed through the issuance of common stock, debt securities, common equity units and preferred shares. The acquisition was accounted for using the purchase method of accounting, which requires that the assets and liabilities of Travelers be measured at their fair value as of July 1, 2005. The purchase price has been allocated to the assets acquired and liabilities assumed using management's best estimate of their fair values as of the acquisition date. The computation of the purchase price and the allocation of the purchase price to the net assets acquired based upon their respective fair values as of July 1, 2005 resulted in goodwill of $4.2 billion as follows:
AS OF JULY 1, 2005 ------------------ (IN MILLIONS) Total assets acquired.............................. $ 97,862 Total liabilities assumed.......................... (90,073) -------- Net assets acquired................................ 7,789 Goodwill, resulting from acquisition............... 4,177 -------- Total purchase price............................. $ 11,966 ========
The fair value of certain assets acquired and liabilities assumed, including goodwill, may be adjusted during the allocation period due to finalization of the purchase price to be paid to Citigroup as noted previously, agreement between Citigroup and MetLife as to the tax basis purchase price to be allocated to the acquired subsidiaries, and receipt of information regarding the estimation of certain fair values including certain future policy benefit liabilities. In no case will these adjustments extend beyond one year from the acquisition date or July 1, 2006. As part of the integration of Travelers' operations, management approved and initiated plans to reduce approximately 1,000 domestic and international Travelers employees, which are expected to be completed by December 2006. At March 31, 2006 and December 31, 2005, MetLife accrued restructuring costs of approximately $21 million and $28 million, respectively, which included severance, relocation and outplacement services for Travelers' employees. For the three months ended March 31, 2006, cash payments of approximately $7 million were made. The estimated total restructuring expenses may change as management 14 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) continues to execute the approved plan. Decreases to these estimates are recorded as an adjustment to goodwill. Increases to these estimates are recorded as an adjustment to goodwill during the purchase price allocation period (generally within one year of the acquisition date) and will be recorded as operating expenses thereafter. OTHER ACQUISITIONS AND DISPOSITIONS On September 1, 2005, the Company completed the acquisition of CitiStreet Associates, a division of CitiStreet LLC, which is primarily involved in the distribution of annuity products and retirement plans to the education, healthcare, and not-for-profit markets, for approximately $56 million. CitiStreet Associates was integrated with MetLife Resources, a division of MetLife dedicated to providing retirement plans and financial services to the same markets. See Note 12 for information on the dispositions of P.T. Sejahtera ("MetLife Indonesia") and SSRM Holdings, Inc. ("SSRM"). 3. INVESTMENTS FIXED MATURITIES AND EQUITY SECURITIES AVAILABLE-FOR-SALE The following tables set forth the cost or amortized cost, gross unrealized gain and loss, and estimated fair value of the Company's fixed maturities and equity securities, the percentage of the total fixed maturities holdings that each sector represents and the percentage of the total equity securities at:
MARCH 31, 2006 -------------------------------------------------- COST OR GROSS UNREALIZED AMORTIZED ----------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL --------- ------- ------- ---------- ----- (IN MILLIONS) U.S. corporate securities.............. $ 73,621 $1,866 $1,590 $ 73,897 30.8% Residential mortgage-backed securities........................... 52,630 241 855 52,016 21.7 Foreign corporate securities........... 34,287 1,480 739 35,028 14.6 U.S. Treasury/agency securities........ 27,418 872 566 27,724 11.6 Commercial mortgage-backed securities........................... 20,286 155 412 20,029 8.3 Asset-backed securities................ 13,656 74 100 13,630 5.7 Foreign government securities.......... 10,324 1,269 54 11,539 4.8 State and political subdivision securities........................... 4,768 146 75 4,839 2.0 Other fixed maturity securities........ 955 18 39 934 0.4 -------- ------ ------ -------- ----- Total bonds.......................... 237,945 6,121 4,430 239,636 99.9 Redeemable preferred stock............. 195 2 5 192 0.1 -------- ------ ------ -------- ----- Total fixed maturities............... $238,140 $6,123 $4,435 $239,828 100.0% ======== ====== ====== ======== ===== Common stock........................... $ 1,983 $ 341 $ 23 $ 2,301 68.6% Non-redeemable preferred stock......... 1,029 43 17 1,055 31.4 -------- ------ ------ -------- ----- Total equity securities.............. $ 3,012 $ 384 $ 40 $ 3,356 100.0% ======== ====== ====== ======== =====
15 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
DECEMBER 31, 2005 -------------------------------------------------- COST OR GROSS UNREALIZED AMORTIZED ----------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL --------- ------- ------- ---------- ----- (IN MILLIONS) U.S. corporate securities.............. $ 72,339 $2,814 $ 835 $ 74,318 32.3% Residential mortgage-backed securities........................... 47,365 353 472 47,246 20.5 Foreign corporate securities........... 33,578 1,842 439 34,981 15.2 U.S. Treasury/agency securities........ 25,643 1,401 86 26,958 11.7 Commercial mortgage-backed securities........................... 17,682 223 207 17,698 7.7 Asset-backed securities................ 11,533 91 51 11,573 5.0 Foreign government securities.......... 10,080 1,401 35 11,446 5.0 State and political subdivision securities........................... 4,601 185 36 4,750 2.1 Other fixed maturity securities........ 912 17 41 888 0.4 -------- ------ ------ -------- ----- Total bonds.......................... 223,733 8,327 2,202 229,858 99.9 Redeemable preferred stock............. 193 2 3 192 0.1 -------- ------ ------ -------- ----- Total fixed maturities............... $223,926 $8,329 $2,205 $230,050 100.0% ======== ====== ====== ======== ===== Common stock........................... $ 2,004 $ 250 $ 30 $ 2,224 66.6% Non-redeemable preferred stock......... 1,080 45 11 1,114 33.4 -------- ------ ------ -------- ----- Total equity securities.............. $ 3,084 $ 295 $ 41 $ 3,338 100.0% ======== ====== ====== ======== =====
16 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) UNREALIZED LOSSES FOR FIXED MATURITIES AND EQUITY SECURITIES AVAILABLE-FOR-SALE The following tables show the estimated fair values and gross unrealized losses of the Company's fixed maturities (aggregated by sector) and equity securities in an unrealized loss position, aggregated by length of time that the securities have been in a continuous unrealized loss position at March 31, 2006 and December 31, 2005:
MARCH 31, 2006 ------------------------------------------------------------------------------------------ EQUAL TO OR GREATER THAN LESS THAN 12 MONTHS 12 MONTHS TOTAL ---------------------------- ---------------------------- ---------------------------- ESTIMATED GROSS ESTIMATED GROSS ESTIMATED GROSS FAIR VALUE UNREALIZED LOSS FAIR VALUE UNREALIZED LOSS FAIR VALUE UNREALIZED LOSS ---------- --------------- ---------- --------------- ---------- --------------- (IN MILLIONS, EXCEPT NUMBER OF SECURITIES) U.S. corporate securities............ $ 37,068 $1,442 $3,557 $148 $ 40,625 $1,590 Residential mortgage- backed securities..... 40,934 763 2,381 92 43,315 855 Foreign corporate securities............ 16,315 648 1,846 91 18,161 739 U.S. Treasury/agency securities............ 19,063 560 285 6 19,348 566 Commercial mortgage- backed securities..... 14,855 379 825 33 15,680 412 Asset-backed securities............ 6,764 89 356 11 7,120 100 Foreign government securities............ 1,951 42 290 12 2,241 54 State and political subdivision securities............ 1,638 75 23 -- 1,661 75 Other fixed maturity securities............ 222 37 51 2 273 39 -------- ------ ------ ---- -------- ------ Total bonds........... 138,810 4,035 9,614 395 148,424 4,430 Redeemable preferred stock................. 6 4 12 1 18 5 -------- ------ ------ ---- -------- ------ Total fixed maturities......... $138,816 $4,039 $9,626 $396 $148,442 $4,435 ======== ====== ====== ==== ======== ====== Equity securities....... $ 601 $ 29 $ 143 $ 11 $ 744 $ 40 ======== ====== ====== ==== ======== ====== Total number of securities in an unrealized loss position.............. 12,853 1,303 14,156 ======== ====== ========
17 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
DECEMBER 31, 2005 ------------------------------------------------------------------------------------------ EQUAL TO OR GREATER THAN LESS THAN 12 MONTHS 12 MONTHS TOTAL ---------------------------- ---------------------------- ---------------------------- ESTIMATED GROSS ESTIMATED GROSS ESTIMATED GROSS FAIR VALUE UNREALIZED LOSS FAIR VALUE UNREALIZED LOSS FAIR VALUE UNREALIZED LOSS ---------- --------------- ---------- --------------- ---------- --------------- (IN MILLIONS, EXCEPT NUMBER OF SECURITIES) U.S. corporate securities............ $29,018 $ 737 $2,685 $ 98 $ 31,703 $ 835 Residential mortgage- backed securities..... 31,258 434 1,291 38 32,549 472 Foreign corporate securities............ 13,185 378 1,728 61 14,913 439 U.S. Treasury/agency securities............ 7,759 85 113 1 7,872 86 Commercial mortgage- backed securities..... 10,190 185 685 22 10,875 207 Asset-backed securities............ 4,709 42 305 9 5,014 51 Foreign government securities............ 1,203 31 327 4 1,530 35 State and political subdivision securities............ 1,050 36 16 -- 1,066 36 Other fixed maturity securities............ 319 36 52 5 371 41 ------- ------ ------ ---- -------- ------ Total bonds........... 98,691 1,964 7,202 238 105,893 2,202 Redeemable preferred stock................. 77 3 -- -- 77 3 ------- ------ ------ ---- -------- ------ Total fixed maturities......... $98,768 $1,967 $7,202 $238 $105,970 $2,205 ======= ====== ====== ==== ======== ====== Equity securities....... $ 671 $ 34 $ 131 $ 7 $ 802 $ 41 ======= ====== ====== ==== ======== ====== Total number of securities in an unrealized loss position.............. 12,787 932 13,719 ======= ====== ========
18 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) AGING OF GROSS UNREALIZED LOSSES FOR FIXED MATURITIES AND EQUITY SECURITIES AVAILABLE-FOR-SALE The following tables present the cost or amortized cost, gross unrealized losses and number of securities for fixed maturities and equity securities at March 31, 2006 and December 31, 2005, where the estimated fair value had declined and remained below cost or amortized cost by less than 20%, or 20% or more for:
MARCH 31, 2006 ------------------------------------------------------------ COST OR GROSS NUMBER OF AMORTIZED COST UNREALIZED LOSS SECURITIES ------------------ ------------------ ------------------ LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR 20% MORE 20% MORE 20% MORE --------- ------ --------- ------ --------- ------ (IN MILLIONS, EXCEPT FOR NUMBER OF SECURITIES) Less than six months............ $ 91,526 $231 $1,828 $57 7,887 119 Six months or greater but less than nine months.............. 48,645 11 2,057 6 4,477 18 Nine months or greater but less than twelve months............ 3,068 4 118 2 348 4 Twelve months or greater........ 10,171 5 406 1 1,295 8 -------- ---- ------ --- ------ --- Total......................... $153,410 $251 $4,409 $66 14,007 149 ======== ==== ====== === ====== ===
DECEMBER 31, 2005 ------------------------------------------------------------ COST OR GROSS NUMBER OF AMORTIZED COST UNREALIZED LOSS SECURITIES ------------------ ------------------ ------------------ LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR 20% MORE 20% MORE 20% MORE --------- ------ --------- ------ --------- ------ (IN MILLIONS, EXCEPT FOR NUMBER OF SECURITIES) Less than six months............ $ 92,512 $213 $1,707 $51 11,441 308 Six months or greater but less than nine months.............. 3,704 5 108 2 456 7 Nine months or greater but less than twelve months............ 5,006 -- 133 -- 573 2 Twelve months or greater........ 7,555 23 240 5 924 8 -------- ---- ------ --- ------ --- Total......................... $108,777 $241 $2,188 $58 13,394 325 ======== ==== ====== === ====== ===
19 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) As of March 31, 2006 and December 31, 2005, the Company had $4,475 million and $2,246 million, respectively, of gross unrealized losses related to its fixed maturities and equity securities. These securities are concentrated, calculated as a percentage of gross unrealized loss, as follows:
MARCH 31, DECEMBER 31, 2006 2005 --------- ------------ SECTOR: U.S. corporates........................................... 36% 37% Residential mortgage-backed............................... 19 21 Foreign corporates........................................ 17 20 Other..................................................... 28 22 --- --- Total.................................................. 100% 100% === === INDUSTRY: Mortgage-backed........................................... 27% 30% Industrial................................................ 20 22 Finance................................................... 10 11 Other..................................................... 43 37 --- --- Total.................................................. 100% 100% === ===
As of March 31, 2006, $4,409 million of unrealized losses related to securities with an unrealized loss position less than 20% of cost or amortized cost, which represented 3% of the cost or amortized cost of such securities. As of December 31, 2005, $2,188 million of unrealized losses related to securities with an unrealized loss position less than 20% of cost or amortized cost, which represented 2% of the cost or amortized cost of such securities. As of March 31, 2006, $66 million of unrealized losses related to securities with an unrealized loss position of 20% or more of cost or amortized cost, which represented 26% of the cost or amortized cost of such securities. Of such unrealized losses of $66 million, $57 million have been in an unrealized loss position for a period of less than six months. As of December 31, 2005, $58 million of unrealized losses related to securities with an unrealized loss position of 20% or more of cost or amortized cost, which represented 24% of the cost or amortized cost of such securities. Of such unrealized losses of $58 million, $51 million have been in an unrealized loss position for a period of less than six months. The Company held 18 fixed maturities and equity securities with a gross unrealized loss at March 31, 2006 each greater than $10 million. These securities represented approximately 10% or $460 million in the aggregate of the gross unrealized loss on fixed maturities and equity securities. The Company performs a regular evaluation, on a security-by-security basis, of its investment holdings in accordance with its impairment policy in order to evaluate whether such securities are other-than-temporarily impaired. The increase in the unrealized losses during the three months ended March 31, 2006 is principally driven by an increase in interest rates. Based upon the Company's evaluation of the securities in accordance with its impairment policy, the cause of the decline being principally attributable to the general rise in rates during the period, and the Company's intent and ability to hold the fixed income and equity securities with unrealized losses for a period of time sufficient for them to recover, the Company has concluded that the aforementioned securities are not other-than-temporarily impaired. This information should be read in conjunction with the significant accounting policies and estimates related to investments and the Company's evaluation of investments for impairment as disclosed in Note 1 of Notes to Consolidated Financial Statements included in the 2005 Annual Report. 20 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NET INVESTMENT INCOME The components of net investment income were as follows:
THREE MONTHS ENDED MARCH 31, ------------------- 2006 2005 ------- ------- (IN MILLIONS) Fixed maturities............................................ $3,401 $2,441 Equity securities........................................... 21 13 Mortgage and consumer loans................................. 609 529 Real estate and real estate joint ventures.................. 264 166 Policy loans................................................ 146 138 Other limited partnership interests......................... 208 105 Cash, cash equivalents and short-term investments........... 91 71 Other invested assets....................................... 131 82 ------ ------ Total..................................................... 4,871 3,545 Less: Investment expenses................................... 632 329 ------ ------ Net investment income..................................... $4,239 $3,216 ====== ======
NET INVESTMENT GAINS (LOSSES) Net investment gains (losses) were as follows:
THREE MONTHS ENDED MARCH 31, ------------------- 2006 2005 ------- ------- (IN MILLIONS) Fixed maturities............................................ $(412) $(114) Equity securities........................................... 33 93 Mortgage and consumer loans................................. 4 (11) Real estate and real estate joint ventures.................. 21 -- Other limited partnership interests......................... (6) 2 Derivatives................................................. (212) 10 Other invested assets....................................... (13) 5 ----- ----- Net investment gains (losses)............................. $(585) $ (15) ===== =====
The Company periodically disposes of fixed maturity and equity securities at a loss. Generally, such losses are insignificant in amount or in relation to the cost basis of the investment or are attributable to declines in fair value occurring in the period of disposition. TRADING SECURITIES During 2005, the Company established a trading securities portfolio to support investment strategies that involve the active and frequent purchase and sale of securities and the execution of repurchase agreements. Trading securities and repurchase agreement liabilities are recorded at fair value with subsequent changes in fair value recognized in net investment income related to fixed maturities. 21 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) At March 31, 2006 and December 31, 2005, trading securities are $883 million and $825 million, respectively. Repurchase agreements associated with the trading securities portfolio, which are included within other liabilities, are approximately $466 million and $460 million, respectively, at March 31, 2006 and December 31, 2005. As part of the acquisition of Travelers on July 1, 2005, the Company acquired Travelers' investment in Tribeca Citigroup Investments Ltd. ("Tribeca"). Tribeca is a feeder fund investment structure whereby the feeder fund invests substantially all of its assets in the master fund, Tribeca Global Convertible Instruments Ltd. The primary investment objective of the master fund is to achieve enhanced risk-adjusted return by investing in domestic and foreign equities and equity-related securities utilizing such strategies as convertible securities arbitrage. MetLife is the majority owner of the feeder fund and consolidates the fund within its consolidated financial statements. At March 31, 2006 and December 31, 2005, approximately $470 million and $452 million, respectively, of trading securities are related to Tribeca and approximately $193 million and $190 million, respectively, of the repurchase agreements are related to Tribeca. Net investment income associated with Tribeca for the three months ended March 31, 2006 includes $11 million of interest and dividends earned and net realized and unrealized gains (losses). During the three months ended March 31, 2006 and 2005, excluding Tribeca, interest and dividends earned on trading securities in addition to the net realized and unrealized gains (losses) recognized on the trading securities and the related repurchase agreement liabilities totaled $1 million and $2 million, respectively. Changes in the fair value of such trading securities and repurchase agreement liabilities, excluding Tribeca, held at March 31, 2006 and 2005 total $7 million and ($1) million for the three months ended March 31, 2006 and 2005, respectively. Total net investment income (loss) on securities classified as trading and repurchase agreement liabilities for the three months ended March 31, 2006 and 2005, including Tribeca, total $19 million and $1 million, respectively. 22 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 4. DERIVATIVE FINANCIAL INSTRUMENTS TYPES OF DERIVATIVE INSTRUMENTS The following table provides a summary of the notional amounts and current market or fair value of derivative financial instruments held at:
MARCH 31, 2006 DECEMBER 31, 2005 ------------------------------- ------------------------------- CURRENT MARKET CURRENT MARKET OR FAIR VALUE OR FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- (IN MILLIONS) Interest rate swaps.................. $18,410 $ 663 $ 247 $20,444 $ 653 $ 69 Interest rate floors................. 10,975 81 -- 10,975 134 -- Interest rate caps................... 27,990 285 -- 27,990 242 -- Financial futures.................... 844 2 23 1,159 12 8 Foreign currency swaps............... 15,349 522 1,010 14,274 527 991 Foreign currency forwards............ 4,107 52 70 4,622 64 92 Options.............................. 872 355 5 815 356 6 Financial forwards................... 3,396 20 20 2,452 13 4 Credit default swaps................. 5,436 9 11 5,882 13 11 Synthetic GICs....................... 3,738 -- -- 5,477 -- -- Other................................ 250 26 -- 250 9 -- ------- ------ ------ ------- ------ ------ Total.............................. $91,367 $2,015 $1,386 $94,340 $2,023 $1,181 ======= ====== ====== ======= ====== ======
The above table does not include notional values for equity futures, equity financial forwards, and equity options. At March 31, 2006 and December 31, 2005, the Company owned 1,466 and 3,305 equity futures contracts, respectively. Equity futures market values are included in financial futures in the preceding table. At both March 31, 2006 and December 31, 2005, the Company owned 213,000 equity financial forwards. Equity financial forwards market values are included in financial forwards in the preceding table. At March 31, 2006 and December 31, 2005, the Company owned 5,237,594 and 4,720,254 equity options, respectively. Equity options market values are included in options in the preceding table. This information should be read in conjunction with Note 4 of Notes to Consolidated Financial Statements included in the 2005 Annual Report. HEDGING The table below provides a summary of the notional amount and fair value of derivatives by type of hedge designation at:
MARCH 31, 2006 DECEMBER 31, 2005 ------------------------------- ------------------------------- FAIR VALUE FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- (IN MILLIONS) Fair value........................... $ 5,349 $ 75 $ 136 $ 4,506 $ 51 $ 104 Cash flow............................ 2,357 39 105 8,301 31 505 Foreign operations................... 2,070 17 59 2,005 13 70 Non-qualifying....................... 81,591 1,884 1,086 79,528 1,928 502 ------- ------ ------ ------- ------ ------ Total.............................. $91,367 $2,015 $1,386 $94,340 $2,023 $1,181 ======= ====== ====== ======= ====== ======
23 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) The following table provides the settlement payments recorded in income for the:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ----- ----- (IN MILLIONS) Qualifying hedges: Net investment income..................................... $23 $(5) Interest credited to policyholder account balances........ (6) 7 Other expenses............................................ -- (1) Non-qualifying hedges: Net investment gains (losses)............................. 35 24 --- --- Total.................................................. $52 $25 === ===
FAIR VALUE HEDGES The Company designates and accounts for the following as fair value hedges when they have met the requirements of SFAS 133: (i) interest rate swaps to convert fixed rate investments to floating rate investments; (ii) foreign currency swaps to hedge the foreign currency fair value exposure of foreign-currency-denominated investments and liabilities; and (iii) interest rate futures to hedge against changes in value of fixed rate securities. The Company recognized net investment gains (losses) representing the ineffective portion of all fair value hedges as follows:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ----- ----- (IN MILLIONS) Changes in the fair value of derivatives.................... $ (6) $ 22 Changes in the fair value of the items hedged............... (15) (21) ---- ---- Net ineffectiveness of fair value hedging activities........ $(21) $ 1 ==== ====
All components of each derivative's gain or loss were included in the assessment of hedge ineffectiveness. There were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge. CASH FLOW HEDGES The Company designates and accounts for the following as cash flow hedges, when they have met the requirements of SFAS 133: (i) interest rate swaps to convert floating rate investments to fixed rate investments; (ii) interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) foreign currency swaps to hedge the foreign currency cash flow exposure of foreign-currency-denominated investments and liabilities; and (iv) financial forwards to buy and sell securities. For the three months ended March 31, 2006 and 2005, the Company recognized net investment gains (losses) of $0 million and ($42) million, respectively, which represented the ineffective portion of all cash flow hedges. All components of each derivative's gain or loss were included in the assessment of hedge ineffectiveness. In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions did not occur on the anticipated date or in the additional time period permitted by SFAS 133. The net amounts reclassified into net investment gains (losses) for the three months ended 24 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) March 31, 2006 and 2005 related to such discontinued cash flow hedges were losses of $1 million and $25 million, respectively. There were no hedged forecasted transactions, other than the receipt or payment of variable interest payments. Presented below is a roll forward of the components of other comprehensive income (loss), before income taxes, related to cash flow hedges:
THREE MONTHS ENDED YEAR ENDED THREE MONTHS ENDED MARCH 31, 2006 DECEMBER 31, 2005 MARCH 31, 2005 ------------------ -------------------- ------------------ (IN MILLIONS) Other comprehensive income (loss) balance at the beginning of the period......... $(142) $(456) $(456) Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges................................. (4) 270 91 Amounts reclassified to net investment gains (losses)......................... 5 44 25 Amounts reclassified to net investment income................................. 1 2 1 Amortization of transition adjustment.... (1) (2) (1) ----- ----- ----- Other comprehensive income (loss) balance at the end of the period............... $(141) $(142) $(340) ===== ===== =====
HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS The Company uses forward exchange contracts, foreign currency swaps and options to hedge portions of its net investment in foreign operations against adverse movements in exchange rates. The Company measures ineffectiveness on the forward exchange contracts based upon the change in forward rates. There was no ineffectiveness recorded for the three months ended March 31, 2006 and 2005. The Company's consolidated statements of stockholders' equity for the three months ended March 31, 2006 and the year ended December 31, 2005 include gains (losses) of $12 million and ($115) million, respectively, related to foreign currency contracts and non-derivative financial instruments used to hedge its net investments in foreign operations. At March 31, 2006 and December 31, 2005, the cumulative foreign currency translation loss recorded in accumulated other comprehensive income related to these hedges was $160 million and $172 million, respectively. When net investments in foreign operations are sold or substantially liquidated, the amounts in accumulated other comprehensive income are reclassified to the consolidated statements of income, while a pro rata portion will be reclassified upon partial sale of the net investments in foreign operations. NON-QUALIFYING DERIVATIVES AND DERIVATIVES FOR PURPOSES OTHER THAN HEDGING The Company enters into the following derivatives that do not qualify for hedge accounting under SFAS 133 or for purposes other than hedging: (i) interest rate swaps, purchased caps and floors, and interest rate futures to minimize its exposure to interest rate volatility; (ii) foreign currency forwards, swaps and option contracts to minimize its exposure to adverse movements in exchange rates; (iii) swaptions to sell embedded call options in fixed rate liabilities; (iv) credit default swaps to minimize its exposure to adverse movements in credit; (v) credit default swaps to diversify its credit risk exposure in certain portfolios; (vi) equity futures, equity index options, interest rate futures and equity variance swaps to economically hedge liabilities embedded in certain variable annuity products; (vii) swap spread locks to hedge invested assets against the risk of changes in credit spreads; (viii) financial forwards to buy and sell securities; (ix) synthetic GICs to 25 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) synthetically create traditional GICs; (x) RSATs and TRRs to synthetically create investments; and (xi) basis swaps to better match the cash flows from assets and related liabilities. For the three months ended March 31, 2006 and 2005, the Company recognized as net investment gains (losses) changes in fair value of ($241) million and $40 million, respectively, related to derivatives that do not qualify for hedge accounting. For the three months ended March 31, 2006 and 2005, the Company recorded changes in fair value of ($20) million and $2 million, respectively, as interest credited to policyholder account balances related to derivatives that do not qualify for hedge accounting. For the three months ended March 31, 2006, the Company recorded changes in fair value of ($17) million as net investment income related to economic hedges of equity method investments in joint ventures that do not qualify for hedge accounting. The Company had no economic hedges of equity method investments in joint ventures for the three months ended March 31, 2005. EMBEDDED DERIVATIVES The Company has certain embedded derivatives which are required to be separated from their host contracts and accounted for as derivatives. These host contracts include guaranteed minimum withdrawal contracts, guaranteed minimum accumulation contracts and modified coinsurance contracts. The fair value of the Company's embedded derivative assets was $110 million and $50 million at March 31, 2006 and December 31, 2005, respectively. The fair value of the Company's embedded derivative liabilities was $4 million and $45 million at March 31, 2006 and December 31, 2005, respectively. The amounts recorded in net investment gains (losses) during the three months ended March 31, 2006 and 2005 were gains of $101 million and $34 million, respectively. CREDIT RISK The Company may be exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. Generally, the current credit exposure of the Company's derivative contracts is limited to the fair value at the reporting date. The credit exposure of the Company's derivative transactions is represented by the fair value of contracts with a net positive fair value at the reporting date. The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Because exchange traded futures are effected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments. The Company enters into various collateral arrangements, which require both the pledging and accepting of collateral in connection with its derivative instruments. As of March 31, 2006 and December 31, 2005, the Company was obligated to return cash collateral under its control of $189 million and $195 million, respectively. This unrestricted cash collateral is included in cash and cash equivalents and the obligation to return it is included in payables for collateral under securities loaned and other transactions in the consolidated balance sheets. As of March 31, 2006 and December 31, 2005, the Company had also accepted collateral consisting of various securities with a fair market value of $423 million and $427 million, respectively, which are held in separate custodial accounts. The Company is permitted by contract to sell or repledge this collateral, but as of March 31, 2006 and December 31, 2005, none of the collateral had been sold or repledged. As of March 31, 2006 and December 31, 2005, the Company provided collateral of $6 million and $4 million, respectively, which is included in other assets in the consolidated balance sheets. The counterparties are permitted by contract to sell or repledge this collateral. 26 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 5. CLOSED BLOCK On April 7, 2000, (the "date of demutualization"), Metropolitan Life converted from a mutual life insurance company to a stock life insurance company and became a wholly-owned subsidiary of MetLife, Inc. The conversion was pursuant to an order by the New York Superintendent of Insurance (the "Superintendent") approving Metropolitan Life's plan of reorganization, as amended (the "plan"). On the date of demutualization, Metropolitan Life established a closed block for the benefit of holders of certain individual life insurance policies of Metropolitan Life. 27 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Liabilities and assets designated to the closed block are as follows:
MARCH 31, DECEMBER 31, 2006 2005 ------------ --------------- (IN MILLIONS) CLOSED BLOCK LIABILITIES Future policy benefits...................................... $42,706 $42,759 Other policyholder funds.................................... 280 257 Policyholder dividends payable.............................. 718 693 Policyholder dividend obligation............................ 814 1,607 Payables for collateral under securities loaned and other transactions.............................................. 5,160 4,289 Other liabilities........................................... 262 200 ------- ------- Total closed block liabilities......................... 49,940 49,805 ------- ------- ASSETS DESIGNATED TO THE CLOSED BLOCK Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $29,303 and $27,892, respectively).... 29,915 29,270 Trading securities, at fair value (cost: $2 and $3, respectively).......................................... 2 3 Equity securities available-for-sale, at fair value (cost: $1,188 and $1,180, respectively)....................... 1,410 1,341 Mortgage loans on real estate............................. 7,644 7,790 Policy loans.............................................. 4,131 4,148 Short-term investments.................................... 26 41 Other invested assets..................................... 382 477 ------- ------- Total investments...................................... 43,510 43,070 Cash and cash equivalents................................... 450 512 Accrued investment income................................... 483 506 Deferred income taxes....................................... 735 902 Premiums and other receivables.............................. 259 270 ------- ------- Total assets designated to the closed block............ 45,437 45,260 ------- ------- Excess of closed block liabilities over assets designated to the closed block.......................................... 4,503 4,545 ------- ------- Amounts included in accumulated other comprehensive income (loss): Net unrealized investment gains, net of deferred income taxes of $299 and $554, respectively................... 535 985 Unrealized derivative gains (losses), net of deferred income tax benefit of $(17) and $(17), respectively.... (31) (31) Allocated to policyholder dividend obligation, net of deferred income tax benefit of $(283) and $(538), respectively........................................... (504) (954) ------- ------- Total amounts included in accumulated other comprehensive income (loss).......................................... -- -- ------- ------- Maximum future earnings to be recognized from closed block assets and liabilities.................................... $ 4,503 $ 4,545 ======= =======
28 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Information regarding the closed block policyholder dividend obligation is as follows:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, 2006 2005 ------------------ ------------ (IN MILLIONS) Balance at beginning of period......................... $1,607 $2,243 Impact on revenues, net of expenses and income taxes... (88) (9) Change in unrealized investment and derivative gains (losses)............................................. (705) (627) ------ ------ Balance at end of period............................... $ 814 $1,607 ====== ======
Closed block revenues and expenses are as follows:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ------- ------- (IN MILLIONS) REVENUES Premiums.................................................... $ 698 $ 719 Net investment income and other revenues.................... 594 599 Net investment gains (losses)............................... (64) (21) ------ ------ Total revenues......................................... 1,228 1,297 ------ ------ EXPENSES Policyholder benefits and claims............................ 821 812 Policyholder dividends...................................... 366 363 Change in policyholder dividend obligation.................. (88) (12) Other expenses.............................................. 64 66 ------ ------ Total expenses......................................... 1,163 1,229 ------ ------ Revenues, net of expenses before income taxes............... 65 68 Income taxes................................................ 23 24 ------ ------ Revenues, net of expenses and income taxes.................. $ 42 $ 44 ====== ======
The change in maximum future earnings of the closed block is as follows:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ------- ------- (IN MILLIONS) Balance at end of period.................................... $4,503 $4,668 Balance at beginning of period.............................. 4,545 4,712 ------ ------ Change during period........................................ $ (42) $ (44) ====== ======
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. 29 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 6. CONTINGENCIES, COMMITMENTS AND GUARANTEES CONTINGENCIES LITIGATION The Company is a defendant in a large number of litigation matters. In some of the matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading practice in the United States permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. This variability in pleadings, together with the actual experience of the Company in litigating or resolving through settlement numerous claims over an extended period of time, demonstrate to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value. Thus, unless stated below, the specific monetary relief sought is not noted. Due to the vagaries of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time may normally be inherently impossible to ascertain with any degree of certainty. Inherent uncertainties can include how fact finders will view individually and in their totality documentary evidence, the credibility and effectiveness of witnesses' testimony, and how trial and appellate courts will apply the law in the context of the pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law. On a quarterly and yearly basis, the Company reviews relevant information with respect to liabilities for litigation and contingencies to be reflected in the Company's consolidated financial statements. The review includes senior legal and financial personnel. Unless stated below, estimates of possible additional losses or ranges of loss for particular matters cannot in the ordinary course be made with a reasonable degree of certainty. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been established for a number of the matters noted below. It is possible that some of the matters could require the Company to pay damages or make other expenditures or establish accruals in amounts that could not be estimated as of March 31, 2006. Sales Practices Claims Over the past several years, Metropolitan Life, New England Mutual Life Insurance Company, with which Metropolitan Life merged in 1996 ("New England Mutual"), and General American Life Insurance Company, which was acquired in 2000 ("General American"), have faced numerous claims, including class action lawsuits, alleging improper marketing and sales of individual life insurance policies or annuities. These lawsuits generally are 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. Similar sales practices class actions against New England Mutual and General American 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. A federal court has approved a settlement resolving sales practices claims on behalf 30 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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. 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, including lawsuits or other proceedings relating to the sale of mutual funds and other products, have been brought. As of March 31, 2006, there are approximately 332 sales practices litigation matters pending against Metropolitan Life; approximately 46 sales practices litigation matters pending against New England Mutual, New England Life Insurance Company, and New England Securities Corporation (collectively, "New England"); approximately 44 sales practices litigation matters pending against General American; and approximately 28 sales practices litigation matters pending against Walnut Street Securities, Inc. ("Walnut Street"). In addition, similar litigation matters are pending against MetLife Securities, Inc. ("MSI"). Metropolitan Life, New England, General American, MSI and Walnut Street continue to defend themselves vigorously against these litigation matters. Some individual sales practices claims have been resolved through settlement, won by dispositive motions, or have gone to trial. The outcomes of trials have varied, and appeals are pending in several matters. 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, mutual funds and other products may be commenced in the future. The Metropolitan Life class action settlement did not resolve two putative class actions involving sales practices claims filed against Metropolitan Life in Canada, and these actions remain pending. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for sales practices claims against Metropolitan Life, New England, General American, MSI and Walnut Street. Regulatory authorities in a small number of states have had investigations or inquiries relating to Metropolitan Life's, New England's, General American's, MSI's or Walnut Street's sales of individual life insurance policies or annuities or other products. 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 principally have 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 31 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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. Since 2002, trial courts in California, Utah, Georgia, New York, Texas, and Ohio 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. Metropolitan Life continues to study its claims experience, review external literature regarding asbestos claims experience in the United States and consider numerous variables that can affect its asbestos liability exposure, including bankruptcies of other companies involved in asbestos litigation and legislative and judicial developments, to identify trends and to assess their impact on the recorded asbestos liability. Bankruptcies of other companies involved in asbestos litigation, as well as advertising by plaintiffs' asbestos lawyers, may be resulting in an increase in the cost of resolving claims and could result in an increase in 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 bankruptcies by certain other defendants. In addition, publicity regarding legislative reform efforts may result in an increase or decrease in the number of claims. As reported in the 2005 Annual Report, Metropolitan Life received approximately 18,500 asbestos-related claims in 2005. During the three months ended March 31, 2006 and 2005, Metropolitan Life received approximately 2,220 and 5,900 asbestos-related claims, respectively. See Note 12 of Notes to Consolidated Financial Statements included in the 2005 Annual Report for historical information concerning asbestos claims and MetLife's increase of its recorded liability at December 31, 2002. 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. The number of asbestos cases that may be brought or the aggregate amount of any liability that Metropolitan Life may ultimately incur is uncertain. Accordingly, it is reasonably possible that the Company's total exposure to asbestos claims may be greater than the liability recorded by the Company in its unaudited interim condensed consolidated financial statements and that future charges to income may be necessary. While the potential future charges could be material in particular quarterly or annual periods in which they are recorded, based on information currently known by management, management does not believe any such charges are likely to have a material adverse effect on the Company's consolidated financial position. During 1998, Metropolitan Life paid $878 million in premiums for excess insurance policies for asbestos-related claims. The excess insurance policies for asbestos-related claims provide for recovery of losses up to $1,500 million, which is in excess of a $400 million self-insured retention. The asbestos-related policies are also subject to annual and per-claim sublimits. Amounts are recoverable under the policies annually with 32 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 with respect to the prior year was made under the excess insurance policies in 2003, 2004 and 2005 for the amounts paid with respect to asbestos litigation in excess of the retention. As the performance of the indices impacts the return in the reference fund, it is possible that loss reimbursements to the Company and the recoverable with respect to later periods may be less than the amount of the recorded losses. Such foregone loss reimbursements may be recovered upon commutation depending upon future performance of the reference fund. If at some point in the future, the Company believes the liability for probable and reasonably estimable losses for asbestos-related claims should be increased, an expense would be recorded and the insurance recoverable would be adjusted subject to the terms, conditions and limits of the excess insurance policies. Portions of the change in the insurance recoverable would be recorded as a deferred gain and amortized into income over the estimated remaining settlement period of the insurance policies. The foregone loss reimbursements were approximately $8.3 million with respect to 2002 claims, $15.5 million with respect to 2003 claims, $15.1 million with respect to 2004 claims, $12.7 million with respect to 2005 claims and estimated as of March 31, 2006, to be approximately $60.7 million in the aggregate, including future years. Property and Casualty Actions A purported class action has been filed against Metropolitan Property and Casualty Insurance Company's ("MPC") 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 MPC 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. The court recently granted MPC's motion to dismiss the fraud claim in the second suit. A purported class action has been filed against MPC 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. A recent decision by the Montana Supreme Court in a suit involving another insurer determined that aggregation is required. The parties have reached an agreement to settle this suit. MPC has recorded a liability in an amount the Company believes is adequate to resolve the claims underlying this matter. The amount to be paid will not be material to MPC. Certain plaintiffs' lawyers in another action have alleged that the use of certain automated databases to provide total loss vehicle valuation methods was improper. MPC, along with a number of other insurers, agreed in July 2005 to resolve this issue in a class action format. Management believes that the amount to be paid in resolution of this matter will not be material to MPC. Ten lawsuits are pending against MPC (five in Louisiana and five in Mississippi) relating to Hurricane Katrina, including two purported class actions in Louisiana. It is reasonably possible other actions will be filed. The Company intends to vigorously defend these matters. 33 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Demutualization Actions Several lawsuits were brought in 2000 challenging the fairness of Metropolitan Life's plan of reorganization, as amended (the "plan") and the adequacy and accuracy of Metropolitan Life's disclosure to policyholders regarding the plan. These actions named as defendants some or all of Metropolitan Life, the Holding Company, the individual directors, the New York Superintendent of Insurance (the "Superintendent") and the underwriters for MetLife, Inc.'s initial public offering, Goldman Sachs & Company and Credit Suisse First Boston. In 2003, a trial court within the commercial part of the New York State court granted the defendants' motions to dismiss two purported class actions. In 2004, the appellate court modified the trial court's order by reinstating certain claims against Metropolitan Life, the Holding Company and the individual directors. Plaintiffs in these actions have filed a consolidated amended complaint. On May 2, 2006, the trial court issued a decision granting plaintiffs' motion to certify a litigation class with respect to their claim that defendants violated section 7312 of the New York Insurance Law, but finding that plaintiffs had not met the requirements for certifying a class with respect to a fraud claim. Defendants have a right to appeal this decision. Another purported class action filed in New York State court in Kings County has been consolidated with this action. The plaintiffs in the state court class actions seek compensatory relief and punitive damages. Five persons 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 sought to vacate the Superintendent's Opinion and Decision and enjoin him from granting final approval of the plan. On November 10, 2005, the trial court granted respondents' motions to dismiss this proceeding. Petitioners have filed a notice of appeal. In a class action against Metropolitan Life and the Holding Company pending in the United States District Court for the Eastern District of New York, plaintiffs served a second consolidated amended complaint in 2004. In this action, plaintiffs assert violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 in connection with the plan, claiming that the Policyholder Information Booklets failed to disclose certain material facts and contained certain material misstatements. They seek rescission and compensatory damages. On June 22, 2004, the court denied the defendants' motion to dismiss the claim of violation of the Securities Exchange Act of 1934. The court had previously denied defendants' motion to dismiss the claim for violation of the Securities Act of 1933. In 2004, the court reaffirmed its earlier decision denying defendants' motion for summary judgment as premature. On July 19, 2005, this federal trial court certified a class action against Metropolitan Life and the Holding Company. Metropolitan Life and the Holding Company filed a petition seeking permission for an interlocutory appeal from this order; on or about March 29, 2006, the United States Court of Appeals for the Second Circuit denied the petition. 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. On April 30, 2004, a lawsuit was filed in New York state court in New York County against the Holding Company and Metropolitan Life on behalf of a proposed class comprised of the settlement class in the Metropolitan Life sales practices class action settlement approved in December 1999 by the United States District Court for the Western District of Pennsylvania. In their amended complaint, plaintiffs challenged the treatment of the cost of the sales practices settlement in the demutualization of Metropolitan Life and asserted claims of breach of fiduciary duty, common law fraud, and unjust enrichment. In an order dated July 13, 2005, the court granted the defendants' motion to dismiss the action and the plaintiffs have filed a notice of appeal. 34 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Other A putative class action which commenced in October 2000 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. In September 2005, Metropolitan Life's motion for summary judgment was granted. Plaintiffs have moved for reconsideration. In May 2003, the American Dental Association and three individual providers sued MetLife and Cigna in a purported class action lawsuit brought in the United States District Court for the Southern District of Florida. 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 matter. The district court has granted in part and denied in part MetLife's motion to dismiss. MetLife has filed another motion to dismiss. The court has issued a tag-along order, related to a medical managed care trial, which will stay the lawsuit indefinitely. Regulatory bodies have contacted the Company and have requested information relating to market timing and late trading of mutual funds and variable insurance products and, generally, the marketing of products. The Company believes that many of these inquiries are similar to those made to many financial services companies as part of industry-wide investigations by various regulatory agencies. The SEC has commenced an investigation with respect to market timing and late trading in a limited number of privately-placed variable insurance contracts that were sold through General American. As previously reported, in May 2004, General American received a Wells Notice stating that the SEC staff is considering recommending that the SEC bring a civil action alleging violations of the U.S. securities laws against General American. General American has responded to the Wells Notice. The Company is fully cooperating with regard to regulatory 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. In April 2006, the SEC and Metropolitan Life Insurance Company resolved a formal investigation of Metropolitan Life relating to certain sales by a former MetLife sales representative to the Sheriff's Department of Fulton County, Georgia. The settlement includes a payment to the SEC of a $250,000 fine. The Company has received a number of subpoenas and other requests from the Office of the Attorney General of the State of New York seeking, among other things, information regarding and relating to compensation agreements between insurance brokers and the Company, whether MetLife has provided or is aware of the provision of "fictitious" or "inflated" quotes, and information regarding tying arrangements with respect to reinsurance. Based upon an internal review, the Company advised the Attorney General for the State of New York that MetLife was not aware of any instance in which MetLife had provided a "fictitious" or "inflated" quote. MetLife also has received subpoenas, including sets of interrogatories, from the Office of the Attorney General of the State of Connecticut seeking information and documents including contingent commission payments to brokers and MetLife's awareness of any "sham" bids for business. MetLife also has received a Civil Investigative Demand from the Office of the Attorney General for the State of Massachusetts seeking information and documents concerning bids and quotes that the Company submitted to potential customers in Massachusetts, the identity of agents, brokers, and producers to whom the Company submitted 35 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) such bids or quotes, and communications with a certain broker. The Company has received two subpoenas from the District Attorney of the County of San Diego, California. The subpoenas seek numerous documents including incentive agreements entered into with brokers. The Florida Department of Financial Services and the Florida Office of Insurance Regulation also have served subpoenas on the Company asking for answers to interrogatories and document requests concerning topics that include compensation paid to intermediaries. The Office of the Attorney General for the State of Florida has also served a subpoena on the Company seeking, among other things, copies of materials produced in response to the subpoenas discussed above. The Company has received a subpoena from the Office of the U.S. Attorney for the Southern District of California asking for documents regarding the insurance broker, Universal Life Resources. The Insurance Commissioner of Oklahoma has served a subpoena, including a set of interrogatories, on the Company seeking, among other things, documents and information concerning the compensation of insurance producers for insurance covering Oklahoma entities and persons. The Ohio Department of Insurance has requested documents regarding a broker and certain Ohio public entity groups. The Company continues to cooperate fully with these inquiries and is responding to the subpoenas and other requests. MetLife is continuing to conduct an internal review of its commission payment practices. Approximately sixteen broker-related lawsuits in which the Company was named as a defendant were filed. Voluntary dismissals and consolidations have reduced the number of pending actions to four. In one of these, the California Insurance Commissioner is suing in California state court Metropolitan Life, Paragon Life Insurance Company and other companies alleging that the defendants violated certain provisions of the California Insurance Code. Another of these actions is pending in a multi-district proceeding established in the federal district court in the District of New Jersey. In this proceeding, plaintiffs have filed an amended class action complaint consolidating the claims from separate actions that had been filed in or transferred to the District of New Jersey. The consolidated amended complaint alleges that the Holding Company, Metropolitan Life, several other insurance companies and several insurance brokers violated RICO, ERISA, and antitrust laws and committed other misconduct in the context of providing insurance to employee benefit plans and to persons who participate in such employee benefit plans. Plaintiffs seek to represent classes of employers that established employee benefit plans and persons who participated in such employee benefit plans. A motion for class certification has been filed. Plaintiffs in several other actions have voluntarily dismissed their claims. The Company intends to vigorously defend these cases. In addition to those discussed above, regulators and others have made a number of inquiries of the insurance industry regarding industry brokerage practices and related matters and other inquiries may begin. It is reasonably possible that MetLife will receive additional subpoenas, interrogatories, requests and lawsuits. MetLife will fully cooperate with all regulatory inquiries and intends to vigorously defend all lawsuits. The Company has received a subpoena from the Connecticut Attorney General requesting information regarding its participation in any finite reinsurance transactions. MetLife has also received information requests relating to finite insurance or reinsurance from other regulatory and governmental authorities. MetLife believes it has appropriately accounted for its transactions of this type and intends to cooperate fully with these information requests. The Company believes that a number of other industry participants have received similar requests from various regulatory and governmental authorities. It is reasonably possible that MetLife or its subsidiaries may receive additional requests. MetLife and any such subsidiaries will fully cooperate with all such requests. As previously disclosed, the NASD staff notified MSI, New England Securities Corporation ("NES") and Walnut Street, all direct or indirect subsidiaries of MetLife, Inc., that it has made a preliminary determination to file charges of violations of the NASD's and the SEC's rules against the firms. The pending investigation was initiated after the firms reported to the NASD that a limited number of mutual fund transactions processed by firm representatives and at the firms' consolidated trading desk, during the period April through December 2003, had been received from customers after 4:00 p.m., Eastern time, and received 36 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) the same day's net asset value. The potential charges of violations of the NASD's and the SEC's rules relate to the processing of transactions received after 4:00 p.m., the firms' maintenance of books and records, supervisory procedures and responses to the NASD's information requests. Under the NASD's procedures, the firms have submitted a response to the NASD staff. The NASD staff has not made a formal recommendation regarding whether any action alleging violations of the rules should be filed. MetLife continues to cooperate fully with the NASD. Following an inquiry commencing in March 2004, the staff of the NASD has notified MSI that it has made a preliminary determination to recommend charging MSI with the failure to adopt, maintain and enforce written supervisory procedures reasonably designed to achieve compliance with suitability requirements regarding the sale of college savings plans, also known as 529 plans. This notification follows an industry-wide inquiry by the NASD examining sales of 529 plans. Under the NASD's procedures, MSI submitted its written explanation of why it believes charges should not be filed. The NASD staff has not made a formal recommendation regarding whether any action alleging violations of applicable rules should be filed. MSI continues to cooperate fully with the NASD. In February 2006, the SEC commenced a formal investigation of NES in connection with the suitability of its sales of variable universal life insurance policies. The Company believes that others in the insurance industry are the subject of similar investigations by the SEC. NES is cooperating fully with the SEC. MSI received in 2005 a notice from the Illinois Department of Securities asserting possible violations of the Illinois Securities Act in connection with sales of a former affiliate's mutual funds. A response has been submitted and MSI intends to cooperate fully with the Illinois Department of Securities. In August 1999, an amended putative class action complaint was filed in Connecticut state court against MetLife Life and Annuity Company of Connecticut ("MLAC"), formerly The Travelers Life and Annuity Company, Travelers Equity Sales, Inc. and certain former affiliates. The amended complaint alleges Travelers Property Casualty Corporation, a former MLAC affiliate, purchased structured settlement annuities from MLAC and spent less on the purchase of those structured settlement annuities than agreed with claimants, and that commissions paid to brokers for the structured settlement annuities, including an affiliate of MLAC, were paid in part to Travelers Property Casualty Corporation. On May 26, 2004, the Connecticut Superior Court certified a nationwide class action involving the following claims against MLAC: violation of the Connecticut Unfair Trade Practice Statute, unjust enrichment, and civil conspiracy. On June 15, 2004, the defendants appealed the class certification order. In March 2006, the Connecticut Supreme Court reversed the trial court's certification of a class. Plaintiff may seek upon remand to the trial court to file another motion for class certification. MLAC and Travelers Equity Sales, Inc. intend to continue to vigorously defend the matter. A former registered representative of Tower Square Securities, Inc. ("Tower Square"), a broker-dealer subsidiary of MetLife Insurance Company of Connecticut, formerly The Travelers Insurance Company, is alleged to have defrauded individuals by diverting funds for his personal use. In June 2005, the SEC issued a formal order of investigation with respect to Tower Square and served Tower Square with a subpoena. The Securities and Business Investments Division of the Connecticut Department of Banking and the NASD are also reviewing this matter. On April 18, 2006, the Connecticut Department of Banking issued a notice to Tower Square asking it to demonstrate its prior compliance with applicable Connecticut securities laws and regulations. In the context of the above, two arbitration matters were commenced in 2005 against Tower Square. In one of the matters, defendants include other unaffiliated broker-dealers with whom the registered representative was formerly registered. In May 2006, Tower Square received a lawsuit filed by two claimants in Connecticut state court. It is reasonably possible that other actions will be brought regarding this matter. Tower Square intends to defend itself vigorously in all such cases. In another matter, the NASD has made a preliminary determination that Tower Square violated certain NASD rules relating to supervisory procedures, documentation and compliance with the firm's anti-money laundering program. Tower Square intends to fully cooperate with the SEC, the NASD and the Connecticut Department of Banking. 37 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Metropolitan Life also has been named as a defendant in numerous silicosis, welding and mixed dust cases in various states. The Company intends to defend itself vigorously against these cases. Various litigation, including purported or certified class actions, and various 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. IMPACT OF HURRICANES On August 29, 2005, Hurricane Katrina made landfall in the states of Louisiana, Mississippi and Alabama causing catastrophic damage to these coastal regions. During the three months ended March 31, 2006, the Company reduced its total net losses recognized related to the catastrophe by $2 million, to $132 million, net of income taxes and reinsurance recoverables, and including reinstatement premiums and other reinsurance-related premium adjustments at March 31, 2006. The Auto & Home segment reduced its total net losses recognized related to the catastrophe by $2 million to $118 million, net of income taxes and reinsurance recoverables, and including reinstatement premiums and other reinsurance-related premium adjustments at March 31, 2006. There was no change in the Institutional segment's total net losses recognized related to the catastrophe of $14 million, net of income taxes and reinsurance recoverables and including reinstatement premiums and other reinsurance-related premium adjustments at March 31, 2006. During the first quarter of 2006, MetLife's gross losses from Katrina were reduced by $1 million to approximately $334 million at March 31, 2006, primarily arising from the Company's homeowners business. On October 24, 2005, Hurricane Wilma made landfall across the state of Florida. During the three months ended March 31, 2006, the Company's Auto & Home segment reduced its recognized total losses related to the catastrophe by $2 million to $30 million, net of income taxes and reinsurance recoverables. MetLife's gross losses from Hurricane Wilma were increased by $2 million during the three months ended March 31, 2006 to approximately $59 million at March 31, 2006 arising from the Company's homeowners and automobile businesses. Additional hurricane-related losses may be recorded in future periods as claims are received from insureds and claims to reinsurers are processed. Reinsurance recoveries are dependent on the continued creditworthiness of the reinsurers, which may be affected by their other reinsured losses in connection with Hurricanes Katrina and Wilma and otherwise. In addition, as discussed above, lawsuits, including purported class actions, have been filed in Mississippi and Louisiana challenging denial of claims for damages caused to 38 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) property during Hurricane Katrina. Metropolitan Property and Casualty Insurance Company ("MPC") is a named party in some of these lawsuits. In addition, rulings in cases in which MPC is not a party may affect interpretation of its policies. MPC intends to vigorously defend these matters. However, any adverse rulings could result in an increase in the Company's hurricane-related claim exposure and losses. Based on information known by management as of March 31, 2006, it does not believe that additional claim losses resulting from Hurricane Katrina will have a material adverse impact on the Company's unaudited interim condensed consolidated financial statements. ARGENTINA As a part of the Travelers acquisition, the Company acquired Citigroup's insurance operations in Argentina. The Argentinean economic, regulatory and legal environment, including interpretations of laws and regulations by regulators and courts, is uncertain. Potential legal or governmental actions related to pension reform, fiduciary responsibilities, performance guarantees and tax rulings could adversely affect the results of the Company. Upon acquisition, the Company established liabilities related to insurance liabilities, most significantly death and disability policy liabilities, based upon its interpretation of Argentinean law and the Company's best estimate of its obligations under such law. Additionally, the Company has established certain liabilities related to its estimated obligations associated with litigation and tax rulings related to pesification. COMMITMENTS 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 $2,704 million and $2,684 million at March 31, 2006 and December 31, 2005, respectively. The Company anticipates that these amounts will be invested in partnerships over the next five years. MORTGAGE LOAN COMMITMENTS The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $2,533 million and $2,974 million at March 31, 2006 and December 31, 2005, respectively. OTHER COMMITMENTS MetLife Insurance Company of Connecticut ("MICC"), formerly The Travelers Insurance Company, is a member of the Federal Home Loan Bank of Boston (the "FHLB of Boston") and holds $70 million of common stock of the FHLB of Boston, which is included in equity securities on the Company's consolidated balance sheets. MICC has also entered into several funding agreements with the FHLB of Boston whereby MICC has issued such funding agreements in exchange for cash and for which the FHLB of Boston has been granted a blanket lien on MICC's residential mortgages and mortgage-backed securities to collateralize MICC's obligations under the funding agreements. MICC maintains control over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The funding agreements and the related security agreement represented by this blanket lien provide that upon any event of default by MICC the FHLB of Boston's recovery is limited to the amount of MICC's liability under the outstanding funding agreements. The amount of the Company's liability for funding agreements with the FHLB of Boston as of March 31, 2006 and December 31, 2005 is $926 million and $1.1 billion, respectively, which is included in policyholder account balances. 39 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) MetLife Bank, National Association ("MetLife Bank" or "MetLife Bank, N.A.") is a member of the Federal Home Loan Bank of New York (the "FHLB of NY") and holds $46 million and $43 million of common stock of the FHLB of NY, at March 31, 2006 and December 31, 2005, respectively, which is included in equity securities on the Company's consolidated balance sheets. MetLife Bank has also entered into repurchase agreements with the FHLB of NY whereby MetLife Bank has issued repurchase agreements in exchange for cash and for which the FHLB of NY has been granted a blanket lien on MetLife Bank's residential mortgages and mortgage-backed securities to collateralize MetLife Bank's obligations under the repurchase agreements. MetLife Bank maintains control over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The repurchase agreements and the related security agreement represented by this blanket lien provide that upon any event of default by MetLife Bank the FHLB of NY's recovery is limited to the amount of MetLife Bank's liability under the outstanding repurchase agreements. The amount of the Company's liability for repurchase agreements with the FHLB of NY as of March 31, 2006 and December 31, 2005 are $938 million and $855 million, respectively, which is included in long-term debt. On December 12, 2005, Reinsurance Group of America, Incorporated ("RGA") repurchased 1.6 million shares of its outstanding common stock at an aggregate price of approximately $76 million under an accelerated share repurchase agreement with a major bank. The bank borrowed the stock sold to RGA from third parties and purchased the shares in the open market over the subsequent few months to return to the lenders. RGA would either pay or receive an amount based on the actual amount paid by the bank to purchase the shares. These repurchases resulted in an increase in the Company's ownership percentage of RGA to approximately to 53% at December 31, 2005 from approximately 52% at December 31, 2004. In February 2006, the final purchase price was determined resulting in a cash settlement substantially equal to the aggregate cost. RGA recorded the initial repurchase of shares as treasury stock and recorded the amount received as an adjustment to the cost of the treasury stock. At March 31, 2006, the Company's ownership percentage of RGA remains at approximately 53%. GUARANTEES In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties pursuant to which it may be required to make payments now or in the future. In the context of acquisition, disposition, investment and other transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and other specific liabilities, and other indemnities and guarantees that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities, such as third party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual limitations and those that arise by operation of law, such as applicable statutes of limitation. In some cases, the maximum potential obligation under the indemnities and guarantees is subject to a contractual limitation ranging from less than $1 million to $2 billion, with a cumulative maximum of $3.5 billion, 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 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. 40 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) The Company has also guaranteed minimum investment returns on certain international retirement funds in accordance with local laws. Since these guarantees are 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 guarantees in the future. In the first quarter of 2006, the Company did not record any additional liabilities for indemnities, guarantees and commitments. In the first quarter of 2005, the Company recorded a liability of $4 million with respect to indemnities provided in connection with a certain disposition. The approximate term for this liability is 18 months. The maximum potential amount of future payments the Company could be required to pay under these indemnities is approximately $500 million. Due to the uncertainty in assessing changes to the liability over the term, the liability on the Company's consolidated balance sheet will remain until either expiration or settlement of the guarantee unless evidence clearly indicates that the estimates should be revised. The Company's recorded liabilities at both March 31, 2006 and December 31, 2005 for indemnities, guarantees and commitments were $9 million. In connection with RSATs, the Company writes credit default swap obligations requiring payment of principal due in exchange for the reference credit obligation, depending on the nature or occurrence of specified credit events for the referenced entities. In the event of a specified credit event, the Company's maximum amount at risk, assuming the value of the referenced credits becomes worthless, is $491 million at March 31, 2006. The credit default swaps expire at various times during the next ten years. 7. EMPLOYEE BENEFIT PLANS PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS Certain subsidiaries of the Holding Company (the "Subsidiaries") are sponsors and/or administrators of defined benefit pension plans covering eligible employees and sales representatives. Retirement benefits are based upon years of credited service and final average or career average earnings history. The Subsidiaries also provide certain postemployment benefits and certain postretirement health care and life insurance benefits for retired employees. Employees of the Subsidiaries who were hired prior to 2003 (or, in certain cases, rehired during or after 2003) and meet age and service criteria while working for a covered subsidiary, may become eligible for these postretirement benefits, at various levels, in accordance with the applicable plans. The Subsidiaries have issued group annuity and life insurance contracts supporting approximately 98% of all pension and postretirement employee benefit plans assets sponsored by the Subsidiaries. A December 31 measurement date is used for all of the Subsidiaries' defined benefit pension and other postretirement benefit plans. The components of net periodic benefit cost were as follows:
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------ ----------------------- THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, MARCH 31, ------------------ ----------------------- 2006 2005 2006 2005 ------ ------ ------- ------- (IN MILLIONS) Service cost............................. $ 40 $ 36 $ 9 $ 9 Interest cost............................ 85 79 30 30 Expected return on plan assets........... (115) (112) (21) (20) Amortization of prior service cost....... 2 4 (9) (5) Amortization of prior actuarial losses... 33 29 6 4 ----- ----- ---- ---- Net periodic benefit cost................ $ 45 $ 36 $ 15 $ 18 ===== ===== ==== ====
41 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) The Company disclosed in Note 13 of Notes to Consolidated Financial Statements included in the 2005 Annual Report, that those subsidiaries which participate in the pension and other postretirement benefit plans discussed above expected to contribute to such plans $187 million and $128 million, respectively, in 2006. During the three months ended March 31, 2006, contributions of $158 million have been made to the pension plans and it is anticipated that certain subsidiaries will contribute an additional $30 million to fund such pension plans in 2006, for a total of $188 million. As of March 31, 2006, contributions of $25 million have been made to the other postretirement benefit plans. 8. EQUITY PREFERRED STOCK On June 13, 2005, the Holding Company issued 24 million shares of Floating Rate Non-Cumulative Preferred Stock, Series A (the "Series A preferred shares") with a $0.01 par value per share, and a liquidation preference of $25 per share for aggregate proceeds of $600 million. On June 16, 2005, the Holding Company issued 60 million shares of 6.50% Non-Cumulative Preferred Stock, Series B (the "Series B preferred shares"), with a $0.01 par value per share, and a liquidation preference of $25 per share, for aggregate proceeds of $1.5 billion. Effective March 6, 2006, the Holding Company's board of directors declared dividends of $0.3432031 per share, for a total of $9 million, on its Series A preferred shares, and $0.4062500 per share, for a total of $24 million, on its Series B preferred shares. Both dividends were paid on March 15, 2006 to shareholders of record as of February 28, 2006. See Note 14 of Notes to Consolidated Financial Statements included in the 2005 Annual Report for further information. COMMON STOCK The Company did not acquire any shares of the Holding Company's common stock during the three months ended March 31, 2006 and 2005. During the three months ended March 31, 2006 and 2005, 620,877 and 643,332 shares of common stock were issued from treasury stock for $21 million in both periods. At March 31, 2006, the Holding Company had approximately $716 million remaining on the October 26, 2004 common stock repurchase program. As a result of the acquisition of Travelers, the Holding Company has suspended its common stock repurchase activity. Future common stock repurchases will be dependent upon several factors, including the Company's capital position, its financial strength and credit ratings, general market conditions and the price of the Holding Company's common stock. On December 16, 2004, the Holding Company repurchased 7,281,553 shares of its outstanding common stock at an aggregate cost of $300 million under an accelerated common stock repurchase agreement with a major bank. The bank borrowed the stock sold to the Holding Company from third parties and purchased the common stock in the open market to return to such third parties. In April 2005, the Holding Company received a cash adjustment of approximately $7 million based on the actual amount paid by the bank to purchase the common stock, for a final purchase price of approximately $293 million. The Holding Company recorded the shares initially repurchased as treasury stock and recorded the amount received as an adjustment to the cost of the treasury stock. 42 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) STOCK-BASED COMPENSATION Overview As described more fully in Note 1, effective January 1, 2006, the Company adopted SFAS 123(r) using the modified prospective transition method. The adoption of SFAS 123(r) did not have a significant impact on the Company's consolidated financial position or consolidated results of operations. Description of Plans The MetLife, Inc. 2000 Stock Incentive Plan, as amended (the "Stock Incentive Plan"), authorized the granting of awards in the form of options to buy shares of Holding Company common stock ("Stock Options") that either qualify as incentive Stock Options under Section 422A of the Internal Revenue Code or are non-qualified. The MetLife, Inc. 2000 Directors Stock Plan, as amended (the "Directors Stock Plan"), authorized the granting of awards in the form of Share Awards, non-qualified Stock Options, or a combination of the foregoing to outside Directors of the Holding Company. Under the MetLife, Inc. 2005 Stock and Incentive Compensation Plan, as amended (the "2005 Stock Plan"), awards granted may be in the form of Stock Options, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units, Performance Shares or Performance Share Units, Cash-Based Awards, and Stock-Based Awards (each as defined in the 2005 Stock Plan). Under the MetLife, Inc. 2005 Non-Management Director Stock Compensation Plan (the "2005 Directors Stock Plan"), awards granted may be in the form of non-qualified Stock Options, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units, or Stock-Based Awards (each as defined in the 2005 Directors Stock Plan). The Stock Incentive Plan, Directors Stock Plan, 2005 Stock Plan, the 2005 Directors Stock Plan and the LTPCP, as described below, are hereinafter collectively referred to as the "Incentive Plans." The aggregate number of shares reserved for issuance under the 2005 Stock Plan and the LTPCP is 68,000,000, plus those shares available but not utilized under the Stock Incentive Plan and those shares utilized under the Stock Incentive Plan that are recovered due to forfeiture of Stock Options. Additional shares carried forward from the Stock Incentive Plan and available for issuance under the 2005 Stock Plan were 12,285,419 as of March 31, 2006. There were no shares carried forward from the Directors Stock Plan. Each share issued under the 2005 Stock Plan in connection with a Stock Option or Stock Appreciation Right reduces the number of shares remaining for issuance under that plan by one, and each share issued under the 2005 Stock Plan in connection with awards other than Stock Options or Stock Appreciation Rights reduces the number of shares remaining for issuance under that plan by 1.179 shares. The number of shares reserved for issuance under the 2005 Directors Stock Plan are 2,000,000. As of March 31, 2006, the aggregate number of shares remaining available for issuance pursuant to the 2005 Stock Plan and the 2005 Directors Stock Plan were 67,419,164 and 1,970,919, respectively. Stock Option exercises and other stock-based awards to employees settled in shares are satisfied through the issuance of shares held in treasury by the Company. Although the Company has suspended the currently authorized share repurchase program, as described previously, sufficient treasury shares exist to satisfy foreseeable obligations under the Incentive Plans. Compensation expense related to awards under the Incentive Plans is recognized based on the number of awards expected to vest, which represents the awards granted less expected forfeitures over the life of the award, as estimated at the date of grant. Unless a material deviation from the assumed rate is observed during the term in which the awards are expensed, any adjustment necessary to reflect differences in actual experience is recognized in the period the award becomes payable or exercisable. Compensation expense of $50 million and $23 million, and income tax benefits of $17 million and $8 million, related to the Incentive Plans was recognized for the three months ended March 31, 2006 and 2005, respectively. Compensation 43 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) expense is principally related to the issuance of Stock Options, Performance Shares and LTPCP arrangements. As described in Note 1, the Company changed its policy prospectively for recognizing expense for stock-based awards to retirement eligible employees. Had the Company continued to recognize expense over the stated requisite service period, compensation expense related to the Incentive Plans would have been $26 million, rather than $50 million, for the three-months ended March 31, 2006. Had the Company applied the policy of recognizing expense related to stock-based compensation over the shorter of the requisite service period or the period to attainment of retirement eligibility for awards granted prior to January 1, 2006, proforma compensation expense would have been $40 million for the three months ended March 31, 2006. Proforma compensation expense for the three months ended March 31, 2005 under the revised policy would not have been materially different from the actual expense recognized. Stock Options All Stock Options granted had an exercise price equal to the closing price of the Holding Company's stock as reported on the New York Stock Exchange on the date of grant, and have a maximum term of ten years. Certain Stock Options granted under the Stock Incentive Plan and the 2005 Stock Plan have or will become exercisable over a three year period commencing with the date of grant, while other Stock Options have or will become exercisable three years after the date of grant. Stock Options issued under the Directors Stock Plan were exercisable immediately. The date at which a Stock Option issued under the 2005 Directors Stock Plan becomes exercisable is determined at the time such Stock Option is granted. A summary of the activity related to Stock Options for the three months ended March 31, 2006 is presented. The aggregate intrinsic value was computed using the closing share price on March 31, 2006 of $48.37 and $49.00 on December 30, 2005, as applicable.
WEIGHTED AVERAGE WEIGHTED REMAINING SHARES UNDER AVERAGE CONTRACTUAL AGGREGATE OPTION EXERCISE PRICE TERM INTRINSIC VALUE ------------ -------------- ------------ --------------- (YEARS) (IN MILLIONS) Outstanding at January 1, 2006.... 24,381,783 $31.83 6.92 $419 ====== ==== ==== Granted......................... 3,636,850 Exercised....................... (616,588) Canceled/Expired................ (39,450) Forfeited....................... (68,444) ---------- Outstanding at March 31, 2006..... 27,294,151 $34.30 7.24 $384 ========== ====== ==== ==== Aggregate number of stock options expected to vest at March 31, 2006............................ 26,525,376 $34.03 7.16 $380 ========== ====== ==== ==== Exercisable, March 31, 2006....... 17,802,042 $29.97 6.21 $327 ========== ====== ==== ====
Prior to January 1, 2005, the Black-Scholes model was used to determine the fair value of Stock Options granted and recognized in the financial statements or as reported in the pro forma disclosure which follows. The fair value of Stock Options issued on or after January 1, 2005 was estimated on the date of grant using a binomial lattice model. The Company made this change because lattice models produce more accurate option values due to the ability to incorporate assumptions about grantee exercise behavior resulting from changes in the price of the underlying shares. In addition, lattice models allow for changes in critical assumptions over the 44 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) life of the option in comparison to closed-form models like Black-Scholes, which require single-value assumptions at the time of grant. The Company used daily historical volatility since the inception of trading when calculating Stock Option values using the Black-Scholes model. In conjunction with the change to the binomial lattice model, the Company began estimating expected future volatility based on an analysis of historical prices of the Holding Company's common stock and call options on that common stock traded on the open market. The Company uses a weighted-average of the implied volatility for publicly traded call options with the longest remaining maturity nearest to the money as of each valuation date and the historical volatility, calculated using monthly closing prices of the Holding Company's common stock. The Company chose a monthly measurement interval for historical volatility as it believes this better depicts the nature of employee option exercise decisions being based on longer-term trends in the price of the underlying shares rather than on daily price movements. The risk-free rate is based on observed interest rates for instruments with maturities similar to the expected term of the Stock Options. Whereas the Black-Scholes model requires a single spot rate for instruments with a term matching the expected life of the option at the valuation date, the binomial lattice model allows for the use of different rates for each year over the contractual term of the option. The table below presents the full range of imputed forward rates for U.S. Treasury Strips that was used in the binomial lattice model over the contractual term of all Stock Options granted in the period. Dividend yield is determined based on historical dividend distributions compared to the price of the underlying common stock as of the valuation date and held constant over the life of the Stock Option. Use of the Black-Scholes model requires an input of the expected life of the Stock Options, or the average number of years before Stock Options will be exercised or expired. The Company estimated expected life using the historical average years to exercise or cancellation and average remaining years outstanding for vested Stock Options. Alternatively, the binomial model used by the Company incorporates the contractual term of the Stock Options and then considers expected exercise behavior and a post-vesting termination rate, or the rate at which vested options are exercised or expire prematurely due to termination of employment, to derive an expected life. The post-vesting termination rate is determined from actual historical exercise and expiration activity under the Incentive Plans. Exercise behavior in the binomial lattice model used by the Company is expressed using an exercise multiple, which reflects the ratio of exercise price to the strike price of Stock Options granted at which holders of the Stock Options are expected to exercise. The exercise multiple is derived from actual historical exercise activity. No significant Stock Option grants were made during the three months ending March 31, 2005. The following weighted-average assumptions, with the exception of risk-free rate, which is expressed as a range, were used to determine the fair value of Stock Options issued during the three months ended March 31, 2006: Dividend yield.............................................. 1.04% Risk-free rate of return.................................... 4.16%-4.94% Expected volatility......................................... 22.08% Exercise multiple........................................... 1.52 Post-vesting termination rate............................... 4.11% Contractual term (years).................................... 10 Weighted average exercise price of stock options granted.... $50.12 Weighted average fair value of stock options granted........ $13.82
Compensation expense related to Stock Option awards expected to vest and granted prior to January 1, 2006 is recognized ratably over the requisite service period, which equals the vesting term. Compensation 45 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) expense related to Stock Option awards expected to vest and granted on or after January 1, 2006 is recognized ratably over the requisite service period or the period to retirement eligibility, if shorter. Compensation expense of $23 million and $10 million, related to Stock Options was recognized for the three months ended March 31, 2006 and 2005, respectively. Had compensation expense for grants awarded prior to January 1, 2003 been determined based on the fair value at the date of grant, the Company's earnings and earnings per common share amounts would have been reduced to the following pro forma amounts for the three months ended March 31, 2005:
(IN MILLIONS, EXCEPT PER SHARE DATA) Net income available to common shareholders................. $ 987 Add: Stock-option based employee compensation expense included in reported net income, net of income taxes.................................................. 7 Deduct: Total stock-option based employee compensation determined under fair value based method for all awards, net of income taxes............................ (8) ----- Pro forma net income available to common shareholders....... $ 986 ===== BASIC EARNINGS PER COMMON SHARE As reported................................................. $1.34 ===== Pro forma................................................... $1.34 ===== DILUTED EARNINGS PER COMMON SHARE As reported................................................. $1.33 ===== Pro forma................................................... $1.33 =====
As of March 31, 2006, there was $80 million of total unrecognized compensation costs related to Stock Options. It is expected that these costs will be recognized over a weighted average period of 2.13 years. The following is a summary of Stock Option exercise activity for the:
THREE MONTHS ENDED MARCH 31, ------------------- 2006 2005 ----- ----- (IN MILLIONS) Total intrinsic value of stock options exercised............ $13 $ 7 Cash received from exercise of stock options................ $18 $19 Tax benefit realized from stock options exercised........... $ 4 $ 2
Performance Shares Beginning in 2005, certain members of management were awarded Performance Shares under (and as defined in) the 2005 Stock Plan. Participants are awarded an initial target number of Performance Shares with the final number of Performance Shares payable being determined by the product of the initial target multiplied by a factor of 0.0 to 2.0. The factor applied is based on measurements of the Holding Company's performance with respect to: (i) the change in annual net operating earnings per share, as defined; and (ii) the proportionate total shareholder return, as defined, with reference to the three-year performance period relative to other companies in the Standard & Poor's Insurance Index with reference to the same three-year period. Performance Share awards will normally vest in their entirety at the end of the three-year performance period 46 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) (subject to certain contingencies) and will be payable entirely in shares of the Holding Company common stock. No Performance Shares were granted during the three months ended March 31, 2005. The following is a summary of Performance Share activity for the three months ended March 31, 2006: Outstanding at January 1, 2006.............................. 1,029,700 Granted................................................... 875,975 Forfeited................................................. (6,250) --------- Outstanding at March 31, 2006............................... 1,899,425 ========= Performance Shares expected to vest at March 31, 2006....... 1,812,360 =========
Performance Share amounts above represent aggregate initial target awards and do not reflect potential increases or decreases resulting from the final performance factor to be determined at the end of the respective performance period. None of the Performance Shares vested during the three months ended March 31, 2006. Performance Share awards are accounted for as equity awards but are not credited with dividend-equivalents for actual dividends paid on the Holding Company common stock during the performance period. Accordingly, the fair value of Performance Shares is based upon the closing price of the Holding Company common stock on the date of grant, reduced by the present value of estimated dividends to be paid on that stock during the performance period. The grant date fair value of Performance Shares issued during the three months ended March 31, 2006 was $48.40. Compensation expense related to initial Performance Shares expected to vest and granted prior to January 1, 2006 is recognized ratably during the performance period. Compensation expense related to initial Performance Shares expected to vest and granted on or after January 1, 2006 is recognized ratably over the performance period or the period to retirement eligibility, if shorter. Performance Shares expected to vest and the related compensation expenses may be further adjusted by the performance factor most likely to be achieved, as estimated by management, at the end of the performance period. Compensation expense of $24 million and $3 million, related to Performance Shares was recognized for the three months ended March 31, 2006 and 2005, respectively. As of March 31, 2006, there was $68 million of total unrecognized compensation costs related to Performance Share awards. It is expected that these costs will be recognized over a weighted average period of 2.08 years. Long-Term Performance Compensation Plan Prior to January 1, 2005, the Company granted stock-based compensation to certain members of management under LTPCP. Each participant was assigned a target compensation amount (an "Opportunity Award") at the inception of the performance period with the final compensation amount determined based on the total shareholder return on the Holding Company's common stock over the three-year performance period, subject to limited further adjustment approved by the Holding Company's Board of Directors. Payments on the Opportunity Awards are normally payable in their entirety (subject to certain contingencies) at the end of the three-year performance period, and may be paid in whole or in part with shares of the Holding Company's common stock, as approved by the Holding Company's Board of Directors. There were no new grants under the LTPCP during the three months ended March 31, 2006 or 2005. A portion of each Opportunity Award under the LTPCP is expected to be settled in shares of the Holding Company's common stock while the remainder will be settled in cash. The portion of the Opportunity Award expected to be settled in shares of the Holding Company's common stock is accounted for as an equity award 47 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) with the fair value of the award determined based upon the closing price of the Holding Company's common stock on the date of grant. The compensation expense associated with the equity award, based upon the grant date fair value, is recognized into expense ratably over the respective three-year performance period. The portion of the Opportunity Award expected to be settled in cash is accounted for as a liability and is remeasured using the closing price of the Holding Company's common stock on the final day of each subsequent reporting period during the three-year performance period. Compensation expense of $3 million and $10 million, related to LTPCP Opportunity Awards was recognized for the three months ended March 31, 2006 and 2005, respectively. The aggregate fair value of LTPCP Opportunity Awards outstanding at March 31, 2006 was $104 million, of which $10 million was not yet recognized. It is expected that these remaining costs will be recognized during 2006. LTPCP Opportunity Awards with an aggregate fair value of $65 million vested during the three months ended March 31, 2006. Payment in the form of 906,989 shares and $16 million in cash was made in the following quarter. It is expected that approximately 760,000 additional shares and $12 million in cash will be issued in future settlement of LTPCP Opportunity Awards expected to become payable in the second quarter of 2007. COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss) are as follows:
THREE MONTHS ENDED MARCH 31, ------------------- 2006 2005 -------- ------ (IN MILLIONS) Net income.................................................. $ 747 $ 987 Other comprehensive income (loss): Unrealized gains (losses) on derivative instruments, net of income taxes........................................ 1 100 Unrealized investment gains (losses), net of related offsets and income taxes............................... (1,323) (884) Foreign currency translation adjustment................... -- (63) Minimum pension liability adjustment...................... -- 47 ------- ----- Other comprehensive income (loss):.......................... (1,322) (800) ------- ----- Comprehensive income (loss)............................ $ (575) $ 187 ======= =====
48 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 9. OTHER EXPENSES Other expenses were comprised of the following:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ------ ------ (IN MILLIONS) Compensation................................................ $ 800 $ 675 Commissions................................................. 846 690 Interest and debt issue cost................................ 211 131 Amortization of DAC and VOBA................................ 602 543 Capitalization of DAC....................................... (883) (767) Rent, net of sublease income................................ 70 94 Minority interest........................................... 59 50 Insurance taxes............................................. 160 119 Other....................................................... 633 436 ------ ------ Total other expenses...................................... $2,498 $1,971 ====== ======
10. EARNINGS PER COMMON SHARE The following presents the weighted average shares used in calculating basic earnings per common share and those used in calculating diluted earnings per common share for each income category presented below:
THREE MONTHS ENDED MARCH 31, ----------------------------------- 2006 2005 --------------- --------------- (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) Weighted average common stock outstanding for basic earnings per common share.......................................... 762,043,823 733,997,727 Incremental common shares from assumed: Exercise or issuance of stock-based awards............. 6,760,812 5,575,712 ------------ ------------ Weighted average common stock outstanding for diluted earnings per common share................................. 768,804,635 739,573,439 ============ ============ EARNINGS PER COMMON SHARE BEFORE PREFERRED STOCK DIVIDENDS: INCOME FROM CONTINUING OPERATIONS......................... $ 750 $ 800 ============ ============ Basic.................................................. $ 0.98 $ 1.09 ============ ============ Diluted................................................ $ 0.98 $ 1.08 ============ ============ INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES.................................................. $ (3) $ 187 ============ ============ Basic.................................................. $ -- $ 0.25 ============ ============ Diluted................................................ $ -- $ 0.25 ============ ============ NET INCOME................................................ $ 747 $ 987 ============ ============ Basic.................................................. $ 0.98 $ 1.34 ============ ============ Diluted................................................ $ 0.97 $ 1.33 ============ ============
49 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
THREE MONTHS ENDED MARCH 31, ----------------------------------- 2006 2005 --------------- --------------- (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) EARNINGS PER COMMON SHARE AFTER PREFERRED STOCK DIVIDENDS: INCOME FROM CONTINUING OPERATIONS......................... $ 750 $ 800 Preferred stock dividends................................. 33 -- ------------ ------------ INCOME FROM CONTINUING OPERATIONS AVAILABLE TO COMMON SHAREHOLDERS........................................... $ 717 $ 800 ============ ============ Basic.................................................. $ 0.94 $ 1.09 ============ ============ Diluted................................................ $ 0.93 $ 1.08 ============ ============ NET INCOME................................................ $ 747 $ 987 Preferred stock dividends................................. 33 -- ------------ ------------ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS............... $ 714 $ 987 ============ ============ Basic.................................................. $ 0.94 $ 1.34 ============ ============ Diluted................................................ $ 0.93 $ 1.33 ============ ============
In connection with the acquisition of Travelers, the Company distributed and sold 82.8 million 6.375% common equity units for $2,070 million in proceeds in a registered public offering on June 21, 2005. These common equity units consist of stock purchase contracts issued by the Holding Company. The stock purchase contracts are reflected in diluted earnings per common share using the treasury stock method, and are dilutive when the weighted average market price of the Holding Company's common stock is greater than or equal to the threshold appreciation price of $53.10. During the period from the date of issuance through March 31, 2006, the weighted average market price of the Holding Company's common stock was less than the threshold appreciation price. Accordingly, the stock purchase contracts did not have an impact on diluted earnings per common share. See Note 9 of Notes to Consolidated Financial Statements included in the 2005 Annual Report. 11. BUSINESS SEGMENT INFORMATION The Company provides insurance and financial services to customers in the United States, Asia Pacific, Latin America, and Europe. The Company's business is divided into five operating segments: Institutional, Individual, Auto & Home, International and Reinsurance, as well as Corporate & Other. These segments are managed separately because they either provide different products and services, require different strategies or have different technology requirements. As a part of the Travelers acquisition, management realigned certain products and services within several of the Company's segments to better conform to the way it manages and assesses its business. Accordingly, all prior period segment results have been adjusted to reflect such product reclassifications. Also in connection with the Travelers acquisition, management has utilized its economic capital model to evaluate the deployment of capital based upon the unique and specific nature of the risks inherent in the Company's existing and newly acquired businesses and has adjusted such allocations based upon this model. 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. As a part of the 50 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) economic capital process, a portion of net investment income is credited to the segments based on the level of allocated equity. Institutional offers a broad range of group insurance and retirement & 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 protection and asset accumulation products, including life insurance, annuities and mutual funds. Auto & Home provides personal lines property and casualty insurance, including private passenger automobile, homeowners and personal excess liability insurance. International provides life insurance, accident and health insurance, annuities and retirement & savings products to both individuals and groups. Through the Company's majority-owned subsidiary, RGA, Reinsurance provides 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. Corporate & Other contains the excess capital not allocated to the business segments, various start-up entities, including MetLife Bank and run-off entities, as well as interest expense related to the majority of the Company's outstanding debt and expenses associated with certain legal proceedings and income tax audit issues. Corporate & Other also includes the elimination of all intersegment amounts, which generally relate to intersegment loans, which bear interest rates commensurate with related borrowings, as well as intersegment transactions. Additionally, the Company's asset management business, including amounts reported as discontinued operations, is included in the results of operations for Corporate & Other. See Note 12 for disclosures regarding discontinued operations, including real estate. 51 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Set forth in the tables below is certain financial information with respect to the Company's segments, as well as Corporate & Other, for the three months ended March 31, 2006 and 2005. The accounting policies of the segments are the same as those of the Company, except for the method of capital allocation and the accounting for gains (losses) from intercompany sales, which are eliminated in consolidation. The Company allocates capital to each segment based upon the economic capital model that allows the Company to effectively manage its capital. The Company evaluates the performance of each operating segment based upon net income excluding net investment gains (losses), net of income taxes, adjustments related to net investment gains (losses), net of income taxes, the impact from discontinued operations, other than discontinued real estate, net of income taxes, less preferred stock dividends. Scheduled periodic settlement payments on derivative instruments not qualifying for hedge accounting are included in net investment gains (losses). The Company allocates certain non-recurring items, such as expenses associated with certain legal proceedings, to Corporate & Other.
AUTO & FOR THE THREE MONTHS ENDED MARCH 31, 2006 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE - ----------------------------------------- ------------- ---------- --------- ------------- ----------- (IN MILLIONS) Premiums.......... $2,989 $1,082 $724 $631 $993 Universal life and investment-type product policy fees... 201 790 -- 184 -- Net investment income... 1,764 1,741 45 235 175 Other revenues.... 170 125 7 4 15 Net investment gains (losses)... (321) (263) 1 20 7 Policyholder benefits and claims... 3,364 1,265 452 503 813 Interest credited to policyholder account balances........ 589 476 -- 87 63 Policyholder dividends... -- 419 1 2 -- Other expenses.... 533 851 201 327 275 Income (loss) from continuing operations before provision (benefit) for income taxes........... 317 464 123 155 39 Income (loss) from discontinued operations, net of income taxes... -- (1) -- -- -- Net income........ 213 304 91 104 26 CORPORATE & FOR THE THREE MONTHS ENDED MARCH 31, 2006 OTHER TOTAL - ----------------------------------------- -------------- ------ (IN MILLIONS) Premiums.......... $ 9 $6,428 Universal life and investment-type product policy fees... -- 1,175 Net investment income... 279 4,239 Other revenues.... 7 328 Net investment gains (losses)... (29) (585) Policyholder benefits and claims... 8 6,405 Interest credited to policyholder account balances........ -- 1,215 Policyholder dividends... (1) 421 Other expenses.... 311 2,498 Income (loss) from continuing operations before provision (benefit) for income taxes........... (52) 1,046 Income (loss) from discontinued operations, net of income taxes... (2) (3) Net income........ 9 747
52 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
AUTO & FOR THE THREE MONTHS ENDED MARCH 31, 2005 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE - ----------------------------------------- ------------- ---------- --------- ------------- ----------- (IN MILLIONS) Premiums.......... $2,844 $1,028 $728 $466 $903 Universal life and investment-type product policy fees... 193 479 -- 119 -- Net investment income... 1,219 1,526 43 149 150 Other revenues.... 161 112 9 3 11 Net investment gains (losses)... 22 52 -- -- 28 Policyholder benefits and claims... 3,111 1,206 478 394 739 Interest credited to policyholder account balances........ 301 392 -- 47 56 Policyholder dividends... -- 409 -- 2 -- Other expenses.... 510 650 199 175 253 Income (loss) from continuing operations before provision (benefit) for income taxes........... 517 540 103 119 44 Income (loss) from discontinued operations, net of income taxes... 7 12 -- (1) -- Net income........ 349 368 76 76 29 CORPORATE & FOR THE THREE MONTHS ENDED MARCH 31, 2005 OTHER TOTAL - ----------------------------------------- -------------- ------ (IN MILLIONS) Premiums.......... $ (3) $5,966 Universal life and investment-type product policy fees... -- 791 Net investment income... 129 3,216 Other revenues.... 3 299 Net investment gains (losses)... (117) (15) Policyholder benefits and claims... (2) 5,926 Interest credited to policyholder account balances........ (1) 795 Policyholder dividends... 4 415 Other expenses.... 184 1,971 Income (loss) from continuing operations before provision (benefit) for income taxes........... (173) 1,150 Income (loss) from discontinued operations, net of income taxes... 169 187 Net income........ 89 987
The following table presents assets with respect to the Company's segments, as well as Corporate & Other, at:
MARCH 31, DECEMBER 31, 2006 2005 ------------ --------------- (IN MILLIONS) Institutional............................................... $183,885 $176,401 Individual.................................................. 235,058 228,325 Auto & Home................................................. 5,407 5,397 International............................................... 19,285 18,624 Reinsurance................................................. 16,398 16,049 Corporate & Other........................................... 39,069 36,849 -------- -------- Total..................................................... $499,102 $481,645 ======== ========
Net investment income and net investment gains (losses) are based upon the actual results of each segment's specifically identifiable asset portfolio adjusted for allocated capital. Other costs are allocated to each of the segments based upon: (i) a review of the nature of such costs; (ii) time studies analyzing the amount of employee compensation costs incurred by each segment; and (iii) cost estimates included in the Company's product pricing. Revenues derived from any customer did not exceed 10% of consolidated revenues. Revenues from U.S. operations were $10,105 million and $9,155 million for the three months ended March 31, 2006 and 2005, respectively, which represented 87% and 89%, respectively, of consolidated revenues. 12. DISCONTINUED OPERATIONS REAL ESTATE The Company actively manages its real estate portfolio with the objective of maximizing earnings through selective acquisitions and dispositions. Income related to real estate classified as held-for-sale or sold 53 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) is presented in discontinued operations. These assets are carried at the lower of depreciated cost or fair value less expected disposition costs. The following table presents the components of income from discontinued real estate operations:
THREE MONTHS ENDED MARCH 31, ------------------- 2006 2005 ------ ------ (IN MILLIONS) Investment income........................................... $ 1 $ 82 Investment expense.......................................... (1) (43) Net investment gains (losses)............................... (5) 18 --- ---- Total revenues............................................ (5) 57 Provision (benefit) for income taxes........................ (2) 20 --- ---- Income (loss) from discontinued operations, net of income taxes.................................................. $(3) $ 37 === ====
The carrying value of real estate related to discontinued operations was $23 million and $22 million at March 31, 2006 and December 31, 2005, respectively. The following table shows the discontinued real estate operations by segment:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ----- ----- (IN MILLIONS) Net investment income Institutional............................................. $-- $10 Individual................................................ -- 7 Corporate & Other......................................... -- 22 --- --- Total net investment income............................ $-- $39 === === Net investment gains (losses) Institutional............................................. $-- $ 2 Individual................................................ (2) 12 Corporate & Other......................................... (3) 4 --- --- Total net investment gains (losses).................... $(5) $18 === ===
In May 2005, the Company sold its One Madison Avenue and 200 Park Avenue properties in Manhattan, New York for $918 million and $1.72 billion, respectively, resulting in second quarter 2005 gains, net of income taxes, of $431 million and $762 million, respectively. Net investment income on One Madison Avenue and 200 Park Avenue was $11 million and $16 million, respectively, for the three months ended March 31, 2005 and is included in income from discontinued operations in the accompanying interim condensed consolidated statements of income. In connection with the sale of the 200 Park Avenue property, the Company has retained rights to existing signage and is leasing space for associates in the property for 20 years with optional renewal periods through 2205. OPERATIONS On September 29, 2005, the Company completed the sale of MetLife Indonesia to a third party resulting in a gain upon disposal of $10 million, net of income taxes. As a result of this sale, the Company recognized 54 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) income (loss) from discontinued operations of ($1) million, net of income taxes, for the three months ended March 31, 2005. The Company reclassified the operations of MetLife Indonesia into discontinued operations for all periods presented. The following table presents the amounts related to the operations of MetLife Indonesia that has been combined with the discontinued real estate operations in the interim condensed consolidated income statement:
THREE MONTHS ENDED MARCH 31, 2005 ------------------ (IN MILLIONS) Revenues.................................................... $ 2 Expenses.................................................... 3 ----- Income (loss) before provision for income taxes............. (1) Provision for income taxes.................................. -- ----- Income (loss) from discontinued operations, net of income taxes.................................................. $ (1) =====
On January 31, 2005, the Company completed the sale of SSRM to a third party for $328 million in cash and stock. As a result of the sale of SSRM, the Company recognized income from discontinued operations of approximately $157 million, net of income taxes, comprised of a realized gain of $165 million, net of income taxes, and an operating expense related to a lease abandonment of $8 million, net of income taxes. Under the terms of the sale agreement, MetLife will have an opportunity to receive, prior to the end of 2006, additional payments aggregating up to approximately 25% of the base purchase price, based on, among other things, certain revenue retention and growth measures. The purchase price is also subject to reduction over five years, depending on retention of certain MetLife-related business. Also under the terms of such agreement, MetLife had the opportunity to receive additional consideration for the retention of certain customers for a specific period in 2005. In the fourth quarter of 2005, upon finalization of the computation, the Company received a payment of $12 million, net of income taxes, due to the retention of these specific customer accounts. The Company reclassified the operations of SSRM into discontinued operations for all periods presented. Additionally, the sale of SSRM resulted in the elimination of the Company's Asset Management segment. The remaining asset management business, which is insignificant, has been reclassified into Corporate & Other. The Company's discontinued operations for the three months ended March 31, 2005 also includes expenses of approximately $6 million, net of income taxes, related to the sale of SSRM. The operations of SSRM include affiliated revenue of $5 million for the three months ended March 31, 2005 related to asset management services provided by SSRM to the Company that have not been eliminated from discontinued operations as these transactions continue after the sale of SSRM. The following table presents the amounts related to operations of SSRM that have been combined with the discontinued real estate operations in the interim condensed consolidated income statement:
THREE MONTHS ENDED MARCH 31, 2005 ------------------ (IN MILLIONS) Revenues.................................................... $ 19 Expenses.................................................... 38 ---- Income (loss) before provision for income taxes............. (19) Provision (benefit) for income taxes........................ (5) ---- Income (loss) from discontinued operations, net of income taxes.................................................. (14) Net investment gain, net of income taxes.................... 165 ---- Income (loss) from discontinued operations, net of income taxes.................................................. $151 ====
55 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For purposes of this discussion, the terms "MetLife" or the "Company" refers to MetLife, Inc., a Delaware corporation (the "Holding Company"), and its subsidiaries, including Metropolitan Life Insurance Company ("Metropolitan Life"). Following this summary is a discussion addressing the consolidated results of operations and financial condition of the Company for the periods indicated. This discussion should be read in conjunction with the Company's unaudited interim condensed consolidated financial statements included elsewhere herein. This 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 MetLife, Inc. and its subsidiaries, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and other similar expressions. 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 United States Securities and Exchange Commission ("SEC"), 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. ECONOMIC CAPITAL 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. As part of the economic capital process, a portion of net investment income is credited to the segments based on the level of allocated equity. This is in contrast to the standardized regulatory risk-based capital ("RBC") formula, which is not as refined in its risk calculations with respect to the nuances of the Company's businesses. ACQUISITIONS AND DISPOSITIONS On September 29, 2005, the Company completed the sale of P.T. Sejahtera ("MetLife Indonesia") to a third party resulting in a gain upon disposal of $10 million, net of income taxes. As a result of this sale, the Company recognized income (loss) from discontinued operations of ($1) million, net of income taxes, for the 56 three months ended March 31, 2005. The Company reclassified the operations of MetLife Indonesia into discontinued operations for all periods presented. On September 1, 2005, the Company completed the acquisition of CitiStreet Associates, a division of CitiStreet LLC, which is primarily involved in the distribution of annuity products and retirement plans to the education, healthcare, and not-for-profit markets, for approximately $56 million. CitiStreet Associates was integrated with MetLife Resources, a division of MetLife dedicated to providing retirement plans and financial services to the same markets. On July 1, 2005, the Holding Company completed the acquisition of The Travelers Insurance Company, excluding certain assets, most significantly, Primerica, from Citigroup Inc. ("Citigroup"), and substantially all of Citigroup's international insurance businesses (collectively, "Travelers") for $12.0 billion. The results of Travelers' operations were included in the Company's unaudited interim condensed consolidated financial statements beginning July 1, 2005. As a result of the acquisition, management of the Company increased significantly the size and scale of the Company's core insurance and annuity products and expanded the Company's presence in both the retirement & savings domestic and international markets. The distribution agreements executed with Citigroup as part of the acquisition will provide the Company with one of the broadest distribution networks in the industry. Consideration paid by the Holding Company for the purchase consisted of approximately $10.9 billion in cash and 22,436,617 shares of the Holding Company's common stock with a market value of approximately $1.0 billion to Citigroup and approximately $100 million in other transaction costs. Consideration paid to Citigroup will be finalized subject to review of the June 30, 2005 financial statements of Travelers by both the Company and Citigroup and interpretation of the provisions of the acquisition agreement by both parties. In addition to cash on-hand, the purchase price was financed through the issuance of common stock, debt securities, common equity units and preferred shares. See "-- Liquidity and Capital Resources -- The Holding Company -- Liquidity Sources." On January 31, 2005, the Company completed the sale of SSRM Holdings, Inc. ("SSRM") to a third party for $328 million in cash and stock. As a result of the sale of SSRM, the Company recognized income from discontinued operations of approximately $157 million, net of income taxes, comprised of a realized gain of $165 million, net of income taxes, and an operating expense related to a lease abandonment of $8 million, net of income taxes. Under the terms of the sale agreement, MetLife will have an opportunity to receive, prior to the end of 2006, additional payments aggregating up to approximately 25% of the base purchase price, based on, among other things, certain revenue retention and growth measures. The purchase price is also subject to reduction over five years, depending on retention of certain MetLife-related business. Also under the terms of such agreement, MetLife had the opportunity to receive additional consideration for the retention of certain customers for a specific period in 2005. In the fourth quarter of 2005, upon finalization of the computation, the Company received a payment of $12 million, net of income taxes, due to the retention of these specific customer accounts. The Company reclassified the operations of SSRM into discontinued operations for all periods presented. Additionally, the sale of SSRM resulted in the elimination of the Company's Asset Management segment. The remaining asset management business, which is insignificant, has been reclassified into Corporate & Other. The Company's discontinued operations for the three months ended March 31, 2005 also includes expenses of approximately $6 million, net of income taxes, related to the sale of SSRM. IMPACT OF HURRICANES On August 29, 2005, Hurricane Katrina made landfall in the states of Louisiana, Mississippi and Alabama causing catastrophic damage to these coastal regions. During the three months ended March 31, 2006, the Company reduced its total net losses recognized related to the catastrophe by $2 million, to $132 million, net of income taxes and reinsurance recoverables, and including reinstatement premiums and other reinsurance-related premium adjustments at March 31, 2006. The Auto & Home segment reduced its total net losses recognized related to the catastrophe by $2 million to $118 million, net of income taxes and reinsurance recoverables, and including reinstatement premiums and other reinsurance-related premium adjustments at March 31, 2006. There was no change in the Institutional segment's total net losses recognized related to the catastrophe of $14 million, net of income taxes and reinsurance recoverables and including 57 reinstatement premiums and other reinsurance-related premium adjustments at March 31, 2006. During the first quarter of 2006, MetLife's gross losses from Katrina were reduced by $1 million to approximately $334 million at March 31, 2006, primarily arising from the Company's homeowners business. On October 24, 2005, Hurricane Wilma made landfall across the state of Florida. During the three months ended March 31, 2006, the Company's Auto & Home segment reduced its recognized total losses related to the catastrophe by $2 million to $30 million, net of income taxes and reinsurance recoverables. MetLife's gross losses from Hurricane Wilma were increased by $2 million during the three months ended March 31, 2006 to approximately $59 million at March 31, 2006 arising from the Company's homeowners and automobile businesses. Additional hurricane-related losses may be recorded in future periods as claims are received from insureds and claims to reinsurers are processed. Reinsurance recoveries are dependent on the continued creditworthiness of the reinsurers, which may be affected by their other reinsured losses in connection with Hurricanes Katrina and Wilma and otherwise. In addition, as discussed above, lawsuits, including purported class actions, have been filed in Mississippi and Louisiana challenging denial of claims for damages caused to property during Hurricane Katrina. Metropolitan Property and Casualty Insurance Company ("MPC") is a named party in some of these lawsuits. In addition, rulings in cases in which MPC is not a party may affect interpretation of its policies. MPC intends to vigorously defend these matters. However, any adverse rulings could result in an increase in the Company's hurricane-related claim exposure and losses. Based on information known by management as of March 31, 2006, it does not believe that additional claim losses resulting from Hurricane Katrina will have a material adverse impact on the Company's unaudited interim condensed consolidated financial statements. SUMMARY OF CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the unaudited interim condensed consolidated financial statements. The most critical estimates include those used in determining: (i) investment impairments; (ii) the fair value of investments in the absence of quoted market values; (iii) application of the consolidation rules to certain investments; (iv) the fair value of and accounting for derivatives; (v) the capitalization and amortization of deferred policy acquisition costs ("DAC") and the establishment and amortization of value of business acquired ("VOBA"); (vi) the measurement of goodwill and related impairment, if any; (vii) the liability for future policyholder benefits; (viii) accounting for reinsurance transactions; (ix) the liability for litigation and regulatory matters; and (x) accounting for employee benefit plans. The application of purchase accounting requires the use of estimation techniques in determining the fair value of the assets acquired and liabilities assumed -- the most significant of which relate to the aforementioned critical estimates. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company's businesses and operations. Actual results could differ from these estimates. INVESTMENTS The Company's principal investments are in fixed maturities, mortgage and consumer loans, other limited partnerships, and real estate and real estate joint ventures, 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 58 time and the extent to which the market value has been below cost or amortized cost; (ii) the potential for impairments of securities when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; (vi) the Company's ability and intent to hold the security for a period of time sufficient to allow for the recovery of its value to an amount equal to or greater than cost or amortized cost; (vii) unfavorable changes in forecasted cash flows on asset-backed securities; and (viii) other subjective factors, including concentrations and information obtained from regulators and rating agencies. In addition, the earnings on certain investments are dependent upon market conditions, which could result in prepayments and changes in amounts to be earned due to changing interest rates or equity markets. The determination of fair values in the absence of quoted market values is based on: (i) valuation methodologies; (ii) securities the Company deems to be comparable; and (iii) assumptions deemed appropriate given the circumstances. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts. In addition, the Company enters into certain structured investment transactions, real estate joint ventures and limited partnerships for which the Company may be deemed to be the primary beneficiary and, therefore, may be required to consolidate such investments. The accounting rules for the determination of the primary beneficiary are complex and require evaluation of the contractual rights and obligations associated with each party involved in the entity, an estimate of the entity's expected losses and expected residual returns and the allocation of such estimates to each party. DERIVATIVES The Company enters into freestanding derivative transactions primarily to manage the risk associated with variability in cash flows or changes in fair values related to the Company's financial assets and liabilities. 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 have embedded derivatives. The associated financial statement risk is the volatility in net income which can result from (i) changes in fair value of derivatives not qualifying as accounting hedges; (ii) ineffectiveness of designated hedges; and (iii) counterparty default. In addition, there is a risk that embedded derivatives requiring bifurcation are not identified and reported at fair value in the unaudited interim condensed consolidated financial statements. Accounting for derivatives is complex, as evidenced by significant authoritative interpretations of the primary accounting standards which continue to evolve, as well as the significant judgments and estimates involved in determining fair value in the absence of quoted market values. These estimates are based on valuation methodologies and assumptions deemed appropriate under 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 AND VALUE OF BUSINESS ACQUIRED 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 DAC and VOBA 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. VOBA reflects the estimated fair value of in-force contracts in a life insurance company acquisition and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the insurance and annuity contracts in force at the acquisition date. VOBA is based on actuarially determined projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment 59 returns and other factors. Actual experience on the purchased business may vary from these projections. 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 common industry practice, in its determination of the amortization of DAC and 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. GOODWILL Goodwill is the excess of cost over the fair value of net assets acquired. The Company tests goodwill for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. Impairment testing is performed using the fair value approach, which requires the use of estimates and judgment, at the "reporting unit" level. A reporting unit is the operating segment, or a business that is one level below the operating segment if discrete financial information is prepared and regularly reviewed by management at that level. For purposes of goodwill impairment testing, goodwill within Corporate & Other is allocated to reporting units within the Company's business segments. If the carrying value of a reporting unit's goodwill exceeds its fair value, the excess is recognized as an impairment and recorded as a charge against net income. The fair values of the reporting units are determined using a market multiple or a discounted cash flow model. The critical estimates necessary in determining fair value are projected earnings, comparative market multiples and the discount rate. LIABILITY FOR FUTURE POLICY BENEFITS AND UNPAID CLAIMS AND CLAIM EXPENSES The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, traditional annuities and non-medical health 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. Utilizing these assumptions, liabilities are established on a block of business basis. The Company also establishes liabilities for unpaid claims and claim expenses for property and casualty claim insurance which represent 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. Differences between actual experience and the assumptions used in pricing these policies and in the establishment of liabilities result in variances in profit and could result in losses. The effects of changes in such estimated liabilities are included in the results of operations in the period in which the changes occur. 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 60 expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the contract using the deposit method of accounting. LITIGATION The Company is a party to a number of legal actions and is involved in a number of regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on the Company's consolidated financial position. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities related to certain lawsuits, including the Company's asbestos-related liability, are especially difficult to estimate due to the limitation of available data and uncertainty regarding numerous variables used to determine amounts recorded. The data and variables that impact the assumptions 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. On a quarterly and annual basis the Company reviews relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected in the Company's consolidated financial statements. The review includes senior legal and financial personnel. It is possible that an adverse outcome in certain of the Company's litigation and regulatory investigations, including asbestos-related cases, or the use of different assumptions in the determination of amounts recorded could have a material effect upon the Company's consolidated net income or cash flows in particular quarterly or annual periods. EMPLOYEE BENEFIT PLANS Certain subsidiaries of the Holding Company sponsor pension and other postretirement plans in various forms covering employees who meet specified eligibility requirements. The reported expense and liability associated with these plans require 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. These assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of the participants. These differences may have a significant effect on the Company's unaudited interim condensed consolidated financial statements and liquidity. RESULTS OF OPERATIONS EXECUTIVE SUMMARY MetLife, Inc. is a leading provider of insurance and other financial services to millions of individual and institutional customers throughout the United States. Through its subsidiaries and affiliates, MetLife, Inc. offers life insurance, annuities, automobile and homeowners insurance and retail banking services to individuals, as well as group insurance, reinsurance and retirement & savings products and services to corporations and other institutions. Outside the United States, the MetLife companies have direct insurance operations in Asia Pacific, Latin America and Europe. MetLife is organized into five operating segments: Institutional, Individual, Auto & Home, International and Reinsurance, as well as Corporate & Other. The management's discussion and analysis which follows isolates, in order to be meaningful, the results of the Travelers acquisition in the period over period comparison as the Travelers acquisition was not included in the results of the Company until July 1, 2005. The Travelers' amounts which have been isolated represent the results of the Travelers legal entities which have been acquired. These amounts represent the impact of the Travelers acquisition; however, as business currently transacted through the acquired Travelers legal entities is transitioned to legal entities already owned by the Company, some of which has already occurred, the identification of the Travelers legal entity business will not necessarily be indicative of the impact of the Travelers acquisition on the results of the Company. 61 As a part of the Travelers acquisition, management realigned certain products and services within several of the Company's segments to better conform to the way it manages and assesses its business. Accordingly, all prior period segment results have been adjusted to reflect such product reclassifications. Also in connection with the Travelers acquisition, management has utilized its economic capital model to evaluate the deployment of capital based upon the unique and specific nature of the risks inherent in the Company's existing and newly acquired businesses and has adjusted such allocations based upon this model. THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2005 The Company reported $714 million in net income available to common shareholders and diluted earnings per common share of $0.93 for the three months ended March 31, 2006 compared to $987 million in net income available to common shareholders and diluted earnings per common share of $1.33 for the three months ended March 31, 2005. The acquisition of Travelers contributed $147 million to net income available to common shareholders for the three months ended March 31, 2006. Excluding the impact of the Travelers acquisition, net income available to common shareholders decreased by $420 million for the three months ended March 31, 2006 compared to the 2005 period. In 2005, the Company completed the sale of SSRM and recognized a gain of $177 million, net of income taxes, of which $165 million, net of income taxes, was recorded during the three months ended March 31, 2005. Accordingly, income from discontinued operations and, correspondingly, net income, decreased by $190 million for the three months ended March 31, 2006 compared to the 2005 period primarily as a result of the aforementioned sale. In addition, net investment losses increased by $362 million, net of income taxes, for the three months ended March 31, 2006 as compared to the corresponding period in 2005. The acquisition of Travelers contributed a loss of $109 million, net of income taxes, to this increase. Excluding the impact of Travelers, net investment losses increased by $253 million, net of income taxes, for the three months ended March 31, 2006 compared to the 2005 period. This increase is primarily due to losses on fixed maturity sales resulting from continued portfolio repositioning in a rising interest rate environment. Also contributing to the increase are losses from the mark-to-market on derivatives in 2006 primarily resulting from changes in U.S. interest rates. In addition, during the three months ended March 31, 2006, the Company paid $33 million in dividends on its preferred shares issued in connection with financing the acquisition of Travelers. The remainder, an increase of $56 million in net income available to common shareholders for the three months ended March 31, 2006 compared to the 2005 period, was primarily due to an increase in premiums, fees and other revenues attributable to continued sales growth across most of the Company's business segments, as well as the positive impact of the U.S. financial markets on policy fees. Policy fees from variable life and annuity and investment-type products are typically calculated as a percentage of the average assets in policyholder accounts. The value of these assets can fluctuate depending on equity performance. In addition, contributing to the increase was higher than expected levels of corporate and real estate joint venture income as well as commercial mortgage prepayment fees. Partially offsetting these increases is a rise in expenses primarily due to higher interest expense, integration costs, stock-based compensation expense, corporate support expenses and DAC amortization. INDUSTRY TRENDS The Company's segments continue to be influenced by a variety of trends that affect the industry. Financial Environment. The current financial environment presents a challenge for the life insurance industry. A low general level of long-term interest rates and the relatively flat yield curve can have a negative impact on the demand for and the profitability of spread-based products such as fixed annuities, guaranteed interest contracts ("GICs") and universal life insurance. In addition, a reversion to lower short-term interest rates could put pressure on interest spreads on existing blocks of business as declining investment portfolio yields draw closer to minimum crediting rate guarantees on certain products. The compression of the yields from a flattening yield curve and low longer-term interest rates will be a concern until new money rates on corporate bonds are higher than overall life insurer investment portfolio yields. Recent volatile equity market 62 performance has also presented challenges for life insurers, as fee revenue from variable annuities and pension products is tied to separate account balances, which reflect equity market performance. Also, variable annuity product demand often mirrors consumer demand for equity market investments. Improving Economy. A recovery in the employment market combined with higher corporate confidence should improve demand for group insurance and retirement & savings-type products. Group insurance premium growth, with respect to life and disability products, for example, is closely tied to employers' total payroll growth. Additionally, the potential market for these products is expanded by new business creation. Bond portfolio credit losses have also benefited from an increasingly healthy economy. Demographics. In the coming decade, a key driver shaping the actions of the life insurance industry will be the rising income protection, wealth accumulation, protection and transfer needs of the retiring Baby Boomers -- the first of whom have entered their pre-retirement, peak savings years. As a result of increasing longevity, retirees will need to accumulate sufficient savings to finance retirements that may span 30 or more years. Helping the Baby Boomers to accumulate assets for retirement and subsequently to convert these assets into retirement income represents a tremendous opportunity for the life insurance industry. Life insurers are well positioned to address the Baby Boomers' rapidly increasing need for savings tools and for income protection. In light of recent Social Security reform and pension solvency concerns, guarantees are what sets the U.S. life insurance industry apart from other financial services providers pursuing the retiring Baby Boomer segment. The Company believes that, among life insurers, those with strong brands, high financial strength ratings, and broad distribution, are best positioned to capitalize on the opportunity to offer income protection products to Baby Boomers. Moreover, the life insurance industry's products and the needs they are designed to address are complex. The Company believes that individuals approaching retirement age will need to seek advice to plan for and manage their retirements and that, in the workplace, as employees take greater responsibility for their benefit options and retirement planning, they will need individually tailored advice. One of the challenges for the life insurance industry will be the delivering of tailored advice in a cost effective manner. Competitive Pressures. The life insurance industry is becoming increasingly competitive. The product development and product life-cycles have shortened in many product segments, leading to more intense competition with respect to product features. Larger companies have the ability to invest in brand equity, product development, technology and risk management, which are among the fundamentals for sustained profitable growth in the life insurance industry. In addition, several of the industry's products can be quite homogeneous and subject to intense price competition. Sufficient scale, financial strength and financial flexibility are becoming prerequisites for sustainable growth in the life insurance industry. Larger market participants tend to have the capacity to invest in additional distribution capability and the information technology needed to offer the superior customer service demanded by an increasingly sophisticated industry client base. Regulatory Changes. The life insurance industry is regulated at the state level, with some products also subject to federal regulation. As life insurers introduce new and often more complex products, regulators refine capital requirements and introduce new reserving standards for the life insurance industry. Regulation recently adopted or currently under review can potentially impact the reserve and capital requirements for several of the industry's products. In addition, regulators have undertaken market and sales practices reviews of several markets or products including equity-indexed annuities, variable annuities and group products. 63 DISCUSSION OF RESULTS The following table presents consolidated financial information for the Company for the periods indicated:
THREE MONTHS ENDED MARCH 31, ------------------- 2006 2005 -------- -------- (IN MILLIONS) REVENUES Premiums.................................................... $ 6,428 $ 5,966 Universal life and investment-type product policy fees...... 1,175 791 Net investment income....................................... 4,239 3,216 Other revenues.............................................. 328 299 Net investment gains (losses)............................... (585) (15) ------- ------- Total revenues............................................ 11,585 10,257 ------- ------- EXPENSES Policyholder benefits and claims............................ 6,405 5,926 Interest credited to policyholder account balances.......... 1,215 795 Policyholder dividends...................................... 421 415 Other expenses.............................................. 2,498 1,971 ------- ------- Total expenses............................................ 10,539 9,107 ------- ------- Income from continuing operations before provision for income taxes.............................................. 1,046 1,150 Provision for income taxes.................................. 296 350 ------- ------- Income from continuing operations........................... 750 800 Income (loss) from discontinued operations, net of income taxes..................................................... (3) 187 ------- ------- Net income.................................................. 747 987 Preferred stock dividends................................... 33 -- ------- ------- Net income available to common shareholders................. $ 714 $ 987 ======= =======
THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2005 -- THE COMPANY Income from Continuing Operations Income from continuing operations decreased by $50 million, or 6%, to $750 million for the three months ended March 31, 2006 from $800 million in the comparable 2005 period. The current period includes $147 million of income from continuing operations related to the acquisition of Travelers. Excluding the acquisition of Travelers, income from continuing operations decreased by $197 million, or 25%. The Institutional segment contributed $140 million, net of income taxes, to this decrease primarily due to net investment losses and unfavorable underwriting, partially offset by favorable interest margins. The Individual segment contributed $120 million, net of income taxes, to the decrease, as a result of net investment losses, higher annuity net guaranteed benefit costs, higher expenses, lower net investment income and higher DAC amortization. These decreases were partially offset by increased fee income related to the growth in separate account products, a decrease in the closed block-related policyholder dividend obligation, favorable underwriting and improved interest rate spreads in the Individual segment. Partially offsetting the decreases in income from continuing operations is an increase in Corporate & Other of $47 million. This increase is primarily due to higher net investment income and lower net investment losses, partially offset by higher interest expense on debt, growth in interest credited to bankholder deposits and integration costs associated with the Travelers acquisition. The Auto & Home segment increased $15 million primarily due to an improved combined ratio 64 which resulted from reduced non-catastrophe claims, favorable development of prior year claims, and a reduction in loss adjustment expenses. These increases in the Auto & Home segment were partially offset by higher catastrophe losses in the first quarter of 2006 and a decrease in net earned premium. In addition, the International segment increased $4 million, net of income taxes, primarily due to business growth in Mexico and South Korea, partially offset by a decrease in Canada due to the realignment of economic capital and higher home office and infrastructure expenditures in support of segment growth. Revenues Premiums, fees and other revenues increased by $875 million, or 12%, to $7,931 million for the three months ended March 31, 2006 from $7,056 million from the comparable 2005 period. The current period includes $484 million of premium, fees and other revenues related to the acquisition of Travelers. Excluding the acquisition of Travelers, premium, fees and other revenues increased by $391 million, or 6%. The Institutional segment contributed $119 million, or 30%, to the period over period increase. The Institutional segment increase is primarily due to improved sales and favorable persistency in group life, as well as sales growth in the non-medical health & other business, partially offset by a decrease in premiums from pension close-outs and structured settlement sales and an increase in master terminal funding in retirement & savings. The Reinsurance segment contributed $94 million, or 24%, to the Company's period over period increase in premiums, fees and other revenues. This growth is primarily attributable to new premiums from facultative and automatic treaties and renewal premiums on existing blocks of business in the U.S. and international operations. The International segment contributed $91 million, or 23%, to the period over period increase primarily due to business growth through increased sales and renewal business in Mexico, South Korea, Brazil, and Taiwan, as well as changes in foreign currency rates, partially offset by a decrease in Chile's premiums, fees and other revenues due to lower annuity sales which was partially offset by an increase in institutional premiums through its bank distribution channel. The Individual segment contributed $82 million, or 21%, to the period over period increase primarily due to higher fee income from variable annuity and universal life products, active marketing of income annuity products and growth in the business in traditional life products. The growth in traditional products more than offset the decline in premiums in the Company's closed block business as this business continues to run-off. Interest rate margins, which generally represent the difference between net investment income and interest credited to policyholder account balances, increased in the Individual segment and the non-medical health and other and retirement and savings businesses in the Institutional segment and decreased in the group life business in the Institutional segment for the three months ended March 31, 2006 as compared to the prior period. Interest rate spreads are influenced by several factors, including business growth, movement in interest rates, and certain investment and investment-related transactions, such as corporate joint venture income and bond and commercial mortgage prepayment fees, the timing and amount of which are generally unpredictable and, as a result, can fluctuate from period to period. If interest rates remain low, it could result in compression of the Company's interest rate spreads on several of its products, which provide guaranteed minimum rates of return to policyholders. This compression could adversely impact the Company's future financial results. Net investment losses increased by $570 million to $585 million for the three months ended March 31, 2006 from $15 million for the comparable 2005 period. The current period includes $172 million of net investment losses related to the acquisition of Travelers. Excluding the acquisition of Travelers, net investment losses increased by $398 million. This increase is primarily due to losses on fixed maturity sales resulting from continued portfolio repositioning in a rising interest rate environment. Also contributing to the increase are losses from the mark-to-market on derivatives in 2006 primarily resulting from changes in U.S. interest rates. Expenses Underwriting results were favorable within the life products in the Individual segment and in the retirement & savings products in the Institutional segment, while underwriting results were unfavorable in group life and non-medical health and other products within the Institutional segment. Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity or other insurance costs, less claims incurred, and the change in insurance-related liabilities. Underwriting results are significantly influenced by mortality, morbidity or other insurance-related experience 65 trends and the reinsurance activity related to certain blocks of business and, as a result, can fluctuate from period to period. Underwriting results, excluding catastrophes, in the Auto & Home segment were favorable for the three months ended March 31, 2006, as the combined ratio, excluding catastrophes, decreased to 86.6% from 90.9% in the three months ended March 31, 2005. Underwriting results in the International segment increased commensurate with the growth in the business as discussed above. Other expenses increased by $527 million, or 27%, to $2,498 million for the three months ended March 31, 2006 from $1,971 million for the comparable 2005 period. The current period includes $290 million of other expenses related to the acquisition of Travelers. Excluding the acquisition of Travelers, other expenses increased by $237 million, or 12%. Corporate & Other contributed $117 million, or 49%, to the period over period variance primarily due to higher interest expense, growth in interest credited to bank holder deposits at MetLife Bank, National Association ("MetLife Bank" or "MetLife Bank, N.A."), integration costs associated with the Travelers acquisition and corporate support expenses. In addition, $55 million, or 23%, of this increase in the International segment is primarily attributable to business growth commensurate with the increase in revenues discussed above and changes in foreign currency rates. Other expenses in the International segment also increased due to information technology projects, growth initiative projects, and an increase in integration costs, as well as an increase in compensation expense at the home office. The Reinsurance segment also contributed $22 million, or 9%, to the increase in other expenses primarily due to an increase in interest expense, amortization of the value of business acquired and stock-based compensation expense. The Individual segment contributed $24 million, or 10%, to the period over period increase primarily due to related stock-based compensation and the impact of revisions to policyholder liabilities in the current period, partially offset by the revisions to certain commission and expense liabilities in the prior period. In addition, the increase in the Individual segment is due to higher DAC amortization. The Institutional segment contributed $17 million, or 7%, to the period over period increase primarily due to higher non-deferrable volume-related expenses, partially offset by a decrease in corporate support expenses, which includes an increase in stock-based compensation. Net Income Income tax expense for the three months ended March 31, 2006 is $296 million, or 28% of income from continuing operations before provision for income taxes, compared with $350 million, or 30%, for the comparable 2005 period. The current period includes $61 million of income tax expense related to the acquisition of Travelers. Excluding the acquisition of Travelers, income tax expense for the three months ended March 31, 2006 is $235 million, or 28% of income from continuing operations before provision for income taxes, compared with $350 million, or 30%, for the comparable 2005 period. The 2006 and 2005 effective tax rates differ from the corporate tax rate of 35% primarily due to the impact of non-taxable investment income and tax credits for investments in low income housing. Income from discontinued operations consists of net investment income and net investment gains related to real estate properties that the Company has classified as available-for-sale or has sold and for the three months ended March 31, 2005, the operations and gain upon disposal from the sale of SSRM on January 31, 2005 and the operations of MetLife Indonesia which was sold on September 29, 2005. Income from discontinued operations, net of income taxes, decreased by $190 million, or 102% to ($3) million for the three months ended March 31, 2006 from $187 million for the comparable 2005 period. This decrease is primarily due to the gain of $165 million, net of income taxes, on the sale of SSRM in the three months ended March 31, 2005. In addition, during the three months ended March 31, 2006, the Company paid $33 million in dividends on its preferred shares issued in connection with financing the acquisition of Travelers. 66 INSTITUTIONAL The following table presents consolidated financial information for the Institutional segment for the periods indicated:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ------- ------- (IN MILLIONS) REVENUES Premiums.................................................... $2,989 $2,844 Universal life and investment-type product policy fees...... 201 193 Net investment income....................................... 1,764 1,219 Other revenues.............................................. 170 161 Net investment gains (losses)............................... (321) 22 ------ ------ Total revenues............................................ 4,803 4,439 ------ ------ EXPENSES Policyholder benefits and claims............................ 3,364 3,111 Interest credited to policyholder account balances.......... 589 301 Other expenses.............................................. 533 510 ------ ------ Total expenses............................................ 4,486 3,922 ------ ------ Income from continuing operations before provision for income taxes.............................................. 317 517 Provision for income taxes.................................. 104 175 ------ ------ Income from continuing operations........................... 213 342 Income from discontinued operations, net of income taxes.... -- 7 ------ ------ Net income.................................................. $ 213 $ 349 ====== ======
The Company's Institutional segment offers a broad range of group insurance and retirement & savings products and services to corporations and other institutions and their respective employees. Group insurance products are offered as employer-paid benefits or as voluntary benefits where all or a portion of the premiums are paid by the employee. Retirement & 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. THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2005 -- INSTITUTIONAL Income from Continuing Operations Income from continuing operations decreased by $129 million, or 38%, to $213 million for the three months ended March 31, 2006 from $342 million for the comparable 2005 period. The acquisition of Travelers contributed $11 million to income from continuing operations, which includes $64 million, net of income taxes, of net investment losses. Excluding the impact of Travelers, income from continuing operations decreased $140 million, or 41%, from the comparable 2005 period. Included in this decrease is a decline of $159 million, net of income taxes, in net investment gains (losses), as well as $5 million charge, net of income taxes, resulting from an increase in policyholder benefits and claims related to net investment gains (losses). Excluding the impact of Travelers and the decline in net investment gains (losses), income from continuing operations increased by $24 million, net of income taxes, from the comparable 2005 period. 67 Interest margins increased by $19 million, net of income taxes, compared to the prior period. Management attributes this increase primarily to improvements in interest margins for the retirement & savings and the non-medical health & other business of $16 million and $13 million, both net of income taxes, respectively. Higher earnings from growth in the asset base and corporate and real estate joint venture income across the majority of the businesses are the primary drivers of the period over period increase. Interest margins in group life decreased by $10 million, net of income taxes. The interest margins in the retirement & savings and the group life business include the impact of a reduction in interest spreads compared to the prior year period. Interest rate spreads are generally the percentage point difference between the yield earned on invested assets and the interest rate the Company uses to credit on certain liabilities. Therefore, given a constant value of assets and liabilities, an increase in interest rate spreads would result in higher income to the Company. Interest rate spreads for the three months ended March 31, 2006 decreased to 1.50% and 1.74% from 1.65% and 2.03%, in the prior year period for the retirement & savings and the group life business, respectively. Management generally expects these spreads to be in the range of 1.35% to 1.50%, and 1.70% to 1.90% for the retirement & savings and the group life business, respectively. Interest rate spreads for the non-medical health & other business are not a significant driver of interest margins. Interest rate spreads are influenced by several factors, including business growth, movement in interest rates, and certain investment and investment-related transactions, such as corporate joint venture income and bond and commercial mortgage prepayment fees for which the timing and amount are generally unpredictable. As a result, income from these investment transactions may fluctuate from period to period. Partially offsetting the increase in interest margins, is a decline in underwriting results of $3 million, net of income taxes, compared to the prior period. This decline is primarily due to less favorable results of $15 million, net of income taxes, in the non-medical health & other business and a $4 million, net of income taxes, decrease in the group life business. The unfavorable results in non-medical health & other business are primarily due to reserve refinements in the long term care business ("LTC"). These unfavorable results were partially offset by an improvement of $16 million, net of income taxes, in retirement & savings' underwriting results, largely due to favorable claim experience. Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity or other insurance costs less claims incurred and the change in insurance related liabilities. Underwriting results are significantly influenced by mortality, morbidity, or other insurance-related experience trends and the reinsurance activity related to certain blocks of business. Also contributing to the period over period increase is an increase in premiums, fees, and other revenue, which, have more than offset increases in operating expenses. Revenues Total revenues, excluding net investment gains (losses), increased by $707 million, or 16%, to $5,124 million for the three months ended March 31, 2006 from $4,417 million for the comparable 2005 period. The acquisition of Travelers contributed $408 million to the period over period increase. Excluding the impact of the Travelers acquisition and the change in net investment gains (losses), total revenues increased by $299 million, or 7%, from the comparable 2005 period. This increase is comprised of growth in premiums, fees and other revenues of $119 million and higher net investment income of $180 million. The increase of $119 million in premiums, fees, and other revenues is largely due to an increase in group life's insurance premiums, fees and other revenues of $192 million, which management primarily attributes to improved sales and favorable persistency, as well as a significant increase in premiums from two large customers. Non-medical health & other business premiums, fees, and other revenues, contributed $121 million, primarily due to growth in the disability, dental and accidental death and dismemberment products of $75 million. In addition, continued growth in the LTC business contributed $40 million. Retirement & savings' premiums, fees and other revenues decreased by $194 million, which is largely due to a decrease in premiums, resulting primarily from declines of $198 million in pension close-outs and $44 million in structured settlements, predominately due to the impact of a decline in sales, partially offset by a $46 million increase in the master terminal funding product, largely due to the impact of an increase in sales. Premiums, 68 fees and other revenues from retirement & savings products are significantly influenced by large transactions, and as a result, can fluctuate from period to period. In addition, net investment income increased by $180 million primarily due to higher income from growth in the asset base driven by sales throughout 2005 and 2006, particularly in GICs and the structured settlement business. In addition, increases in corporate and real estate joint venture income and the impact of higher short-term interest rates contributed to the growth compared to the prior year period. These increases are partially offset by a decline in net investment income resulting from lower average yields on fixed corporate maturities, primarily due to investment turnover. Expenses Total expenses increased by $564 million, or 14%, to $4,486 million for the three months ended March 31, 2006 from $3,922 million for the comparable 2005 period. The acquisition of Travelers contributed $293 million to the period over period increase. Excluding the impact of the Travelers acquisition, total expenses increased $271 million, or 7%, from the comparable 2005 period. This increase is comprised of higher policyholder benefits and claims of $130 million, an increase in interest credited to policyholder account balances of $124 million and an increase in other expenses of $17 million. The increase in policyholder benefits and claims is attributable to increases in both group life and non-medical health & other business of $193 million and $119 million, respectively. Offsetting these increases is a decrease in retirement & savings of $182 million. Overall, these increases are predominantly attributable to the business growth referenced in the revenue discussion above, as well as less favorable claim experience in the group life business. In addition, the increase in the non-medical health & other business includes a charge for disabled life and active life reserve refinements in LTC. Claim experience was mixed across the various businesses within the non-medical health & other business. These increases to policyholder benefits and claims are partially offset by favorable claim experience in the retirement & savings business. The increase in interest credited to policyholder account balances of $124 million is primarily the result of increases in the retirement & savings business of $99 million and the group life business of $25 million. The increase in the retirement & savings business is primarily attributable to a combination of growth in policyholder deposits, predominately as a result of growth in GICs, and an increase in short-term interest rates. The increase in the group life business is largely due to growth in the business as well as the increase in the short-tem interest rates. The rise in other expenses of $17 million is primarily due to higher non-deferrable volume-related expenses of $28 million, which are largely associated with business growth, partially offset by a net decrease of $11 million in corporate support expenses, which is net of an $11 million increase in expense related to stock-based compensation. 69 INDIVIDUAL The following table presents consolidated financial information for the Individual segment for the periods indicated:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ------- ------- (IN MILLIONS) REVENUES Premiums.................................................... $1,082 $1,028 Universal life and investment-type product policy fees...... 790 479 Net investment income....................................... 1,741 1,526 Other revenues.............................................. 125 112 Net investment gains (losses)............................... (263) 52 ------ ------ Total revenues............................................ 3,475 3,197 ------ ------ EXPENSES Policyholder benefits and claims............................ 1,265 1,206 Interest credited to policyholder account balances.......... 476 392 Policyholder dividends...................................... 419 409 Other expenses.............................................. 851 650 ------ ------ Total expenses............................................ 3,011 2,657 ------ ------ Income from continuing operations before provision for income taxes.............................................. 464 540 Provision for income taxes.................................. 159 184 ------ ------ Income from continuing operations........................... 305 356 Income (loss) from discontinued operations, net of income taxes..................................................... (1) 12 ------ ------ Net income.................................................. $ 304 $ 368 ====== ======
The Company'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. THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2005 -- INDIVIDUAL Income from Continuing Operations Income from continuing operations decreased by $51 million, or 14%, to $305 million for the three months ended March 31, 2006 from $356 million for the comparable 2005 period. The acquisition of Travelers contributed $69 million to income from continuing operations, which includes $46 million, net of income taxes, of net investment losses. Excluding the impact of Travelers, income from continuing operations decreased by $120 million, or 34%, to $236 million for the three months ended March 31, 2006 from $356 million for the comparable 2005 period. Included in this decrease are net investment losses of $162 million, net of income taxes. Excluding the impact of net investment losses and Travelers, income from continuing operations increased by $42 million from the comparable 2005 period. Fee income from separate account products increased income from continuing operations by $36 million, net of income taxes, primarily related to growth in the business and favorable market conditions. 70 The decrease in the closed-block related policyholder dividend obligation of $30 million, net of income taxes, also contributed to the increase in income from continuing operations. Favorable underwriting results in life products contributed $15 million, net of income taxes, to the increase in income from continuing operations. Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity or other insurance costs less claims incurred and the change in insurance-related liabilities. Underwriting results are significantly influenced by mortality, morbidity, or other insurance-related experience trends and the reinsurance activity related to certain blocks of business and as a result can fluctuate from period to period. Improvements in interest rate spreads contributed $5 million, net of income taxes, to the period over period increase. Interest rate spreads are generally the percentage point difference between the yield earned on invested assets and the interest rate the Company uses to credit on certain liabilities. Therefore, given a constant value of assets and liabilities, an increase in interest rate spreads would result in higher income to the Company. Interest rate spreads are influenced by several factors, including business growth, movement in interest rates, and certain investment and investment-related transactions, such as corporate joint venture income and bond and commercial mortgage prepayment fees for which the timing and amount are generally unpredictable. As a result, income from these investment transactions may fluctuate from period to period. These aforementioned increases in income from continuing operations are partially offset by higher annuity benefits of $23 million, net of income taxes, primarily due to the costs of the guaranteed annuity benefit riders and the related hedging. Also offsetting the increase in income from continuing operations, is an increase in policyholder dividends of $7 million, net of income taxes, due to growth in the business. The increase in income from continuing operations is partially offset by higher expenses of $13 million, net of income taxes, which includes $7 million, net of income taxes, related to stock-based compensation, and $6 million , net of income taxes, due to the impact of revisions to policyholder liabilities in the current period partially offset by the revisions to certain commission and expense liabilities in the prior period. In addition, offsetting the increase in income from continuing operations, is lower net investment income on blocks of business that are not driven by interest rate spreads of $4 million, net of income taxes, and higher DAC amortization of $3 million, net of income taxes. Revenues Total revenues, excluding net investment gains (losses), increased by $593 million, or 19%, to $3,738 million for the three months ended March 31, 2006 from $3,145 million for the comparable 2005 period. The acquisition of Travelers contributed $509 million to the period over period increase. Excluding the impact of Travelers and the change in net investment gains (losses), total revenues increased by $84 million, or 3%, from the comparable 2005 period. This increase includes higher fee income primarily from variable annuity and universal life products of $68 million resulting from a combination of growth in the business and improved overall market performance. Policy fees from variable life and annuity and investment-type products are typically calculated as a percentage of the average assets in policyholder accounts. The value of these assets can fluctuate depending on equity performance. In addition, management attributes higher premiums of $14 million in 2006 to the active marketing of income annuity products. Although premiums associated with the Company's closed block of business continue to decline as expected by $21 million, this decline was offset by a $21 million increase in premiums of other life products due to growth in the business. Net investment income increased by $2 million resulting from higher joint venture income and bond and commercial mortgage prepayment fees partially offset by a decline in fixed maturity yields on a larger asset base. 71 Expenses Total expenses increased by $354 million, or 13%, to $3,011 million for the three months ended March 31, 2006 from $2,657 million for the comparable 2005 period. The acquisition of Travelers contributed $333 million to the period over period increase. Excluding the impact of Travelers, total expenses increased by $21 million, or less than 1%, from the comparable 2005 period. Higher other expenses of $20 million including $10 million related to stock-based compensation and $10 million related to the impact of revisions to policyholder liabilities in the current period, partially offset by revisions to certain commission and expense liabilities in the prior period contributed to the increase in other expenses. Also contributing to the increase in other expenses is higher DAC amortization of $4 million resulting from growth in the business and adjustments for management's update of assumptions used to determine estimated gross margins, which were partially offset by investment losses. In addition, total expenses increased by $10 million due policyholder dividends associated with growth in the business. Partially offsetting these increases in total expenses is a decrease in policyholder benefits due to a reduction in the closed block-related policyholder dividend obligation of $46 million driven by higher realized losses, and lower net investment income, all in the closed block. Also decreasing policyholder benefits is $10 million due to a revision to the estimates of certain claim liabilities in the life products. Partially offsetting these decreases in policyholder benefits is an increase in annuity benefits of $49 million primarily due to the costs of the guaranteed annuity benefit riders and the related hedging and the increase in future policyholder benefits associated with income annuity premium growth discussed above. AUTO & HOME The following table presents consolidated financial information for the Auto & Home segment for the periods indicated:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ----- ----- (IN MILLIONS) REVENUES Premiums.................................................... $724 $728 Net investment income....................................... 45 43 Other revenues.............................................. 7 9 Net investment gains (losses)............................... 1 -- ---- ---- Total revenues............................................ 777 780 ---- ---- EXPENSES Policyholder benefits and claims............................ 452 478 Policyholder dividends...................................... 1 -- Other expenses.............................................. 201 199 ---- ---- Total expenses............................................ 654 677 ---- ---- Income before provision for income taxes.................... 123 103 Provision for income taxes.................................. 32 27 ---- ---- Net income.................................................. $ 91 $ 76 ==== ====
Auto & Home, operating through MPC and its subsidiaries, offers personal lines property and casualty insurance directly to employees at their employer's worksite, as well as through a variety of retail distribution channels. Auto & Home primarily sells auto insurance and homeowners insurance. 72 THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2005 -- AUTO & HOME Net Income Net income increased by $15 million, or 20%, to $91 million for the three months ended March 31, 2006 from $76 million for the comparable 2005 period. This increase is primarily attributable to an improved combined ratio which contributed $14 million, net of income taxes, to net income as a result of reduced non-catastrophe claims. Favorable development of prior year loss reserves, resulting in $6 million, net of income taxes, and a reduction in loss adjustment expenses of $4 million, net of income taxes, also contributed to the increase in net income. These increases were somewhat offset by higher catastrophe losses in the first quarter of 2006, resulting in a decrease to net income of $6 million, net of income taxes. Also impacting net income was a decrease in net earned premiums of $3 million, net of income taxes, an increase in other expenses of $1 million, net of income taxes, a reduction in other income of $1 million, net of income taxes and an increase in investment income of $1 million, net of income taxes. Revenues Total revenues, excluding net investment gains (losses), decreased by $4 million, or less than 1%, to $776 million for the three months ended March 31, 2006 from $780 million for the comparable 2005 period. The decrease was primarily due to an increase in catastrophe reinsurance costs of $3 million and a number of small increases in voluntary and involuntary programs totaling $1 million, offset by a decrease of $2 million in the Massachusetts involuntary market. The change in investment income remained essentially flat over the comparable 2005 period. This is a result of an increase in investment yields on a relatively flat asset base offset by a decrease in investment income related to a realignment of economic capital. Expenses Total expenses decreased by $23 million, or 3%, to $654 million for the three months ended March 31, 2006 from $677 million for the comparable 2005 period. The decrease was due to a $19 million reduction in non-catastrophe losses, due primarily to favorable claims frequency trends, particularly in the automobile line of business, partially offset by an increase in claims severity in the homeowners line of business. Also contributing to the decrease in expenses was additional favorable prior year loss development of $14 million in the first quarter of 2006 compared to $5 million for the comparable 2005 period and a $5 million reduction in unallocated loss adjusting expenses resulting from the related favorable loss experience. Offsetting these improvements were catastrophe losses of $19 million in the first quarter of 2006 compared to $11 million in the first quarter of 2005 and an increase of $2 million in other expenses. Underwriting results, excluding catastrophes, in the Auto & Home segment were favorable for the three months ended March 31, 2006, as the combined ratio, excluding catastrophes, decreased to 86.6% from 90.9% in the prior period. 73 INTERNATIONAL The following table presents consolidated financial information for the International segment for the periods indicated:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ------- ----- (IN MILLIONS) REVENUES Premiums.................................................... $ 631 $466 Universal life and investment-type product policy fees...... 184 119 Net investment income....................................... 235 149 Other revenues.............................................. 4 3 Net investment gains (losses)............................... 20 -- ------ ---- Total revenues............................................ 1,074 737 ------ ---- EXPENSES Policyholder benefits and claims............................ 503 394 Interest credited to policyholder account balances.......... 87 47 Policyholder dividends...................................... 2 2 Other expenses.............................................. 327 175 ------ ---- Total expenses............................................ 919 618 ------ ---- Income from continuing operations before provision for income taxes.............................................. 155 119 Provision for income taxes.................................. 51 42 ------ ---- Income from continuing operations........................... 104 77 Income (loss) from discontinued operations, net of income taxes..................................................... -- (1) ------ ---- Net income.................................................. $ 104 $ 76 ====== ====
International provides life insurance, accident and health insurance, credit insurance, annuities and retirement & savings products to both individuals and groups. The Company focuses on emerging markets primarily within the Latin America region, the Asia Pacific region and Europe. THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2005 -- INTERNATIONAL Income from Continuing Operations Income from continuing operations increased by $27 million, or 35%, to $104 million for the three months ended March 31, 2006 from $77 million for the comparable 2005 period. The acquisition of Travelers contributed $23 million to income from continuing operations, which includes $7 million, net of income taxes, of net investment gains. Excluding the impact of Travelers, income from operations increased by $4 million, or 5%, over the comparable 2005 period. Included in this increase are net investment gains (losses) of $6 million, net of income taxes. Excluding the impact of Travelers and the increase in net investment gains, income from continuing operations decreased $2 million from the comparable 2005 period. Mexico's income from continuing operations increased by $13 million, primarily due to increased earnings on its institutional business as well as growth and better mortality in its traditional life business. Mexico also benefited from a decrease in certain policyholder liabilities caused by a decrease in the unrealized investment gains on invested assets supporting those liabilities. South Korea's income from continuing operations increased by $12 million, net of income taxes, primarily due to higher sales of its variable universal life product and a larger in-force business, partially offset by higher expenses due to the business growth. 74 Partially offsetting these increases in income from continuing operations was a decrease in Canada of $13 million, net of income taxes, primarily due to the realignment of economic capital. Higher home office and infrastructure expenditures in support of segment growth of $14 million, net of income taxes, also decreased income from continuing operations. Changes in foreign currency rates account for $3 million of the increase in income from continuing operations. Revenues Total revenues, excluding net investment gains (losses), increased by $317 million, or 43%, to $1,054 million for the three months ended March 31, 2006 from $737 million for the comparable 2005 period. The acquisition of Travelers contributed $206 million to the period over period increase. Excluding the impact of Travelers and the change in net investment gains (losses), total revenues increased by $111 million, or 15%, over the comparable 2005 period. Premiums, fees, and other revenues increased by $91 million, or 15%, to $679 million for the three months ended March 31, 2006 from $588 million for the comparable 2005 period. This increase is primarily the result of continued growth in the business through increased sales and renewal business within South Korea, Brazil and Taiwan of $38 million, $14 million, and $8 million, respectively. Mexico's premiums, fees, and other revenues increased by $44 million, primarily due to increased earnings on its institutional and traditional life businesses as well as higher fees and growth in its universal life and pension businesses. Chile's premiums, fees, and other revenues decreased by $11 million, primarily due to lower sales in its annuity business resulting from management's decision not to match aggressive pricing in the market place, partially offset by an increase in institutional premiums through its bank distribution channel. Net investment income increased by $20 million, or 13%, to $169 million for the three months ended March 31, 2006 from $149 million for the comparable 2005 period. Mexico and Chile's net investment income increased by $16 million and $10 million, respectively, due to higher inflation rates and increases in total invested assets. The investment valuations and returns on these invested assets are linked to the inflation rates. South Korea, Brazil, and Taiwan's net investment income increased by $5 million, $2 million, and $2 million, respectively, primarily due to increases in invested assets. These increases in net investment income were partially offset by a decrease of $20 million in Canada due to the realignment of economic capital. The remainder of the increase in total revenues, excluding net investment gains (losses), can be attributed to business growth and net investment income in the other countries. Changes in foreign currency exchange rates account for $29 million of the increase in total revenues, excluding net investment gains(losses). Expenses Total expenses increased by $301 million, or 49%, to $919 million for the three months ended March 31, 2006 from $618 million for the comparable 2005 period. The acquisition of Travelers contributed $185 million to the period over period increase. Excluding the impact of Travelers, total expenses increased by $116 million, or 19%, over the comparable 2005 period. Policyholder benefit and claims, policyholder dividends and interest credited to policyholder account balances increased by $61 million, or 14%, to $504 million for the three months ended March 31, 2006 from $443 million for the comparable 2005 period. Policyholder benefits and claims, policyholder dividends and interest credited to policyholders accounts in Mexico increased by $30 million, primarily due to an increase in policyholder benefits and claims of $22 million commensurate with growth in the traditional life business discussed above, as well as an increase in interest credited to policyholders account of $16 million in line with the net investment income increase in Mexico. Partially offsetting these increases in Mexico is a decrease in certain policyholder liabilities caused by a decrease in the unrealized investment gains on the invested assets supporting those liabilities of $8 million. South Korea, Brazil, and Taiwan's policyholder benefits and claims, policyholder dividends and interest credited to policyholders accounts increased by $15 million, $12 million, and $11 million, respectively, commensurate with the business growth discussed above. These increases in policyholder benefits and claims, policyholder dividends and interest credited to policyholders accounts are 75 partially offset by a decrease of $4 million in Chile, which is primarily due to a decrease in its annuity business offset partially by an increase in its interest credited to policyholders in line with the net investment income increase in Chile. Other expenses increased by $55 million, or 31%, to $230 million for the three months ended March 31, 2006 from $175 million for the comparable 2005 period. South Korea's other expenses increased by $12 million, primarily due to an increase in the amortization of DAC and additional overhead expenses, both of which are due to the growth in business. Mexico's other expenses increased by $11 million, primarily due to an increase in commissions commensurate to the business growth discussed above as well as an increase in its litigation liabilities and additional expenses associated with the start of the Mexican Pension Business ("AFORE"). Brazil's other expenses increased by $6 million, primarily due to the growth in business discussed above. Chile's other expenses increased by $4 million, primarily due to increased commissions associated with its institutional business, this was partially offset by a decrease in the commissions of its annuity business. Other expenses associated with the home office increased by $22 million primarily due to an increase in expenses for information technology projects, growth initiatives projects, and integration costs as well as an increase in compensation resulting from an increase in headcount from the comparable 2005 period. The remainder of the increase in total expenses can be attributed to business growth in the other countries. Changes in foreign currency exchange rates account for $25 million of the increase in total expenses. REINSURANCE The following table presents consolidated financial information for the Reinsurance segment for the periods indicated:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ------- ------- (IN MILLIONS) REVENUES Premiums.................................................... $ 993 $ 903 Universal life and investment-type product policy fees...... -- -- Net investment income....................................... 175 150 Other revenues.............................................. 15 11 Net investment gains (losses)............................... 7 28 ------ ------ Total revenues............................................ 1,190 1,092 ------ ------ EXPENSES Policyholder benefits and claims............................ 813 739 Interest credited to policyholder account balances.......... 63 56 Policyholder dividends...................................... -- -- Other expenses.............................................. 275 253 ------ ------ Total expenses............................................ 1,151 1,048 ------ ------ Income before provision for income taxes.................... 39 44 Provision for income taxes.................................. 13 15 ------ ------ Net income.................................................. $ 26 $ 29 ====== ======
The Company's Reinsurance segment is comprised of the life reinsurance business of Reinsurance Group of America, Incorporated ("RGA"), a publicly traded company. RGA's operations in North America are its largest and include operations of its Canadian and U.S. subsidiaries. In addition to these operations, RGA has subsidiary companies, branch offices, or representative offices in Australia, Barbados, China, Hong Kong, India, Ireland, Japan, Mexico, South Africa, South Korea, Spain, Taiwan and the United Kingdom. 76 THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2005 -- REINSURANCE Net Income Net income decreased by $3 million, or 10%, to $26 million for the three months ended March 31, 2006 from $29 million for the comparable 2005 period. This decrease in net income is attributable to a reduction in net investment gains of $14 million, net of income taxes, primarily as a result of a decrease in the fair value of embedded derivatives related to funds withheld and modified coinsurance contracts, and an increase in other expenses of $12 million, net of income taxes, primarily related to interest expense, the amortization of acquired business, and equity compensation expense. This decrease in net income is partially offset by a 10% increase in premiums and related policyholder benefits and claims, adding $10 million to net income, an increase in investment income net of interest credited of $11 million, net of income taxes, and an increase of $2 million in other revenues, net of income taxes. The increases in premiums and policyholder benefits and claims are primarily due to added in force from facultative and automatic treaties and renewals of existing blocks of business in the U.S. and international operations. Investment income growth, net of interest credited, is due to growth in the invested asset base. Other revenue growth is related to an increase in surrender charges and financial reinsurance fees. Revenues Total revenues, excluding net investment gains (losses), increased by $119 million, or 11%, to $1,183 million for the three months ended March 31, 2006 from $1,064 million for the comparable 2005 period. The increase in revenues is primarily associated with growth in new premiums from facultative and automatic treaties and renewal premiums on existing blocks of business in all RGA operating segments, including the U.S., which contributed $45 million; Canada, which contributed $21 million; and Asia Pacific, which contributed $21 million. Growth in RGA's Europe and South Africa operating segment accounted for the remainder of the increase. Premium levels are significantly influenced by large transactions and reporting practices of ceding companies and, as a result, can fluctuate from period to period. Net investment income increased $25 million, primarily due to growth in the invested asset base from positive operating cash inflows, additional deposits associated with the coinsurance of annuity products, and net proceeds of RGA's $400 million junior subordinated note offering in December 2005, partially offset by a decrease in net investment income related to a realignment of economic capital. Investment yields were relatively flat as compared to the prior period. Other revenues increased $4 million primarily due to an increase in surrender charges on asset-intensive business and an increase in fees associated with financial reinsurance. Additionally, included within the total revenue increase is a reduction in revenue associated with foreign currency exchange rate movements of $9 million. Expenses Total expenses increased by $103 million, or 10%, to $1,151 million for the three months ended March 31, 2006 from $1,048 million for the comparable 2005 period. This increase is commensurate with the growth in revenues and is primarily attributable to an increase of $74 million in policyholder benefits and claims, primarily associated with a growth in insurance in force of approximately $280 billion and $7 million in interest credited, which is generally offset by a corresponding increase in investment income. Other expenses were up $22 million due to a $7 million increase in interest expense associated with the aforementioned junior subordinated note offering in December 2005, $5 million in amortization expense 77 associated with the value of business acquired, and $4 million in an increase in stock-based compensation expense. The remaining increase of $6 million is primarily compensation and overhead related expenses associated with RGA's international expansion and general growth in operations. Additionally, included within the total expense increase is a reduction in expenses associated with foreign currency exchange rate movements of $8 million. CORPORATE & OTHER The following table presents consolidated financial information for Corporate & Other for the periods indicated:
THREE MONTHS ENDED MARCH 31, ------------------- 2006 2005 ------ ------- (IN MILLIONS) REVENUES Premiums.................................................... $ 9 $ (3) Net investment income....................................... 279 129 Other revenues.............................................. 7 3 Net investment gains (losses)............................... (29) (117) ---- ----- Total revenues............................................ 266 12 ---- ----- EXPENSES Policyholder benefits and claims............................ 8 (2) Interest credited to policyholder account balances.......... -- (1) Policyholder dividends...................................... (1) 4 Other expenses.............................................. 311 184 ---- ----- Total expenses............................................ 318 185 ---- ----- Income (loss) from continuing operations before income tax benefit................................................... (52) (173) Income tax benefit.......................................... (63) (93) ---- ----- Income (loss) from continuing operations.................... 11 (80) Income (loss) from discontinued operations, net of income taxes..................................................... (2) 169 ---- ----- Net income.................................................. 9 89 Preferred stock dividends................................... 33 -- ---- ----- Net income (loss) available to common shareholders.......... $(24) $ 89 ==== =====
Corporate & Other contains the excess capital not allocated to the business segments, various start-up entities, including MetLife Bank and run-off entities, as well as interest expense related to the majority of the Company's outstanding debt and expenses associated with certain legal proceedings and income tax audit issues. Corporate & Other also includes the elimination of all intersegment amounts, which generally relate to intersegment loans, which bear interest rates commensurate with related borrowings, as well as intersegment transactions. THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2005 -- CORPORATE & OTHER Income (loss) from Continuing Operations Income (loss) from continuing operations increased by $91 million, or 114%, to $11 million for the three months ended March 31, 2006 from a loss of $80 million for the comparable 2005 period. The acquisition of Travelers, excluding Travelers financing and integration costs incurred by the Company, contributed 78 $44 million to income from continuing operations, which includes $10 million, net of income taxes, of net investment losses. Excluding the impact of Travelers, income (loss) from continuing operations increased by $47 million, or 59%, from the comparable 2005 period. Included in this increase are lower net investment losses of $66 million, net of income taxes. Excluding the impact of Travelers and the decrease in net investment losses, income from continuing operations decreased by $19 million. The decrease in income from continuing operations is primarily attributable to higher interest expense on debt (principally associated with the issuance of debt to finance the Travelers acquisition), interest credited to bankholder deposits, corporate support expenses and integration costs associated with the acquisition of Travelers of $43 million, $16 million, $7 million and $6 million, respectively, all of which are net of income taxes, partially offset by higher net investment income of $47 million, net of income taxes. Revenues Total revenues, excluding net investment gains (losses), increased by $166 million, or 129%, to $295 million for the three months ended March 31, 2006 from $129 million for the comparable 2005 period. The acquisition of Travelers contributed $85 million to the period over period increase. Excluding the impact of Travelers and the change in net investment gains (losses), total revenues increased by $81 million, or 63%, from the comparable 2005 period. This increase is primarily attributable to increases in income on fixed maturities as a result of higher yields from lengthening the duration and a higher asset base, as well as increased income from corporate joint ventures and mortgage loans on real estate. Also included as a component of total revenues are the elimination of intersegment amounts which are offset within total expenses. Expenses Total expenses increased by $133 million, or 72%, to $318 million for the three months ended March 31, 2006 from $185 million for the comparable 2005 period. The acquisition of Travelers contributed $17 million to the period over period increase. Excluding the impact of Travelers, total expenses increased by $116 million, or 63%, from the comparable 2005 period. This increase is attributable to higher interest expense of $69 million as a result of the issuance of senior notes in 2004 and 2005, which includes $62 million of expenses from the financing of the acquisition of Travelers. Integration costs associated with the acquisition of Travelers were higher by $10 million and corporate support expenses increased by $11 million. As a result of growth in the business, interest credited to bank holder deposits increased by $26 million at MetLife Bank. The remainder of the increase is attributable to the eliminations of intersegment amounts. LIQUIDITY AND CAPITAL RESOURCES THE COMPANY CAPITAL RBC requirements are used as minimum capital requirements by the National Association of Insurance Commissioners ("NAIC") and the state insurance departments to identify companies that merit further regulatory action. RBC is based on a formula calculated by applying factors to various asset, premium and statutory reserve items and takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. These rules apply to each of the Company's domestic insurance subsidiaries. At December 31, 2005, each of the Holding Company's domestic insurance subsidiaries' total adjusted capital was in excess of the RBC levels required by their respective states of domicile. The NAIC adopted the Codification of Statutory Accounting Principles ("Codification") in 2001 to standardize regulatory accounting and reporting to state insurance departments. However, statutory accounting principles continue to be established by individual state laws and permitted practices. The New York State Department of Insurance (the "Department") has adopted Codification with certain modifications for the preparation of statutory financial statements of insurance companies domiciled in New York. Modifications by 79 the various state insurance departments may impact the effect of Codification on the statutory capital and surplus of the Holding Company's insurance subsidiaries. ASSET/LIABILITY MANAGEMENT The Company actively manages its assets using an approach that balances quality, diversification, asset/liability matching, liquidity and investment return. The goals of the investment process are to optimize, net of income taxes, risk-adjusted investment income and risk-adjusted total return while ensuring that the assets and liabilities are managed on a cash flow and duration basis. The asset/liability management process is the shared responsibility of the Portfolio Management Unit, the Business Finance Asset/Liability Management Unit, and the operating business segments under the supervision of the various product line specific Asset/Liability Management Committees ("ALM Committees"). The ALM Committees' duties include reviewing and approving target portfolios on a periodic basis, establishing investment guidelines and limits and providing oversight of the asset/liability 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 ALM Committees. The Company establishes target asset portfolios for each major insurance product, which represent the investment strategies used to profitably fund its liabilities within acceptable levels of risk. These strategies include objectives for effective duration, yield curve sensitivity, convexity, liquidity, asset sector concentration and credit quality. In executing these asset/liability matching strategies, management regularly reevaluates the estimates used in determining the approximate amounts and timing of payments to or on behalf of policyholders for insurance liabilities. Many of these estimates are inherently subjective and could impact the Company's ability to achieve its asset/liability management goals and objectives. LIQUIDITY Liquidity refers to a company's ability to generate adequate amounts of cash to meet its needs. The Company's liquidity position (cash and cash equivalents and short-term investments, excluding securities lending) was $7.0 billion at March 31, 2006 and $6.7 billion at December 31, 2005, respectively. Liquidity needs are determined from a rolling 12-month forecast by portfolio and are monitored daily. Asset mix and maturities are adjusted based on forecast. Cash flow testing and stress testing provide additional perspectives on liquidity. The Company believes that it has sufficient liquidity to fund its cash needs under various scenarios that include the potential risk of early contractholder and policyholder withdrawal. The Company includes provisions limiting withdrawal rights on many of its products, including general account institutional pension products (generally group annuities, including GICs, and certain deposit funds liabilities) sold to employee benefit plan sponsors. Certain of these provisions prevent the customer from making withdrawals prior to the maturity date of the product. In the event of significant unanticipated cash requirements beyond normal liquidity, the Company has multiple liquidity alternatives available based on market conditions and the amount and timing of the liquidity need. These options include cash flow from operations, the sale of liquid assets, global funding sources and various credit facilities. The Company's ability to sell investment assets could be limited by accounting rules including rules relating to the intent and ability to hold impaired securities until the market value of those securities recovers. In extreme circumstances, all general account assets within a statutory legal entity are available to fund any obligation of the general account within that legal entity. 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. 80 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, marketable fixed maturity and equity securities. Liquid assets exclude assets relating to securities lending and dollar roll activities. At March 31, 2006 and December 31, 2005, the Company had $177 billion and $179 billion in liquid assets, respectively. Global Funding Sources. Liquidity is also provided by a variety of both short-term and long-term instruments, including repurchase agreements, commercial paper, medium-term 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 both March 31, 2006 and December 31, 2005, the Company had outstanding $1.4 billion in short-term debt and $9.9 billion in long-term debt. Debt Issuances. During the three months ended March 31, 2006, the Company did not issue any debt except for the repurchase agreements as described below. MetLife Bank has entered into several repurchase agreements with the Federal Home Loan Bank of New York (the "FHLB of NY") whereby MetLife Bank has issued such repurchase agreements in exchange for cash and for which the FHLB of NY has been granted a blanket lien on MetLife Bank's residential mortgages and mortgage-backed securities to collateralize MetLife Bank's obligations under the repurchase agreements. The repurchase agreements and the related security agreement represented by this blanket lien provide that upon any event of default by MetLife Bank the FHLB of NY's recovery is limited to the amount of MetLife Bank's liability under the outstanding repurchase agreements. As of March 31, 2006 and December 31, 2005, the Company's total liability was $938 million and $855 million, respectively, which is included in long-term debt. MetLife Funding, Inc. ("MetLife Funding"), a subsidiary of Metropolitan Life, serves as a centralized finance unit for the Company. Pursuant to a support agreement, Metropolitan Life has agreed to cause MetLife Funding to have a tangible net worth of at least one dollar. At both March 31, 2006 and December 31, 2005, MetLife Funding had a tangible net worth of $11 million. MetLife Funding raises cash from various funding sources and uses the proceeds to extend loans, through MetLife Credit Corp., another subsidiary of Metropolitan Life, to the Holding Company, Metropolitan Life and other affiliates. MetLife Funding manages its funding sources to enhance the financial flexibility and liquidity of Metropolitan Life and other affiliated companies. At March 31, 2006 and December 31, 2005, MetLife Funding had total outstanding liabilities, including accrued interest payable, of $390 million and $456 million, respectively, consisting primarily of commercial paper. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- The Company -- Liquidity Sources -- Debt Issuances" included in MetLife Inc.'s 2005 Annual Report on Form 10-K filed with the SEC ("2005 Annual Report") for further information. 81 Credit Facilities. The Company maintains committed and unsecured credit facilities aggregating $3.9 billion as of March 31, 2006. When drawn upon, these facilities bear interest at varying rates in accordance with the respective agreements. The facilities can be used for general corporate purposes and at March 31, 2006, $3.0 billion of the facilities also serve as back-up lines of credit for the Company's commercial paper programs. The following table provides details on these facilities as of March 31, 2006:
LETTER OF CREDIT UNUSED BORROWER(S) EXPIRATION CAPACITY ISSUANCES DRAWDOWNS COMMITMENTS - ------------------------ -------------- -------- --------- --------- ----------- (IN MILLIONS) MetLife, Inc., MetLife Funding, Inc. and Metropolitan Life Insurance Company..... April 2009 $1,500(1) $243 $ -- $1,257 MetLife, Inc. and MetLife Funding, Inc. ................. April 2010 1,500(1) 215 -- 1,285 MetLife Bank, N.A. ..... July 2006 200 -- -- 200 Reinsurance Group of America, Incorporated.......... March 2011 25 -- 25 -- Reinsurance Group of America, Incorporated.......... May 2007 26 -- 26 -- Reinsurance Group of America, Incorporated.......... September 2010 600 240 50 310 ------ ---- ---- ------ Total.............. $3,851 $698 $101 $3,052 ====== ==== ==== ======
- --------------- (1) These facilities serve as back up lines of credit for the Company's commercial paper programs. Letters of Credit. On July 1, 2005, in connection with the closing of the acquisition of Travelers, the $2.0 billion amended and restated five-year letter of credit and reimbursement agreement (the "L/C Agreement") entered into by The Travelers Life and Annuity Reinsurance Company ("TLARC") and various institutional lenders became effective. Under the L/C Agreement, the Holding Company agreed to unconditionally guarantee reimbursement obligations of TLARC with respect to reinsurance letters of credit issued pursuant to the L/C Agreement. The L/C Agreement expires five years after the closing of the acquisition. The following table provides details on the capacity and outstanding balances of all committed facilities as of March 31, 2006:
LETTER OF CREDIT UNUSED ACCOUNT PARTY EXPIRATION CAPACITY ISSUANCES COMMITMENTS - ------------------------------------- -------------- -------- --------- ----------- (IN MILLIONS) The Travelers Life and Annuity Reinsurance Company................ July 2010 $2,000 $2,000 $ -- Exeter Reassurance Company Ltd. ..... March 2015 225 225 -- Exeter Reassurance Company Ltd. ..... June 2015 250 250 -- Exeter Reassurance Company Ltd. ..... September 2015 325 19 306 Exeter Reassurance Company Ltd. and MetLife, Inc. ..................... March 2016 500 290 210 ------ ------ ---- Total........................... $3,300 $2,784 $516 ====== ====== ====
- --------------- Note: The Holding Company is a guarantor under the first four agreements above. At March 31, 2006 and December 31, 2005, the Company had outstanding $3.7 billion and $3.6 billion, respectively, in letters of credit from various banks, of which $3.5 billion and $3.4 billion, respectively, were part of committed facilities. As of March 31, 2006, these letters of credit automatically renew for one year 82 periods except for $774 million which expire in nine years and $10 million which expire in ten years. Since commitments associated with letters of credit and financing arrangements may expire unused, these amounts do not necessarily reflect the Company's actual future cash funding requirements. 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 March 31, 2006:
LESS THAN THREE TO FIVE MORE THAN CONTRACTUAL OBLIGATIONS TOTAL THREE YEARS YEARS FIVE YEARS - ---------------------------------------- -------- ----------- ------------- ---------- (IN MILLIONS) Other long-term liabilities(1)(2)....... $109,321 $19,508 $ 8,069 $81,744 Payables for collateral under securities loaned and other transactions......... 47,059 47,059 -- -- Long-term debt(3)....................... 19,465 2,883 1,600 14,982 Mortgage commitments.................... 2,533 1,940 258 335 Partnership investments(4).............. 2,704 2,704 -- -- Junior subordinated debt securities underlying common equity units(5)..... 2,407 2,407 -- -- Operating leases........................ 1,300 571 241 488 Shares subject to mandatory redemption(3)......................... 350 -- -- 350 Capital leases.......................... 69 34 9 26 Contracts to purchase real estate....... 6 6 -- -- -------- ------- ------- ------- Total................................... $185,214 $77,112 $10,177 $97,925 ======== ======= ======= =======
- --------------- (1) Other long-term liabilities include various investment-type products with contractually scheduled maturities, including GICs, structured settlements, pension closeouts, certain annuity policies and certain indemnities. (2) Other long-term liabilities include benefit and claim liabilities for which the Company believes the amount and timing of the payment is essentially fixed and determinable. Such amounts generally relate to (i) policies or contracts where the Company is currently making payments and will continue to do so until the occurrence of a specific event, such as death; and (ii) life insurance and property and casualty incurred and reported claims. Liabilities for future policy benefits of $82.9 billion and policyholder account balances of $114.5 billion, at March 31, 2006, have been excluded from this table. Amounts excluded from the table are generally comprised of policies or contracts where (i) the Company is not currently making payments and will not make payments in the future until the occurrence of an insurable event, such as death or disability, or (ii) the occurrence of a payment triggering event, such as a surrender of a policy or contract, is outside the control of the Company. The determination of these liability amounts and the timing of payment are not reasonably fixed and determinable since the insurable event or payment triggering event has not yet occurred. Such excluded liabilities primarily represent future policy benefits of approximately $63.8 billion relating to traditional life, health and disability insurance products and policyholder account balances of approximately $41.2 billion relating to deferred annuities, $28.0 billion for group and universal life products and approximately $27.8 billion for funding agreements 83 without fixed maturity dates. Significant uncertainties relating to these liabilities include mortality, morbidity, expenses, persistency, investment returns, inflation and the timing of payments. See "-- The Company -- Asset/Liability Management." Amounts included in other long-term liabilities reflect estimated cash payments to be made to policyholders. Such cash outflows reflect adjustments for the estimated timing of mortality, retirement, and other appropriate factors, but are undiscounted with respect to interest. The amount shown in the More than Five Years column represents the sum of cash flows, also adjusted for the estimated timing of mortality, retirement and other appropriate factors and undiscounted with respect to interest, extending for more than 100 years from the present date. As a result, the sum of the cash outflows shown for all years in the table of $109.3 billion exceeds the corresponding liability amounts of $51.2 billion included in the unaudited interim condensed consolidated financial statements at March 31, 2006. The liability amount in the unaudited interim condensed consolidated financial statements reflects the discounting for interest, as well as adjustments for the timing of other factors as described above. (3) Amounts differ from the balances presented on the consolidated balance sheets. The amounts above do not include any fair value adjustments, related premiums and discounts or capital leases which are presented separately. Amounts include interest to be paid on fixed-rate debt only. (4) 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. (5) Amounts include interest to be paid on junior subordinated debt. As of March 31, 2006, the Company had no material (individually or in the aggregate) purchase obligations or material (individually or in the aggregate) unfunded pension or other postretirement benefit obligations due within one year. Support Agreements. 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 (or not less than 125% of the company action level RBC, if NELICO has a negative trend), as defined by state insurance statutes, and liquidity necessary to enable it to meet its current obligations on a timely basis. At March 31, 2006, 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 recently referenced RBC-based amount calculated at December 31, 2005. In connection with the Company's acquisition of the parent of General American Life Insurance Company ("General American"), Metropolitan Life entered into a net worth maintenance agreement with General American. Under the agreement, as subsequently amended, 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 250% 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 March 31, 2006, 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, 2005. 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. 84 General American has agreed to guarantee certain contractual obligations of its former subsidiaries, Paragon Life Insurance Company (which merged into Metropolitan Life on May 1, 2006), 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 180% of the company action level RBC, as defined by state insurance statutes, General American would assume as assumption reinsurance, subject to regulatory approvals and required consents, all of MetLife Investors' life insurance policies and annuity contract liabilities. At March 31, 2006, 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, 2005. The Holding Company has net worth maintenance agreements with three of its insurance subsidiaries, MetLife Investors, First MetLife Investors Insurance Company and MetLife Investors Insurance Company of California. Under these agreements, as subsequently amended, the Company agreed, without limitation as to the amount, to cause each of these subsidiaries to have a minimum capital and surplus of $10 million, total adjusted capital at a level not less than 150% of the company action level RBC, as defined by state insurance statutes, and liquidity necessary to enable it to meet its current obligations on a timely basis. At March 31, 2006, 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, 2005. In connection with the acquisition of Travelers, MetLife International Holdings, Inc. ("MIH"), a subsidiary of the Holding Company, committed to the Australian Prudential Regulatory Authority that it will provide or procure the provision of additional capital to MetLife General Insurance Limited ("MGIL"), an Australian subsidiary of MIH, to the extent necessary to enable MGIL to meet insurance capital adequacy and solvency requirements. In addition, MetLife International Insurance, Ltd. ("MIIL"), a Bermuda insurance company, was acquired as part of the Travelers transaction. In connection with the assumption of a block of business by MIIL from a company in liquidation in 1995, Citicorp Life Insurance Company ("CLIC"), an affiliate of MIIL and a subsidiary of the Holding Company, agreed with MIIL and the liquidator to make capital contributions to MIIL to ensure that, for so long as any policies in such block remain outstanding, MIIL remains solvent and able to honor the liabilities under such policies. In connection with the acquisition of Travelers, the Holding Company also committed to the South Carolina Department of Insurance to take necessary action to maintain the minimum capital and surplus of The Travelers Life and Annuity Reinsurance Company, a South Carolina subsidiary of the Holding Company, at the greater of $250,000 or 10% of net loss reserves (loss reserves less deferred acquisition costs). Management does not anticipate that these arrangements will place any significant demands upon the Company's liquidity resources. Litigation. Various litigation, including purported or certified class actions, and various claims and assessments against the Company, in addition to those discussed elsewhere herein and those otherwise provided for in the Company's unaudited interim condensed consolidated financial statements, have arisen in the course of the Company's business, including, but not limited to, in connection with its activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company's compliance with applicable insurance and other laws and regulations. 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 elsewhere herein in connection with specific matters. In some of the matters referred to herein, 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 outcome of such pending investigations and legal proceedings are not likely to have such an effect. However, 85 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. Other. 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 and preferred stock, pay all operating expenses, and meet its cash needs. The nature of the Company's diverse product portfolio and customer base lessens the likelihood that normal operations will result in any significant strain on liquidity. Consolidated cash flows. Net cash provided by operating activities was $2,306 million and $1,656 million for the three months ended March 31, 2006 and 2005, respectively. The $650 million increase in operating cash flows in 2006 over the comparable 2005 period is primarily attributable to continued growth in the annuity business, as well as growth in disability, dental, long-term care business and group life, offset by a reduction in retirement & savings. Net cash used in investing activities was $15,056 million and $7,017 million for the three months ended March 31, 2006 and 2005, respectively. The $8,039 million increase in net cash used in investing activities in 2006 over the comparable 2005 period is primarily due to the increase in net purchases of fixed maturities, the increase in the net origination of mortgage and consumer loans and the increase in the net purchase of real estate and real estate joint ventures as well as other limited partnerships. An increase in net purchases of short-term investments and other invested assets also resulted in an increase in net cash used in investing activities. This was partially offset by the increase in net purchases of equity securities and the decrease in net cash provided by short-term investments. In addition, the 2005 period includes proceeds associated with the sale of SSRM. Overall, the increase in net cash used in investing activities results from an increase in operating cash flows as well as an increase in financing cash flows resulting from increased securities. Net cash provided by financing activities was $13,876 million and $5,180 million for the three months ended March 31, 2006 and 2005, respectively. The $8,696 million increase in net cash provided by financing activities in 2006 over the comparable 2005 period is primarily attributable to an increase in the amount of securities lending cash collateral invested in connection with the program and a decrease in short-term debt repayments as compared to 2005. This increase was partially offset by a decrease in net cash provided by policyholder account balances. THE HOLDING COMPANY CAPITAL Restrictions and Limitations on Bank Holding Companies and Financial Holding Companies -- Capital. The Holding Company and its insured depository institution subsidiary, MetLife 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, 2005, MetLife, Inc. and MetLife Bank met the minimum capital standards as per federal banking regulatory agencies with all of MetLife Bank's risk-based and leverage capital ratios meeting the federal banking regulatory agencies "well capitalized" standards and all of MetLife, Inc.'s risk-based and leverage capital ratios meeting the "adequately capitalized" standards. As of their most recently filed reports with the federal banking regulatory agencies, MetLife, Inc. and MetLife Bank were in compliance with the aforementioned minimum capital standards and each had risk-based and leverage capital ratios that met the federal banking regulatory agencies "well capitalized" standards. 86 LIQUIDITY Liquidity is managed to preserve stable, reliable and cost-effective sources of cash to meet all current and future financial obligations and is provided by a variety of sources, including a portfolio of liquid assets, a diversified mix of short- and long-term funding sources from the wholesale financial markets and the ability to borrow through committed credit facilities. The Holding Company is an active participant in the global financial markets through which it obtains a significant amount of funding. These markets, which serve as cost-effective sources of funds, are critical components of the Holding Company's liquidity management. Decisions to access these markets are based upon relative costs, prospective views of balance sheet growth and a targeted liquidity profile. A disruption in the financial markets could limit the Holding Company's access to liquidity. The Holding Company's ability to maintain regular access to competitively priced wholesale funds is fostered by its current high credit ratings from the major credit rating agencies. Management views its capital ratios, credit quality, stable and diverse earnings streams, diversity of liquidity sources and its liquidity monitoring procedures as critical to retaining high credit ratings. Liquidity is monitored through the use of internal liquidity risk metrics, including the composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, access to the financial markets for capital and debt transactions and exposure to contingent draws on the Holding Company's liquidity. LIQUIDITY SOURCES Dividends. The primary source of the Holding Company's liquidity is dividends it receives from its insurance subsidiaries. The Holding Company's insurance subsidiaries are subject to regulatory restrictions on the payment of dividends imposed by the regulators of their respective domiciles. The dividend limitation for U.S. insurance subsidiaries is based on the surplus to policyholders as of the immediately preceding calendar year and statutory net gain from operations for the immediately preceding calendar year. 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. The maximum amount of dividends which can be paid to the Holding Company by Metropolitan Life, MetLife Insurance Company of Connecticut ("MICC"), formerly The Travelers Insurance Company, MPC and Metropolitan Tower Life Insurance Company ("MTL"), in 2006, without prior regulatory approval, is $863 million, $0 million, $178 million and $85 million, respectively. If paid before a specified date in 2006, some or all of an otherwise ordinary dividend may be deemed special by the relevant regulatory authority and require approval. During the three months ended March 31, 2006, no subsidiaries paid dividends to the Holding Company. Liquid Assets. An integral part of the Holding 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 securities. At March 31, 2006 and December 31, 2005, the Holding Company had $662 million and $668 million in liquid assets, respectively. Global Funding Sources. Liquidity is also provided by a variety of both short-term and long-term instruments, commercial paper, medium- and long-term debt, capital securities and stockholders' equity. The diversity 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. Other sources of the Holding Company's liquidity include programs for short- and long-term borrowing, as needed. At March 31, 2006 and December 31, 2005, the Holding Company had $971 million and $961 million in short-term debt outstanding, respectively. At both March 31, 2006 and December 31, 2005, the Holding Company had $7.3 billion of unaffiliated long-term debt outstanding. At March 31, 2006 and December 31, 2005, the Holding Company had $296 million and $286 million of affiliated long-term debt outstanding, respectively. 87 On April 27, 2005, the Holding Company filed a shelf registration statement (the "2005 Registration Statement") with the SEC, covering $11 billion of securities. On May 27, 2005, the 2005 Registration Statement became effective, permitting the offer and sale, from time to time, of a wide range of debt and equity securities. In addition to the $11 billion of securities registered on the 2005 Registration Statement, approximately $3.9 billion of registered but unissued securities remained available for issuance by the Holding Company as of such date, from the $5.0 billion shelf registration statement filed with the SEC during the first quarter of 2004, permitting the Holding Company to issue an aggregate of $14.9 billion of registered securities. The terms of any offering will be established at the time of the offering. During June 2005, in connection with the Company's acquisition of Travelers, the Holding Company issued $2.0 billion of senior notes, $2.07 billion of common equity units and $2.1 billion of preferred stock under the 2005 Registration Statement. In addition, $0.7 billion of senior notes were sold outside the United States in reliance upon Regulation S under the Securities Act of 1933, as amended, a portion of which may be resold in the United States under the 2005 Registration Statement. Remaining capacity under the 2005 Registration Statement after such issuances is $6.6 billion. Debt Issuances. During the three months ended March 31, 2006, the Holding Company had no new debt issuances. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- The Holding Company -- Liquidity Sources -- Debt Issuances" and "-- Common Equity Units" included in the 2005 Annual Report for further information. Debt Repayments. The Holding Company made no debt repayments for the three months ended March 31, 2006 and 2005. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- The Holding Company -- Liquidity Sources -- Debt Repayments" included in the 2005 Annual Report for further information. Preferred Stock. On June 13, 2005, the Holding Company issued 24 million shares of Floating Rate Non-Cumulative Preferred Stock, Series A (the "Series A preferred shares") with a $0.01 par value per share, and a liquidation preference of $25 per share for aggregate proceeds of $600 million. On June 16, 2005, the Holding Company issued 60 million shares of 6.50% Non-Cumulative Preferred Stock, Series B (the "Series B preferred shares"), with a $0.01 par value per share, and a liquidation preference of $25 per share, for aggregate proceeds of $1.5 billion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- The Holding Company -- Liquidity Sources -- Preferred Stock" included in the 2005 Annual Report for further information. See also "-- Liquidity Uses -- Dividends." Common Equity Units. In connection with financing the acquisition of Travelers on July 1, 2005, the Holding Company issued $1,067 million 4.82% Series A and $1,067 million 4.91% Series B junior subordinated debt securities due no later than February 15, 2039 and February 15, 2040, respectively, for a total of $2,134 million, in exchange for $2,070 million in aggregate proceeds from the sale of the trust preferred securities by the Trusts and $64 million in trust common securities issued equally by the Trusts. The common and preferred securities of the Trusts, totaling $2,134 million, represent undivided beneficial ownership interests in the assets of the Trusts, have no stated maturity and must be redeemed upon maturity of the corresponding series of junior subordinated debt securities -- the sole assets of the respective Trusts. The Series A and Series B Trusts will make quarterly distributions on the common and preferred securities at an annual rate of 4.82% and 4.91%, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- The Holding Company -- Liquidity Sources -- Common Equity Units" included in the 2005 Annual Report for further information. Credit Facilities. The Holding Company maintains committed and unsecured credit facilities aggregating $3.0 billion ($1.5 billion expiring in 2009, which it shares with Metropolitan Life and MetLife Funding, 88 and $1.5 billion expiring in 2010, which it shares with MetLife Funding) as of March 31, 2006. Borrowings under these facilities bear interest at varying rates as stated in the agreements. These facilities are primarily used for general corporate purposes and as back-up lines of credit for the borrowers' commercial paper programs. At March 31, 2006, there were no borrowings against these credit facilities. At March 31, 2006, $458 million of the unsecured credit facilities support the letters of credit issued on behalf of the Company, of which $215 million is in support of letters of credit issued on behalf of the Holding Company. Letters of Credit. On July 1, 2005, in connection with the closing of the acquisition of Travelers, the L/C Agreement entered into by TLARC and various institutional lenders became effective. Under the L/C Agreement, the Holding Company agreed to unconditionally guarantee reimbursement obligations of TLARC with respect to reinsurance letters of credit issued pursuant to the L/C Agreement. The L/C Agreement expires five years after the closing of the acquisition. The following table provides details on the capacity and outstanding balances of all committed facilities as of March 31, 2006:
LETTER OF CREDIT UNUSED ACCOUNT PARTY EXPIRATION CAPACITY ISSUANCES COMMITMENTS - ---------------------------------- -------------- -------- ------------- ----------- (IN MILLIONS) The Travelers Life and Annuity Reinsurance Company............. July 2010 $2,000 $2,000 $ -- Exeter Reassurance Company Ltd. ........................... March 2015 225 225 -- Exeter Reassurance Company Ltd. ........................... June 2015 250 250 -- Exeter Reassurance Company Ltd. ........................... September 2015 325 19 306 Exeter Reassurance Company Ltd. and MetLife, Inc. .............. March 2016 500 290 210 ------ ------ ---- Total...................... $3,300 $2,784 $516 ====== ====== ====
- --------------- Note: The Holding Company is a guarantor under the first four agreements above. At March 31, 2006 and December 31, 2005, the Holding Company had $215 million and $190 million, respectively, in outstanding letters of credit from various banks, all of which automatically renew for one year periods. Since commitments associated with letters of credit and financing arrangements may expire unused, these amounts do not necessarily reflect the Holding Company's actual future cash funding requirements. LIQUIDITY USES The primary uses of liquidity of the Holding Company include service on debt, cash dividends on common and preferred stock, capital contributions to subsidiaries, payment of general operating expenses, acquisitions and the repurchase of the Holding Company's common stock. Dividends. Effective March 6, 2006, the Holding Company's board of directors declared dividends of $0.3432031 per share, for a total of $9 million, on its Series A preferred shares, and $0.4062500 per share, for a total of $24 million, on its Series B preferred shares. Both dividends were paid on March 15, 2006 to shareholders of record as of February 28, 2006. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- The Holding Company -- Liquidity Uses -- Dividends" included in the 2005 Annual Report for further information. Affiliated Transactions. During the three months ended March 31, 2006, the Holding Company invested an aggregate of $89 million in various subsidiaries. On December 12, 2005, RGA repurchased 1.6 million shares of its outstanding common stock at an aggregate price of approximately $76 million under an accelerated share repurchase agreement with a major bank. The bank borrowed the stock sold to RGA from third parties and purchased the shares in the open market over the subsequent few months to return to the lenders. RGA would either pay or receive an amount based on the actual amount paid by the bank to purchase the shares. These repurchases resulted in an increase 89 in the Company's ownership percentage of RGA to approximately to 53% at December 31, 2005 from approximately 52% at December 31, 2004. In February 2006, the final purchase price was determined resulting in a cash settlement substantially equal to the aggregate cost. RGA recorded the initial repurchase of shares as treasury stock and recorded the amount received as an adjustment to the cost of the treasury stock. At March 31, 2006, the Company's ownership percentage of RGA remains at approximately 53%. Share Repurchase. On October 26, 2004, the Holding Company's Board of Directors authorized a $1 billion common stock repurchase program, of which $716 million is remaining on this program. Under this authorization, the Holding Company may purchase its common stock from the MetLife Policyholder Trust, in the open market and in privately negotiated transactions. As a result of the acquisition of Travelers, the Holding Company has suspended its common stock repurchase activity. Future common stock repurchases will be dependent upon several factors, including the Company's capital position, its financial strength and credit ratings, general market conditions and the price of the Holding Company's common stock. On December 16, 2004, the Holding Company repurchased 7,281,553 shares of its outstanding common stock at an aggregate cost of $300 million under an accelerated common stock repurchase agreement with a major bank. The bank borrowed the stock sold to the Holding Company from third parties and purchased the common stock in the open market to return to such third parties. In April 2005, the Holding Company received a cash adjustment of approximately $7 million based on the actual amount paid by the bank to purchase the common stock, for a final purchase price of approximately $293 million. The Holding Company recorded the shares initially repurchased as treasury stock and recorded the amount received as an adjustment to the cost of the treasury stock. Support Agreements. The Holding Company has net worth maintenance agreements with three of its insurance subsidiaries, MetLife Investors, First MetLife Investors Insurance Company and MetLife Investors Insurance Company of California. Under these agreements, as subsequently amended, 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, 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 March 31, 2006, 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, 2005. In connection with the acquisition of Travelers, the Holding Company committed to the South Carolina Department of Insurance to take necessary action to maintain the minimum capital and surplus of The Travelers Life and Annuity Reinsurance Company, a South Carolina subsidiary of the Holding Company, at the greater of $250,000 or 10% of net loss reserves (loss reserves less deferred acquisition costs). 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, its portfolio of liquid assets, anticipated securities issuances 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 and preferred stock, contribute capital to its subsidiaries, pay all operating expenses, and meet its cash needs. OFF-BALANCE SHEET ARRANGEMENTS COMMITMENTS TO FUND PARTNERSHIP INVESTMENTS The Company makes commitments to fund partnership investments in the normal course of business for the purpose of enhancing the Company's total return on its investment portfolio. The amounts of these unfunded commitments were $2,704 million and $2,684 million at March 31, 2006 and December 31, 2005, respectively. The Company anticipates that these amounts will be invested in partnerships over the next five years. There are no other obligations or liabilities arising from such arrangements that are reasonably likely to become material. 90 MORTGAGE LOAN COMMITMENTS The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $2,533 million and $2,974 million at March 31, 2006 and December 31, 2005, respectively. The purpose of these loans is to enhance the Company's total return on its investment portfolio. There are no other obligations or liabilities arising from such arrangements that are reasonably likely to become material. LEASE COMMITMENTS The Company, as lessee, has entered into various lease and sublease agreements for office space, data processing and other equipment. The Company's commitments under such lease agreements are included within the contractual obligations table. See "-- Liquidity and Capital Resources -- The Company -- Liquidity Uses -- Investment and Other." CREDIT FACILITIES AND LETTER OF CREDIT The Company maintains committed and unsecured credit facilities and letters of credit with various financial institutions. See "-- Liquidity and Capital Resources -- The Company -- Liquidity Sources -- Credit Facilities" and "-- Letters of Credit" for further description of such arrangements. SHARE-BASED ARRANGEMENTS In connection with the issuance of the common equity units, the Holding Company has issued forward stock purchase contracts under which the Company will issue, in 2008 and 2009, between 39.0 and 47.8 million shares, depending upon whether the share price is greater than $43.45 and less than $53.10. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Liquidity and Capital Resources -- The Holding Company -- Liquidity Sources -- Common Equity Units" included in the 2005 Annual Report for further information. GUARANTEES In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties pursuant to which it may be required to make payments now or in the future. In the context of acquisition, disposition, investment and other transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and other specific liabilities, and other indemnities and guarantees that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities, such as third party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual limitations and those that arise by operation of law, such as applicable statutes of limitation. In some cases, the maximum potential obligation under the indemnities and guarantees is subject to a contractual limitation ranging from less than $1 million to $2 billion, with a cumulative maximum of $3.5 billion, 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 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 Company has also guaranteed minimum investment returns on certain international retirement funds in accordance with local laws. Since these guarantees are 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 guarantees in the future. 91 In the first quarter of 2006, the Company did not record any additional liabilities for indemnities, guarantees and commitments. In the first quarter of 2005, the Company recorded a liability of $4 million with respect to indemnities provided in connection with a certain disposition. The approximate term for this liability is 18 months. The maximum potential amount of future payments the Company could be required to pay under these indemnities is approximately $500 million. Due to the uncertainty in assessing changes to the liability over the term, the liability on the Company's consolidated balance sheet will remain until either expiration or settlement of the guarantee unless evidence clearly indicates that the estimates should be revised. The Company's recorded liabilities at both March 31, 2006 and December 31, 2005 for indemnities, guarantees and commitments were $9 million. In connection with RSATs, the Company writes credit default swap obligations requiring payment of principal due in exchange for the reference credit obligation, depending on the nature or occurrence of specified credit events for the referenced entities. In the event of a specified credit event, the Company's maximum amount at risk, assuming the value of the referenced credits becomes worthless, is $491 million and $593 million at March 31, 2006 and December 31, 2005, respectively. The credit default swaps expire at various times during the next ten years. OTHER COMMITMENTS MICC is a member of the Federal Home Loan Bank of Boston (the "FHLB of Boston") and holds $70 million of common stock of the FHLB of Boston, which is included in equity securities on the Company's consolidated balance sheets. MICC has also entered into several funding agreements with the FHLB of Boston whereby MICC has issued such funding agreements in exchange for cash and for which the FHLB of Boston has been granted a blanket lien on MICC's residential mortgages and mortgage-backed securities to collateralize MICC's obligations under the funding agreements. MICC maintains control over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The funding agreements and the related security agreement represented by this blanket lien provide that upon any event of default by MICC the FHLB of Boston's recovery is limited to the amount of MICC's liability under the outstanding funding agreements. The amount of the Company's liability for funding agreements with the FHLB of Boston as of March 31, 2006 and December 31, 2005 is $926 million, and $1.1 billion, respectively, which is included in policyholder account balances. MetLife Bank is a member of the FHLB of NY and holds $46 million and $43 million of common stock of the FHLB of NY, at March 31, 2006 and December 31, 2005, respectively, which is included in equity securities on the Company's consolidated balance sheets. MetLife Bank has also entered into repurchase agreements with the FHLB of NY whereby MetLife Bank has issued repurchase agreements in exchange for cash and for which the FHLB of NY has been granted a blanket lien on MetLife Bank's residential mortgages and mortgage-backed securities to collateralize MetLife Bank's obligations under the repurchase agreements. MetLife Bank maintains control over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The repurchase agreements and the related security agreement represented by this blanket lien provide that upon any event of default by MetLife Bank the FHLB of NY's recovery is limited to the amount of MetLife Bank's liability under the outstanding repurchase agreements. The amount of the Company's liability for repurchase agreements with the FHLB of NY as of March 31, 2006 and December 31, 2005 are $938 million and $855 million, respectively, which is included in long-term debt. COLLATERAL FOR SECURITIES LENDING The Company has noncash collateral for securities lending on deposits from customers, which cannot be sold or re-pledged, and which has not been recorded on its consolidated balance sheets. The amount of this collateral was $150 million and $207 million at March 31, 2006 and December 31, 2005, respectively. 92 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. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS 123(r)"), which revises SFAS No. 123, Accounting for Stock-Based Compensation("SFAS 123"), as amended by SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure ("SFAS 148") and supersedes Accounting Principles Board ("APB") Opinion No. 25 ("APB 25"). SFAS 123(r) includes supplemental application guidance issued by the Securities and Exchange Commission in Staff Accounting Bulletin No. 107, Share-Based Payment, ("SAB 107") -- using the modified prospective transition method. In accordance with the modified prospective transition method, results for prior periods have not been restated. SFAS 123(r) requires that the cost of all stock-based transactions be measured at fair value and recognized over the period during which a grantee is required to provide goods or services in exchange for the award. The Company had previously adopted the fair value method of accounting for stock-based awards as prescribed by SFAS 123 on a prospective basis effective January 1, 2003, and prior to January 1, 2003, accounted for its stock-based awards to employees under the intrinsic value method prescribed by APB 25. The Company did not modify the substantive terms of any existing awards prior to adoption of SFAS 123(r). Under the modified prospective transition method, compensation expense recognized in the three months ended March 31, 2006 includes: (a) compensation expense for all stock-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all stock-based awards granted beginning January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(r). The adoption of SFAS 123(r) did not have a significant impact on the Company's financial position or results of operations as all stock-based awards accounted for under the intrinsic value method prescribed by APB 25 had vested prior to the adoption date and the Company had adopted the fair value recognition provisions of SFAS 123 on January 1, 2003. As required by SFAS 148, and carried forward in the provisions of SFAS 123(r), the Company discloses the pro forma impact as if stock-based awards accounted for under APB 25 had been accounted for under the fair value method. SFAS 123 allowed forfeitures of stock-based awards to be recognized as a reduction of compensation expense in the period in which the forfeiture occurred. Upon adoption of SFAS 123(r), the Company changed its policy and now incorporates an estimate of future forfeitures into the determination of compensation expense when recognizing expense over the requisite service period. The impact of this change in accounting policy was not significant to the Company's financial position or results of operations. Additionally, for awards granted after adoption, the Company changed its policy from recognizing expense for stock-based awards over the requisite service period to recognizing such expense over the shorter of the requisite service period or the period to attainment of retirement-eligibility. Prior to the adoption of SFAS 123(r), the Company presented tax benefits of deductions resulting from the exercise of stock options within operating cash flows in the unaudited interim condensed consolidated statements of cash flow. SFAS 123(r) requires tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options ("excess tax benefits") be classified and reported as a financing cash inflow upon adoption of SFAS 123(r). The Company has adopted guidance relating to derivative financial instruments as follows: - Effective January 1, 2006, the Company adopted prospectively SFAS No. 155, Accounting for Certain Hybrid Instruments ("SFAS 155"). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging ("SFAS 133") and SFAS No. 140, Accounting for Transfers and Servicing 93 of Financial, Assets and Extinguishments of Liabilities ("SFAS 140"). SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole, eliminating the need to bifurcate the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. In addition, among other changes, SFAS 155 (i) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133; (ii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (iii) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (iv) eliminates the prohibition on a qualifying special-purpose entity ("QSPE") from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial interest. The adoption of SFAS 155 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. - Effective January 1, 2006, the Company adopted prospectively SFAS 133 Implementation Issue No. B38, Embedded Derivatives: Evaluation of Net Settlement with Respect to the Settlement of a Debt Instrument through Exercise of an Embedded Put Option or Call Option ("Issue B38") and SFAS 133 Implementation Issue No. B39, Embedded Derivatives: Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor ("Issue B39"). Issue B38 clarifies that the potential settlement of a debtor's obligation to a creditor occurring upon exercise of a put or call option meets the net settlement criteria of SFAS No. 133. Issue B39 clarifies that an embedded call option, in which the underlying is an interest rate or interest rate index, that can accelerate the settlement of a debt host financial instrument should not be bifurcated and fair valued if the right to accelerate the settlement can be exercised only by the debtor (issuer/borrower) and the investor will recover substantially all of its initial net investment. The adoption of Issues B38 and B39 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective January 1, 2006, the Company adopted prospectively Emerging Issues Task Force ("EITF") Issue No. 05-7, Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues ("EITF 05-7"). EITF 05-7 provides guidance on whether a modification of conversion options embedded in debt results in an extinguishment of that debt. In certain situations, companies may change the terms of an embedded conversion option as part of a debt modification. The EITF concluded that the change in the fair value of an embedded conversion option upon modification should be included in the analysis of EITF Issue No. 96-19, Debtor's Accounting for a Modification or Exchange of Debt Instruments, to determine whether a modification or extinguishment has occurred and that a change in the fair value of a conversion option should be recognized upon the modification as a discount (or premium) associated with the debt, and an increase (or decrease) in additional paid-in capital. The adoption of EITF 05-7 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective January 1, 2006, the Company adopted EITF Issue No. 05-8, Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature ("EITF 05-8"). EITF 05-8 concludes that (i) the issuance of convertible debt with a beneficial conversion feature results in a basis difference that should be accounted for as a temporary difference; and (ii) the establishment of the deferred tax liability for the basis difference should result in an adjustment to additional paid-in capital. EITF 05-8 was applied retrospectively for all instruments with a beneficial conversion feature accounted for in accordance with EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments. The adoption of EITF 05-8 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective January 1, 2006, the Company adopted SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"). The statement requires retrospective application to prior periods' financial statements for a voluntary change in accounting principle unless it is deemed impracticable. It also requires that a change in the method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting 94 estimate rather than a change in accounting principle. The adoption of SFAS 154 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. In June 2005, the EITF reached consensus on Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights ("EITF 04-5"). EITF 04-5 provides a framework for determining whether a general partner controls and should consolidate a limited partnership or a similar entity in light of certain rights held by the limited partners. The consensus also provides additional guidance on substantive rights. EITF 04-5 was effective after June 29, 2005 for all newly formed partnerships and for any pre-existing limited partnerships that modified their partnership agreements after that date. For all other limited partnerships, EITF 04-5 required adoption by January 1, 2006 through a cumulative effect of a change in accounting principle recorded in opening equity or applied retrospectively by adjusting prior period financial statements. The adoption of the provisions of EITF 04-5 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective November 9, 2005, the Company prospectively adopted the guidance in Financial Accounting Standards Board ("FASB") Staff Position ("FSP") FAS 140-2, Clarification of the Application of Paragraphs 40(b) and 40(c) of FAS 140 ("FSP 140-2"). FSP 140-2 clarified certain criteria relating to derivatives and beneficial interests when considering whether an entity qualifies as a QSPE. Under FSP 140-2, the criteria must only be met at the date the QSPE issues beneficial interests or when a derivative financial instrument needs to be replaced upon the occurrence of a specified event outside the control of the transferor. The adoption of FSP 140-2 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective July 1, 2005, the Company adopted SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 ("SFAS 153"). SFAS 153 amended prior guidance to eliminate the exception for nonmonetary exchanges of similar productive assets and replaced it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS 153 were required to be applied prospectively for fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 did not have a material impact on the Company's unaudited interim condensed consolidated financial statements. Effective July 1, 2005, the Company adopted EITF Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements ("EITF 05-6"). EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. As required by EITF 05-6, the Company adopted this guidance on a prospective basis which had no material impact on the Company's unaudited interim condensed consolidated financial statements. In June 2005, the FASB completed its review of 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 accounting guidance regarding the determination of when an impairment of debt and marketable equity securities and investments accounted for under the cost method should be considered other-than-temporary and recognized in income. EITF 03-1 also requires 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 FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment but has issued FSP 115-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments ("FSP 115-1"), which nullifies the accounting guidance on the determination of whether an investment is other-than-temporarily impaired as set forth in EITF 03-1. As required by FSP 115-1, the Company adopted this guidance on a prospective basis, which had no material impact on the Company's unaudited interim condensed consolidated financial statements, and has provided the required disclosures. 95 In December 2004, the FASB issued FSP 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 ("FSP 109-2"). The American Jobs Creation Act of 2004 ("AJCA") introduced a one-time dividend received deduction on the repatriation of certain earnings to a U.S. taxpayer. FSP 109-2 provides companies additional time beyond the financial reporting period of enactment to evaluate the effects of the AJCA on their plans to repatriate foreign earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes. As of March 31, 2005, the Company was evaluating the impacts of the repatriation provision of the AJCA and during the second half of 2005, the Company recorded a $27 million income tax benefit related to the repatriation of foreign earnings pursuant to Internal Revenue Code Section 965 for which a U.S. deferred income tax provision had previously been recorded. FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets -- an amendment of FASB Statement No. 140 ("SFAS 156"). SFAS 156 amends the guidance in SFAS 140. Among other requirements, SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations. SFAS 156 will be applied prospectively and is effective for fiscal years beginning after September 15, 2006. SFAS 156 is not expected to have a material impact on the Company's consolidated financial statements. In September 2005, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts ("SOP 05-1"). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Under SOP 05-1, modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. A replacement contract that is substantially changed will be accounted for as an extinguishment of the replaced contract resulting in a release of unamortized deferred acquisition costs, unearned revenue and deferred sales inducements associated with the internal replacements occurring in fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of SOP 05-1 and does not expect that the pronouncement will have a material impact on the Company's consolidated financial statements. INVESTMENTS The Company's primary investment objective is to optimize, net of income taxes, risk-adjusted investment income and risk-adjusted total return while ensuring that assets and liabilities are managed on a cash flow and duration basis. 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 96 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 Company also uses certain derivative instruments in the management of credit and interest rate risks. 97 COMPOSITION OF PORTFOLIO AND INVESTMENT RESULTS The following table illustrates the net investment income and annualized yields on average assets for each of the components of the Company's investment portfolio for the three months ended March 31, 2006 and 2005:
AT OR FOR THE THREE MONTHS ENDED MARCH 31, ------------------- 2006 2005 -------- -------- (IN MILLIONS) FIXED MATURITIES Yield(1).................................................... 6.15% 6.34% Investment income(2)........................................ $ 3,002 $ 2,279 Net investment gains (losses)............................... $ (412) $ (114) Ending assets(2)............................................ $240,711 $182,267 MORTGAGE AND CONSUMER LOANS Yield(1).................................................... 6.68% 6.76% Investment income(3)........................................ $ 585 $ 517 Net investment gains (losses)............................... $ 4 $ (11) Ending assets............................................... $ 37,351 $ 31,977 REAL ESTATE AND REAL ESTATE JOINT VENTURES(4) Yield(1).................................................... 12.50% 11.02% Investment income........................................... $ 146 $ 119 Net investment gains (losses)............................... $ 17 $ 18 Ending assets............................................... $ 4,700 $ 4,377 POLICY LOANS Yield(1).................................................... 5.84% 6.17% Investment income........................................... $ 146 $ 138 Ending assets............................................... $ 9,987 $ 8,953 EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS Yield(1).................................................... 12.53% 9.90% Investment income........................................... $ 229 $ 118 Net investment gains (losses)............................... $ 27 $ 95 Ending assets............................................... $ 7,870 $ 5,514 CASH AND SHORT-TERM INVESTMENTS Yield(1).................................................... 4.63% 4.77% Investment income........................................... $ 80 $ 64 Net investment gains (losses)............................... $ (1) $ (1) Ending assets............................................... $ 8,512 $ 6,470 OTHER INVESTED ASSETS(5) Yield(1).................................................... 8.92% 9.09% Investment income........................................... $ 171 $ 104 Net investment gains (losses)............................... $ (259) $ (8) Ending assets............................................... $ 8,386 $ 5,331 TOTAL INVESTMENTS Gross investment income yield(1)............................ 6.54% 6.60% Investment fees and expenses yield.......................... (0.12%) (0.12%) -------- -------- NET INVESTMENT INCOME YIELD................................. 6.42% 6.48% ======== ======== Gross investment income..................................... $ 4,359 $ 3,339 Investment fees and expenses................................ $ (81) $ (60) -------- -------- NET INVESTMENT INCOME(4)(5)................................. $ 4,278 $ 3,279 ======== ======== Ending assets............................................... $317,517 $244,889 ======== ======== Net investment gains (losses)(4)(5)......................... $ (624) $ (21) ======== ========
98 - --------------- (1) Yields are based on quarterly average asset carrying values, excluding recognized and unrealized investment gains (losses), and for yield calculation purposes, average assets exclude collateral associated with the Company's securities lending program. (2) Fixed maturities include $883 million and $134 million in ending assets relating to trading securities at March 31, 2006 and 2005, respectively. Fixed maturities include $19 million and $1 million in investment income relating to trading securities for the three months ended March 31, 2006 and 2005, respectively. The annualized yield on trading securities was 9.09% and 4.65% for the three months ended March 31, 2006 and 2005, respectively. (3) Investment income from mortgage and consumer loans includes prepayment fees. (4) Real estate and real estate joint venture investment income includes amounts classified as discontinued operations of $0 million and $39 million for the three months ended March 31, 2006 and 2005, respectively. Net investment gains (losses) includes $5 million of losses and $18 million of gains classified as discontinued operations for the three months ended March 31, 2006 and 2005, respectively. (5) Investment income from other invested assets includes scheduled periodic settlement payments on derivative instruments that do not qualify for hedge accounting under SFAS 133 of $39 million and $24 million for the three months ended March 31, 2006 and 2005, respectively. These amounts are excluded from net investment gains (losses). Additionally, excluded from net investment gains (losses) is ($4) million for three months ended March 31, 2006 related to settlement payments on derivatives used to hedge interest rate and currency risk on policyholder account balances that do not qualify for hedge accounting. FIXED MATURITIES AND EQUITY SECURITIES AVAILABLE-FOR-SALE Fixed maturities consist principally of publicly traded and privately placed debt securities, and represented 75.5% and 75.2% of total cash and invested assets at March 31, 2006 and December 31, 2005, respectively. Based on estimated fair value, public fixed maturities represented $210,093 million, or 87.6%, and $200,177 million, or 87.0%, of total fixed maturities at March 31, 2006 and December 31, 2005, respectively. Based on estimated fair value, private fixed maturities represented $29,735 million, or 12.4%, and $29,873 million, or 13.0%, of total fixed maturities at March 31, 2006 and December 31, 2005, respectively. In cases where quoted market prices are not available, fair values are estimated using present value or valuation techniques. The fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. 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") and Fitch Ratings Insurance Group ("Fitch")), 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 and Fitch). 99 The following table presents the Company's total fixed maturities by Nationally Recognized Statistical Rating Organizations designation and the equivalent ratings of the NAIC, as well as the percentage, based on estimated fair value, that each designation is comprised of at:
MARCH 31, 2006 DECEMBER 31, 2005 ------------------------------ ------------------------------ COST OR COST OR NAIC AMORTIZED ESTIMATED % OF AMORTIZED ESTIMATED % OF RATING RATING AGENCY DESIGNATION(1) COST FAIR VALUE TOTAL COST FAIR VALUE TOTAL - ------ ------------------------------ --------- ---------- ----- --------- ---------- ----- (IN MILLIONS) 1 Aaa/Aa/A...................... $175,045 $176,017 73.4% $161,256 $165,577 72.0% 2 Baa........................... 47,518 47,852 20.0 47,712 49,124 21.3 3 Ba............................ 9,145 9,456 3.9 8,794 9,142 4.0 4 B............................. 5,924 5,997 2.5 5,666 5,710 2.5 5 Caa and lower................. 289 291 0.1 287 290 0.1 6 In or near default............ 24 23 -- 18 15 -- -------- -------- ----- -------- -------- ----- Subtotal...................... 237,945 239,636 99.9 223,733 229,858 99.9 Redeemable preferred stock.... 195 192 0.1 193 192 0.1 -------- -------- ----- -------- -------- ----- Total fixed maturities........ $238,140 $239,828 100.0% $223,926 $230,050 100.0% ======== ======== ===== ======== ======== =====
- --------------- (1) Amounts presented are based on rating agency designations. Comparisons between NAIC ratings and rating agency designations are published by the NAIC. The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody's, S&P and Fitch at March 31, 2006 and the lower of the applicable ratings between Moody's and S&P at December 31, 2005. Beginning in the third quarter of 2005, the Company incorporated Fitch into its rating agency designations to be consistent with the Lehman Brothers' ratings convention. If no rating is available from a rating agency, then the MetLife rating is used. 100 The following tables set forth the cost or amortized cost, gross unrealized gain and loss, and estimated fair value of the Company's fixed maturities and equity securities, the percentage of the total fixed maturities holdings that each sector represents and the percentage of the total equity securities at:
MARCH 31, 2006 -------------------------------------------------- COST OR GROSS UNREALIZED AMORTIZED ----------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL --------- ------- ------- ---------- ----- (IN MILLIONS) U.S. corporate securities.............. $ 73,621 $1,866 $1,590 $ 73,897 30.8% Residential mortgage-backed securities........................... 52,630 241 855 52,016 21.7 Foreign corporate securities........... 34,287 1,480 739 35,028 14.6 U.S. Treasury/agency securities........ 27,418 872 566 27,724 11.6 Commercial mortgage-backed securities........................... 20,286 155 412 20,029 8.3 Asset-backed securities................ 13,656 74 100 13,630 5.7 Foreign government securities.......... 10,324 1,269 54 11,539 4.8 State and political subdivision securities........................... 4,768 146 75 4,839 2.0 Other fixed maturity securities........ 955 18 39 934 0.4 -------- ------ ------ -------- ----- Total bonds.......................... 237,945 6,121 4,430 239,636 99.9 Redeemable preferred stock............. 195 2 5 192 0.1 -------- ------ ------ -------- ----- Total fixed maturities............... $238,140 $6,123 $4,435 $239,828 100.0% ======== ====== ====== ======== ===== Common stock........................... $ 1,983 $ 341 $ 23 $ 2,301 68.6% Non-redeemable preferred stock......... 1,029 43 17 1,055 31.4 -------- ------ ------ -------- ----- Total equity securities(1)........... $ 3,012 $ 384 $ 40 $ 3,356 100.0% ======== ====== ====== ======== =====
DECEMBER 31, 2005 -------------------------------------------------- COST OR GROSS UNREALIZED AMORTIZED ----------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL --------- ------- ------- ---------- ----- (IN MILLIONS) U.S. corporate securities.............. $ 72,339 $2,814 $ 835 $ 74,318 32.3% Residential mortgage-backed securities........................... 47,365 353 472 47,246 20.5 Foreign corporate securities........... 33,578 1,842 439 34,981 15.2 U.S. Treasury/agency securities........ 25,643 1,401 86 26,958 11.7 Commercial mortgage-backed securities........................... 17,682 223 207 17,698 7.7 Asset-backed securities................ 11,533 91 51 11,573 5.0 Foreign government securities.......... 10,080 1,401 35 11,446 5.0 State and political subdivision securities........................... 4,601 185 36 4,750 2.1 Other fixed maturity securities........ 912 17 41 888 0.4 -------- ------ ------ -------- ----- Total bonds.......................... 223,733 8,327 2,202 229,858 99.9 Redeemable preferred stock............. 193 2 3 192 0.1 -------- ------ ------ -------- ----- Total fixed maturities............... $223,926 $8,329 $2,205 $230,050 100.0% ======== ====== ====== ======== ===== Common stock........................... $ 2,004 $ 250 $ 30 $ 2,224 66.6% Non-redeemable preferred stock......... 1,080 45 11 1,114 33.4 -------- ------ ------ -------- ----- Total equity securities(1)........... $ 3,084 $ 295 $ 41 $ 3,338 100.0% ======== ====== ====== ======== =====
101 - --------------- (1) Equity securities primarily consist of investments in common and preferred stocks and mutual fund interests. Such securities include private equity securities with an estimated fair value of $403 million and $472 million at March 31, 2006 and December 31, 2005, respectively. Fixed Maturity and Equity Security Impairment. The Company classifies all of its fixed maturities and equity securities as available-for-sale and marks them to market through other comprehensive income, except for non-marketable private equities, which are generally carried at cost. 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 in "-- Summary of Critical Accounting Estimates -- Investments," 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. The Company's review of its fixed maturities and equity securities 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 cost or amortized cost by less than 20%; (ii) securities where the estimated fair value had declined and remained below cost or amortized cost by 20% or more for less than six months; and (iii) securities where the estimated fair value had declined and remained below cost or amortized cost by 20% or more for six months or greater. While all of these securities are monitored for potential impairment, the Company's experience indicates that the first two categories do not present as great a risk of impairment, and often, fair values recover over time as the factors that caused the declines improve. The Company records impairments as investment losses and adjusts the cost basis of the fixed maturities and equity securities accordingly. The Company does not change the revised cost basis for subsequent recoveries in value. Impairments of fixed maturities and equity securities were $9 million and $19 million for the three months ended March 31, 2006 and 2005, respectively. The Company's three largest impairments totaled $5 million and $18 million for the three months ended March 31, 2006 and 2005, respectively. The circumstances that gave rise to these impairments were financial restructurings, bankruptcy filings or difficult underlying operating environments for the entities concerned. For the three months ended March 31, 2006 and 2005, the Company sold or disposed of fixed maturities and equity securities at a loss that had a fair value of $27,503 million and $21,428 million, respectively. Gross losses excluding impairments for fixed maturities and equity securities were $524 million and $229 million for the three months ended March 31, 2006 and 2005, respectively. The following tables present the cost or amortized cost, gross unrealized losses and number of securities for fixed maturities and equity securities at March 31, 2006 and December 31, 2005, where the estimated fair value had declined and remained below cost or amortized cost by less than 20%, or 20% or more for:
MARCH 31, 2006 ------------------------------------------------------------ COST OR AMORTIZED GROSS UNREALIZED NUMBER OF COST LOSS SECURITIES ------------------ ------------------ ------------------ LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR 20% MORE 20% MORE 20% MORE --------- ------ --------- ------ --------- ------ (IN MILLIONS, EXCEPT NUMBER OF SECURITIES) Less than six months............ $ 91,526 $231 $1,828 $57 7,887 119 Six months or greater but less than nine months.............. 48,645 11 2,057 6 4,477 18 Nine months or greater but less than twelve months............ 3,068 4 118 2 348 4 Twelve months or greater........ 10,171 5 406 1 1,295 8 -------- ---- ------ --- ------ --- Total......................... $153,410 $251 $4,409 $66 14,007 149 ======== ==== ====== === ====== ===
102
DECEMBER 31, 2005 ------------------------------------------------------------ COST OR AMORTIZED GROSS UNREALIZED NUMBER OF COST LOSS SECURITIES ------------------ ------------------ ------------------ LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR 20% MORE 20% MORE 20% MORE --------- ------ --------- ------ --------- ------ (IN MILLIONS, EXCEPT NUMBER OF SECURITIES) Less than six months............ $ 92,512 $213 $1,707 $51 11,441 308 Six months or greater but less than nine months.............. 3,704 5 108 2 456 7 Nine months or greater but less than twelve months............ 5,006 -- 133 -- 573 2 Twelve months or greater........ 7,555 23 240 5 924 8 -------- ---- ------ --- ------ --- Total......................... $108,777 $241 $2,188 $58 13,394 325 ======== ==== ====== === ====== ===
As of March 31, 2006 and December 31, 2005, the Company had $4,475 million and $2,246 million, respectively, of gross unrealized losses related to its fixed maturities and equity securities. These securities are concentrated, calculated as a percentage of gross unrealized loss, as follows:
MARCH 31, DECEMBER 31, 2006 2005 --------- ------------ SECTOR: U.S. corporates........................................... 36% 37% Residential mortgage-backed............................... 19 21 Foreign corporates........................................ 17 20 Other..................................................... 28 22 --- --- Total.................................................. 100% 100% === === INDUSTRY: Mortgage-backed........................................... 27% 30% Industrial................................................ 20 22 Finance................................................... 10 11 Other..................................................... 43 37 --- --- Total.................................................. 100% 100% === ===
As of March 31, 2006, $4,409 million of unrealized losses related to securities with an unrealized loss position less than 20% of cost or amortized cost, which represented 3% of the cost or amortized cost of such securities. As of December 31, 2005, $2,188 million of unrealized losses related to securities with an unrealized loss position less than 20% of cost or amortized cost, which represented 2% of the cost or amortized cost of such securities. As of March 31, 2006, $66 million of unrealized losses related to securities with an unrealized loss position of 20% or more of cost or amortized cost, which represented 26% of the cost or amortized cost of such securities. Of such unrealized losses of $66 million, $57 million have been in an unrealized loss position for a period of less than six months. As of December 31, 2005, $58 million of unrealized losses related to securities with an unrealized loss position of 20% or more of cost or amortized cost, which represented 24% of the cost or amortized cost of such securities. Of such unrealized losses of $58 million, $51 million have been in an unrealized loss position for a period of less than six months. The Company held 18 fixed maturities and equity securities with a gross unrealized loss at March 31, 2006 each greater than $10 million. These securities represented approximately 10% or $460 million of the gross unrealized loss on fixed maturities and equity securities. The Company performs a regular evaluation, on a security-by-security basis, of its investment holdings in accordance with its impairment policy in order to evaluate whether such securities are other-than-temporarily 103 impaired. The increase in the unrealized losses during the period ended March 31, 2006 is principally driven by an increase in interest rates. Based upon the Company's evaluation of the securities in accordance with its impairment policy, the cause of the decline being principally attributable to the general rise in rates during the period, and the Company's intent and ability to hold the fixed income and equity securities with unrealized losses for a period of time sufficient for them to recover, the Company has concluded that the aforementioned securities are not other-than-temporarily impaired. Corporate Fixed Maturities. The table below shows the major industry types that comprise the corporate fixed maturity holdings at:
MARCH 31, 2006 DECEMBER 31, 2005 ------------------ ------------------ ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (IN MILLIONS) Industrial....................................... $ 40,222 36.9% $ 41,322 37.8% Foreign(1)....................................... 35,028 32.2 34,981 32.0 Finance.......................................... 19,859 18.2 19,189 17.5 Utility.......................................... 12,741 11.7 12,633 11.6 Other............................................ 1,075 1.0 1,174 1.1 -------- ----- -------- ----- Total....................................... $108,925 100.0% $109,299 100.0% ======== ===== ======== =====
- --------------- (1) Includes U.S. dollar-denominated debt obligations of foreign obligors, and other foreign investments. The Company maintains a diversified corporate fixed maturity 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 March 31, 2006 and December 31, 2005, the Company's combined holdings in the ten issuers to which it had the greatest exposure totaled $6,324 million and $6,215 million, respectively, each less than 2% and 3%, respectively, of the Company's total invested assets at such dates. The exposure to the largest single issuer of corporate fixed maturities held at March 31, 2006 and December 31, 2005 was $910 million and $943 million, respectively. The Company has hedged all of its material exposure to foreign currency risk in its corporate fixed maturity portfolio. In the Company's international insurance operations, both its assets and liabilities are generally denominated in local currencies. Structured Securities. The following table shows the types of structured securities the Company held at:
MARCH 31, 2006 DECEMBER 31, 2005 ------------------ ------------------ ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (IN MILLIONS) Residential mortgage-backed securities: Collateralized mortgage obligations............ $31,823 37.1% $29,679 38.8% Pass-through securities........................ 20,193 23.6 17,567 23.0 ------- ----- ------- ----- Total residential mortgage-backed securities..... 52,016 60.7 47,246 61.8 Commercial mortgage-backed securities............ 20,029 23.4 17,698 23.1 Asset-backed securites........................... 13,630 15.9 11,573 15.1 ------- ----- ------- ----- Total....................................... $85,675 100.0% $76,517 100.0% ======= ===== ======= =====
The majority of the residential mortgage-backed securities are guaranteed or otherwise supported by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association. At March 31, 2006, $51,429 million, or 98.9%, of the residential mortgage- backed securities were rated Aaa/AAA by Moody's, S&P or Fitch. At December 31, 2005, $46,304 million, or 98.0%, of the residential mortgage-backed securities were rated Aaa/AAA by Moody's, S&P or Fitch. 104 At March 31, 2006, $16,231 million, or 81%, of the commercial mortgage-backed securities were rated Aaa/AAA by Moody's, S&P or Fitch. At December 31, 2005, $13,272 million, or 75%, of the commercial mortgage-backed securities were rated Aaa/AAA by Moody's, S&P or Fitch. The Company's asset-backed securities are diversified both by sector and by issuer. Home equity loan and credit card receivables, accounting for about 32% and 26% of the total holdings, respectively, constitute the largest exposures in the Company's asset-backed securities portfolio. At March 31, 2006, $7,599 million, or 55.8%, of total asset-backed securities were rated Aaa/AAA by Moody's, S&P or Fitch. At December 31, 2005, $6,084 million, or 52.6%, of total asset-backed securities were rated Aaa/AAA by Moody's, S&P or Fitch. Structured Investment Transactions. The Company participates in structured investment transactions, primarily asset securitizations and structured notes. These transactions enhance the Company's total return on its investment portfolio principally by generating management fee income on asset securitizations and by providing equity-based returns on debt securities through structured notes 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 bankruptcy-remote special purpose entities ("SPEs") 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. 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. 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. These beneficial interests are generally structured notes, which are included in fixed maturities, and their income is recognized using the retrospective interest method or the level yield method, as appropriate. Impairments of these beneficial interests are included in net investment gains (losses). The Company invests in structured notes and similar type instruments, which generally provide equity-based returns on debt securities. The carrying value of such investments was approximately $373 million and $362 million at March 31, 2006 and December 31, 2005, respectively. The related net investment income recognized was $19 million and $4 million for the three months ended March 31, 2006 and 2005, respectively. TRADING SECURITIES During 2005, the Company established a trading securities portfolio to support investment strategies that involve the active and frequent purchase and sale of securities and the execution of repurchase agreements. Trading securities and repurchase agreement liabilities are recorded at fair value with subsequent changes in fair value recognized in net investment income related to fixed maturities. At March 31, 2006 and December 31, 2005, trading securities are $883 million and $825 million, respectively. Repurchase agreements associated with the trading securities portfolio, which are included within other liabilities, are approximately $466 million and $460 million, respectively at March 31, 2006 and December 31, 2005. As part of the acquisition of Travelers on July 1, 2005, the Company acquired Travelers' investment in Tribeca Citigroup Investments Ltd. ("Tribeca"). Tribeca is a feeder fund investment structure whereby the 105 feeder fund invests substantially all of its assets in the master fund, Tribeca Global Convertible Instruments Ltd. The primary investment objective of the master fund is to achieve enhanced risk-adjusted return by investing in domestic and foreign equities and equity-related securities utilizing such strategies as convertible securities arbitrage. MetLife is the majority owner of the feeder fund and consolidates the fund within its consolidated financial statements. At March 31, 2006 and December 31, 2005, approximately $470 million and $452 million, respectively, of trading securities are related to Tribeca and approximately $193 million and $190 million, respectively, of the repurchase agreements are related to Tribeca. Net investment income associated with Tribeca for the three months ended March 31, 2006 includes $11 million of interest and dividends earned and net realized and unrealized gains (losses). During the three months ended March 31, 2006 and 2005, excluding Tribeca, interest and dividends earned on trading securities in addition to the net realized and unrealized gains (losses) recognized on the trading securities and the related repurchase agreement liabilities totaled $1 million and $2 million, respectively. Changes in the fair value of such trading securities and repurchase agreement liabilities, excluding Tribeca, held at March 31, 2006 and 2005 total $7 million and ($1) million for the three months ended March 31, 2006 and 2005, respectively. Total net investment income (loss) on securities classified as trading and repurchase agreement liabilities for the three months ended March 31, 2006 and 2005, including Tribeca, total $19 million and $1 million, respectively. MORTGAGE AND CONSUMER LOANS The Company's mortgage and consumer loans are principally collateralized by commercial, agricultural and residential properties, as well as automobiles. Mortgage and consumer loans comprised 11.8% and 12.2% of the Company's total cash and invested assets at March 31, 2006 and December 31, 2005, respectively. The carrying value of mortgage and consumer loans is stated at original cost net of repayments, amortization of premiums, accretion of discounts and valuation allowances. The following table shows the carrying value of the Company's mortgage and consumer loans by type at:
MARCH 31, 2006 DECEMBER 31, 2005 ---------------- ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- --------- ------ (IN MILLIONS) Commercial mortgage loans.......................... $28,278 75.7% $28,022 75.4% Agricultural mortgage loans........................ 7,689 20.6 7,700 20.7 Consumer loans..................................... 1,384 3.7 1,468 3.9 ------- ----- ------- ----- Total............................................ $37,351 100.0% $37,190 100.0% ======= ===== ======= =====
106 Commercial Mortgage Loans. The Company diversifies its commercial mortgage loans by both geographic region and property type. The following table presents the distribution across geographic regions and property types for commercial mortgage loans at:
MARCH 31, 2006 DECEMBER 31, 2005 ---------------- ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- --------- ------ (IN MILLIONS) REGION Pacific............................................ $ 7,038 24.9% $ 6,818 24.3% South Atlantic..................................... 6,343 22.4 6,093 21.8 Middle Atlantic.................................... 4,177 14.8 4,689 16.7 East North Central................................. 3,161 11.2 3,078 11.0 West South Central................................. 2,288 8.1 2,069 7.4 New England........................................ 1,261 4.5 1,295 4.6 International...................................... 1,896 6.7 1,817 6.5 Mountain........................................... 821 2.9 861 3.1 West North Central................................. 817 2.9 825 2.9 East South Central................................. 380 1.3 381 1.4 Other.............................................. 96 0.3 96 0.3 ------- ----- ------- ----- Total............................................ $28,278 100.0% $28,022 100.0% ======= ===== ======= ===== PROPERTY TYPE Office............................................. $13,636 48.2% $13,453 48.0% Retail............................................. 6,270 22.2 6,398 22.8 Apartments......................................... 3,283 11.6 3,102 11.1 Industrial......................................... 2,763 9.8 2,656 9.5 Hotel.............................................. 1,490 5.3 1,355 4.8 Other.............................................. 836 2.9 1,058 3.8 ------- ----- ------- ----- Total............................................ $28,278 100.0% $28,022 100.0% ======= ===== ======= =====
Restructured, Potentially Delinquent, Delinquent or Under Foreclosure. The Company monitors its mortgage loan investments on an ongoing basis, including reviewing loans that are restructured, potentially delinquent, delinquent or under foreclosure. These loan classifications are consistent with those used in industry practice. 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 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 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 records valuation allowances for certain of the loans that it deems impaired. The Company's valuation allowances are 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. 107 Loan specific valuation allowances are established for the excess carrying value of the mortgage loan over the present value of expected future cash flows discounted at the loan's original effective interest rate, the value of the loan's collateral or the loan's market value if the loan is being sold. Valuation allowances for pools of loans are established based on property types and loan to value risk factors. The Company records valuation allowances as investment losses. The Company records subsequent adjustments to allowances as investment gains (losses). The following table presents the amortized cost and valuation allowance for commercial mortgage loans distributed by loan classification at:
MARCH 31, 2006 DECEMBER 31, 2005 ----------------------------------------- ----------------------------------------- % OF % OF AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST --------- ----- --------- --------- --------- ----- --------- --------- (IN MILLIONS) Performing................... $28,414 100% $139 0.5% $28,158 100% $147 0.5% Restructured................. -- -- -- --% -- -- -- --% Potentially delinquent....... 2 -- -- --% 3 -- -- --% Delinquent or under foreclosure................ 1 -- -- --% 8 -- -- --% ------- ----- ---- ------- ----- ---- Total...................... $28,417 100.0% $139 0.5% $28,169 100.0% $147 0.5% ======= ===== ==== ======= ===== ====
- --------------- (1) Amortized cost is equal to carrying value before valuation allowances. The following table presents the changes in valuation allowances for commercial mortgage loans for the:
THREE MONTHS ENDED MARCH 31, 2006 ------------------ (IN MILLIONS) Balance, beginning of period................................ $147 Additions................................................... 2 Deductions.................................................. (10) ---- Balance, end of period...................................... $139 ====
Agricultural Mortgage Loans. The Company diversifies its agricultural mortgage loans by both geographic region and product type. Approximately 63% of the $7,689 million of agricultural mortgage loans outstanding at March 31, 2006 were subject to rate resets prior to maturity. A substantial portion of these loans 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. 108 The following table presents the amortized cost and valuation allowances for agricultural mortgage loans distributed by loan classification at:
MARCH 31, 2006 DECEMBER 31, 2005 ----------------------------------------- ----------------------------------------- % OF % OF AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST --------- ----- --------- --------- --------- ----- --------- --------- (IN MILLIONS) Performing................... $7,594 98.5% $ 8 0.1% $7,635 99.0% $ 8 0.1% Restructured................. 14 0.2 -- --% 36 0.5 -- --% Potentially delinquent....... 32 0.4 9 28.1% 3 -- 1 33.3% Delinquent or under foreclosure................ 67 0.9 1 1.5% 37 0.5 2 5.4% ------ ----- --- ------ ----- --- Total...................... $7,707 100.0% $18 0.2% $7,711 100.0% $11 0.1% ====== ===== === ====== ===== ===
- --------------- (1) Amortized cost is equal to carrying value before valuation allowances. The following table presents the changes in valuation allowances for agricultural mortgage loans for the:
THREE MONTHS ENDED MARCH 31, ------------------ 2006 ------------------ (IN MILLIONS) Balance, beginning of period................................ $11 Additions................................................... 8 Deductions.................................................. (1) --- Balance, end of period...................................... $18 ===
Consumer Loans. Consumer loans consist of residential mortgages and auto loans. REAL ESTATE AND REAL ESTATE JOINT VENTURES The Company's real estate and real estate joint venture investments consist of commercial properties located primarily in the United States. At March 31, 2006 and December 31, 2005, the carrying value of the Company's real estate, real estate joint ventures and real estate held-for-sale was $4,700 million and $4,665 million, respectively. The Company's real estate and real estate joint venture investments represent 1.5% of total cash and invested assets at both March 31, 2006 and December 31, 2005. The carrying value of real estate is stated at depreciated cost net of impairments and valuation allowances. The carrying value of real estate joint ventures is stated at the Company's equity in the real estate joint ventures net of impairments and valuation allowances. The following table presents the carrying value of the Company's real estate, real estate joint ventures, real estate held-for-sale and real estate acquired upon foreclosure at:
MARCH 31, 2006 DECEMBER 31, 2005 --------------------- --------------------- CARRYING CARRYING TYPE VALUE % OF TOTAL VALUE % OF TOTAL - ------------------------------------------------------ -------- ---------- -------- ---------- (IN MILLIONS) Real estate held-for-investment....................... $3,879 82.5% $3,713 79.6% Real estate joint ventures held-for-investment........ 794 16.9 926 19.8 Foreclosed real estate held-for-investment............ 4 0.1 4 0.1 ------ ----- ------ ----- 4,677 99.5 4,643 99.5 ------ ----- ------ ----- Real estate held-for-sale............................. 23 0.5 22 0.5 Foreclosed real estate held-for-sale.................. -- -- -- -- ------ ----- ------ ----- 23 0.5 22 0.5 ------ ----- ------ ----- Total real estate, real estate joint ventures and real estate held-for-sale................................ $4,700 100.0% $4,665 100.0% ====== ===== ====== =====
109 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 $23 million and $22 million at March 31, 2006 and December 31, 2005, respectively, are net of valuation allowances of $0 million and net of impairments of $0 million at both March 31, 2006 and December 31, 2005. 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 "-- Investments -- Variable Interest Entities." In May 2005, the Company sold its One Madison Avenue and 200 Park Avenue properties in Manhattan, New York for $918 million and $1.72 billion, respectively, resulting in second quarter 2005 gains, net of income taxes, of $431 million and $762 million, respectively. Net investment income on One Madison Avenue and 200 Park Avenue was $11 million and $16 million, respectively, for the three months ended March 31, 2005 and is included in income from discontinued operations. In connection with the sale of the 200 Park Avenue property, the Company has retained rights to existing signage and is leasing space for associates in the property for 20 years with optional renewal periods through 2205. OTHER LIMITED PARTNERSHIP INTERESTS The carrying value of other limited partnership interests (which primarily represent ownership interests in pooled investment funds that make private equity investments in companies in the United States and overseas) was $4,514 million and $4,276 million at March 31, 2006 and December 31, 2005, respectively. 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, does not have a controlling interest and is not the primary beneficiary. 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 other limited partnerships represented 1.4% of cash and invested assets at both March 31, 2006 and December 31, 2005. Some of the Company's investments in other limited partnership interests meet the definition of a VIE under FIN 46(r). See "-- Investments -- Variable Interest Entities." OTHER INVESTED ASSETS The Company's other invested assets consist principally of leveraged leases and funds withheld at interest of $4,701 million and $4,573 million at March 31, 2006 and December 31, 2005, 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 includes derivative revaluation gains and 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 2.6% of cash and invested assets at both March 31, 2006 and December 31, 2005. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses a variety of derivatives, including swaps, forwards, futures and option contracts, to manage its various risks. 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. 110 The table below provides a summary of the notional amount and current market or fair value of derivative financial instruments held at:
MARCH 31, 2006 DECEMBER 31, 2005 ------------------------------- ------------------------------- CURRENT MARKET OR CURRENT MARKET OR FAIR VALUE FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- (IN MILLIONS) Interest rate swaps.......... $18,410 $ 663 $ 247 $20,444 $ 653 $ 69 Interest rate floors......... 10,975 81 -- 10,975 134 -- Interest rate caps........... 27,990 285 -- 27,990 242 -- Financial futures............ 844 2 23 1,159 12 8 Foreign currency swaps....... 15,349 522 1,010 14,274 527 991 Foreign currency forwards.... 4,107 52 70 4,622 64 92 Options...................... 872 355 5 815 356 6 Financial forwards........... 3,396 20 20 2,452 13 4 Credit default swaps......... 5,436 9 11 5,882 13 11 Synthetic GICs............... 3,738 -- -- 5,477 -- -- Other........................ 250 26 -- 250 9 -- ------- ------ ------ ------- ------ ------ Total...................... $91,367 $2,015 $1,386 $94,340 $2,023 $1,181 ======= ====== ====== ======= ====== ======
The above table does not include notional values for equity futures, equity financial forwards, and equity options. At March 31, 2006 and December 31, 2005, the Company owned 1,466 and 3,305 equity futures contracts, respectively. Equity futures market values are included in financial futures in the preceding table. At both March 31, 2006 and December 31, 2005, the Company owned 213,000 equity financial forwards. Equity financial forwards market values are included in financial forwards in the preceding table. At March 31, 2006 and December 31, 2005, the Company owned 5,237,594 and 4,720,254 equity options, respectively. Equity options market values are included in options in the preceding table. Credit Risk. The Company may be exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. Generally, the current credit exposure of the Company's derivative contracts is limited to the fair value at the reporting date. The credit exposure of the Company's derivative transactions is represented by the fair value of contracts with a net positive fair value at the reporting date. The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Because exchange traded futures are effected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments. The Company enters into various collateral arrangements, which require both the pledging and accepting of collateral in connection with its derivative instruments. As of March 31, 2006 and December 31, 2005, the Company was obligated to return cash collateral under its control of $189 million and $195 million, respectively. This unrestricted cash collateral is included in cash and cash equivalents and the obligation to return it is included in payables for collateral under securities loaned and other transactions in the consolidated balance sheets. As of March 31, 2006 and December 31, 2005, the Company had also accepted collateral consisting of various securities with a fair market value of $423 million and $427 million, respectively, which are held in separate custodial accounts. The Company is permitted by contract to sell or repledge this collateral, but as of March 31, 2006 and December 31, 2005, none of the collateral had been sold or repledged. 111 As of March 31, 2006 and December 31, 2005, the Company provided collateral of $6 million and $4 million, respectively, which is included in other assets in the consolidated balance sheets. The counterparties are permitted by contract to sell or repledge this collateral. VARIABLE INTEREST ENTITIES The following table presents the total assets of and maximum exposure to loss relating to variable interest entities ("VIEs") for which the Company has concluded that (i) it is the primary beneficiary and which are consolidated in the Company's consolidated financial statements at March 31, 2006; and (ii) it holds significant variable interests but it is not the primary beneficiary and which have not been consolidated:
MARCH 31, 2006 --------------------------------------------------- PRIMARY BENEFICIARY NOT PRIMARY BENEFICIARY ------------------------ ------------------------ MAXIMUM MAXIMUM TOTAL EXPOSURE TO TOTAL EXPOSURE TO ASSETS(1) LOSS(2) ASSETS(1) LOSS(2) ---------- ----------- ---------- ----------- (IN MILLIONS) Asset-backed securitizations and collateralized debt obligations......... $ -- $ -- $ 3,351 $ 406 Real estate joint ventures(3)............. 305 122 187 16 Other limited partnerships(4)............. 91 57 12,606 1,601 Other investments(5)...................... -- -- 3,738 242 ---- ---- ------- ------ Total................................... $396 $179 $19,882 $2,265 ==== ==== ======= ======
- --------------- (1) The assets of the asset-backed securitizations and collateralized debt obligations are reflected at fair value at March 31, 2006. The assets of the real estate joint ventures, other limited partnerships and other investments are reflected at the carrying amounts at which such assets would have been reflected on the Company's balance sheet had the Company consolidated the VIE from the date of its initial investment in the entity. (2) The maximum exposure to loss of the asset-backed securitizations and collateralized debt obligations is equal to the carrying amounts of retained interests. In addition, the Company provides collateral management services for certain of these structures for which it collects a management fee. The maximum exposure to loss relating to real estate joint ventures, other limited partnerships and other investments is equal to the carrying amounts plus any unfunded commitments, reduced by amounts guaranteed by other partners. (3) Real estate joint ventures include partnerships and other ventures which engage in the acquisition, development, management and disposal of real estate investments. (4) Other limited partnerships include partnerships established for the purpose of investing in real estate funds, public and private debt and equity securities, as well as limited partnerships established for the purpose of investing in low-income housing that qualifies for federal tax credits. (5) Other investments include securities that are not asset-backed securitizations or collateralized debt obligations. SECURITIES LENDING The Company participates in a securities lending program whereby blocks of securities, which are included in fixed maturity securities, 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 $45,405 million and $32,068 million and an estimated fair value of $45,477 million and $32,954 million were on loan under the program at March 31, 2006 and December 31, 2005, respectively. Securities loaned under such transactions may be sold or repledged by the transferee. The Company was liable for cash collateral under its control of $46,870 million and $33,893 million at March 31, 2006 and December 31, 2005, respectively. Securities loaned transactions are 112 accounted for as financing arrangements on the Company's consolidated balance sheets and consolidated statements of cash flows and the income and expenses associated with the program are reported in net investment income as investment income and investment expenses, respectively. Security collateral of $150 million and $207 million, respectively, at March 31, 2006 and December 31, 2005 on deposit from customers in connection with the securities lending transactions may not be sold or repledged and is not reflected in the consolidated financial statements. SEPARATE ACCOUNTS The Company had $132.5 billion and $127.9 billion held in its separate accounts, for which the Company generally does not bear investment risk, as of March 31, 2006 and December 31, 2005, respectively. 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 compliance with insurance laws. Effective with the adoption of SOP 03-1, on January 1, 2004, the Company reports separately, as assets and liabilities, investments held in separate accounts and liabilities of the separate accounts if (i) such separate accounts are legally recognized; (ii) assets supporting the contract liabilities are legally insulated from the Company's general account liabilities; (iii) investments are directed by the contractholder; and (iv) all investment performance, net of contract fees and assessments, is passed through to the contractholder. The Company reports separate account assets meeting such criteria at their fair value. Investment performance (including investment income, net investment gains (losses) and changes in unrealized gains (losses)) and the corresponding amounts credited to contractholders of such separate accounts are offset within the same line in the consolidated statements of income. The Company's revenues reflect fees charged to the separate accounts, including mortality charges, risk charges, policy administration fees, investment management fees and surrender charges. Separate accounts not meeting the above criteria are combined on a line-by-line basis with the Company's general account assets, liabilities, revenues and expenses. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company regularly analyzes its exposure to interest rate, equity market and foreign currency exchange risk. As a result of that analysis, the Company has determined that the fair value of its interest rate sensitive invested assets is materially exposed to changes in interest rates, and that the amount of that risk has not changed significantly from that reported on December 31, 2005. The equity and foreign currency portfolios do not expose the Company to material market risk, nor has the Company's exposure to those risks materially changed from that reported on December 31, 2005. The Company analyzes interest rate risk using various models including multi-scenario cash flow projection models that forecast cash flows of the liabilities and their supporting investments, including derivative instruments. As disclosed in MetLife Inc.'s 2005 Annual Report on Form 10-K, the Company uses a variety of strategies to manage interest rate, equity market, and foreign currency exchange risk, including the use of derivative instruments. The Company's management processes for measuring, managing and monitoring market risk remain as described in MetLife Inc.'s 2005 Annual Report on Form 10-K. Some of those processes utilize interim manual reporting and estimation techniques when the Company integrates newly acquired operations. 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, based on changes in interest rates, equity market 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 market 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 113 performing this analysis, the Company used market rates at March 31, 2006 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 market price and foreign currency exchange rate) related to its trading and non-trading invested assets and other financial instruments. 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 market value of its equity positions due to a 10% change (increase or decrease) in equity prices; and - the U.S. dollar equivalent balances of the Company's currency exposures due to a 10% change (increase or decrease) in currency exchange rates. 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 interest 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; - for derivatives that qualify as hedges, the impact on reported earnings may be materially different from the change in market values; - 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 rate sensitive invested assets. The equity and foreign currency portfolios do not expose the Company to material market risk. 114 The table below illustrates the potential loss in fair value of the Company's interest rate sensitive financial instruments at March 31, 2006. In addition, the potential loss with respect to the fair value of currency exchange rates and the Company's equity price sensitive positions at March 31, 2006 is set forth in the table below. The potential loss in fair value for each market risk exposure of the Company's portfolio, at March 31, 2006 was:
MARCH 31, 2006 ----------------- (IN MILLIONS) Non-trading: Interest rate risk........................................ $6,207 Equity price risk......................................... $ 699 Foreign currency exchange rate risk....................... $ 488 Trading: Interest rate risk........................................ $ 14
115 The table below provides additional detail regarding the potential loss in fair value of the Company's non-trading interest sensitive financial instruments at March 31, 2006 by type of asset or liability.
AS OF MARCH 31, 2006 ------------------------------------ ASSUMING A 10% INCREASE NOTIONAL IN THE YIELD AMOUNT FAIR VALUE CURVE -------- ---------- ------------ (IN MILLIONS) ASSETS Fixed maturities.......................................... $239,828 $(6,454) Equity securities......................................... 3,356 -- Mortgage and consumer loans............................... 37,370 (705) Policy loans.............................................. 9,987 (326) Short-term investments.................................... 3,368 (13) Cash and cash equivalents................................. 5,144 -- Mortgage loan commitments................................. $ 2,533 (15) (10) ------- Total assets........................................... $(7,508) ------- LIABILITIES Policyholder account balances............................. $126,807 $ 1,044 Short-term debt........................................... 1,360 -- Long-term debt............................................ 10,057 440 Junior subordinated debt securities underlying common equity units........................................... 2,088 25 Shares subject to mandatory redemption.................... 226 -- Payables for collateral under securities loaned and other transactions........................................... 47,059 -- ------- Total liabilities...................................... $ 1,509 ------- OTHER Derivative instruments (designated hedges or otherwise) Interest rate swaps.................................... $18,410 $ 416 $ (16) Interest rate floors................................... 10,975 81 (27) Interest rate caps..................................... 27,990 285 94 Financial futures...................................... 844 (21) (28) Foreign currency swaps................................. 15,349 (488) (231) Foreign currency forwards.............................. 4,107 (18) -- Options................................................ 872 350 -- Financial forwards..................................... 3,396 -- -- Credit default swaps................................... 5,436 (2) -- Synthetic GICs......................................... 3,738 -- -- Other.................................................. 250 26 -- ------- Total other....................................... $ (208) ------- NET CHANGE.................................................. $(6,207) =======
116 This quantitative measure of risk has increased by $684 million, or 12%, at March 31, 2006, from $5,523 million at December 31, 2005. The primary reason for the increase is an overall increase in the yield curve of approximately $600 million, an increase in asset growth of approximately $250 million, partially offset by a decrease in the asset duration and other of approximately $166 million. ITEM 4. CONTROLS AND PROCEDURES The Holding Company's management, with the participation of the Holding Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Holding Company's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes to the Holding Company's internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Holding Company's internal control over financial reporting. 117 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The following should be read in conjunction with Note 6 to the unaudited interim condensed consolidated financial statements in Part I of this report. The Company is a defendant in a large number of litigation matters. In some of the matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading practice in the United States permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. This variability in pleadings, together with the actual experience of the Company in litigating or resolving through settlement numerous claims over an extended period of time, demonstrate to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value. Thus, unless stated below, the specific monetary relief sought is not noted. Due to the vagaries of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time may normally be inherently impossible to ascertain with any degree of certainty. Inherent uncertainties can include how fact finders will view individually and in their totality documentary evidence, the credibility and effectiveness of witnesses' testimony, and how trial and appellate courts will apply the law in the context of the pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law. On a quarterly and yearly basis, the Company reviews relevant information with respect to liabilities for litigation and contingencies to be reflected in the Company's consolidated financial statements. The review includes senior legal and financial personnel. Unless stated below, estimates of possible additional losses or ranges of loss for particular matters cannot in the ordinary course be made with a reasonable degree of certainty. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been established for a number of the matters noted below. It is possible that some of the matters could require the Company to pay damages or make other expenditures or establish accruals in amounts that could not be estimated as of March 31, 2006. Sales Practices Claims Over the past several years, Metropolitan Life, New England Mutual Life Insurance Company, with which Metropolitan Life merged in 1996 ("New England Mutual"), and General American Life Insurance Company, which was acquired in 2000 ("General American"), have faced numerous claims, including class action lawsuits, alleging improper marketing and sales of individual life insurance policies or annuities. These lawsuits generally are referred to as "sales practices claims." 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, including lawsuits or other proceedings relating to the sale of mutual funds and other products, have been brought. As of March 31, 2006, there are approximately 332 sales practices litigation matters pending against Metropolitan Life; approximately 46 sales practices litigation matters pending against New England Mutual, New England Life Insurance Company, and New England Securities Corporation (collectively, "New England"); approximately 44 sales practices litigation matters pending against General American; and approximately 28 sales practices litigation matters pending against Walnut Street Securities, Inc. ("Walnut Street"). In addition, similar litigation matters are pending against MetLife Securities, Inc. ("MSI"). Metropolitan Life, New England, General American, MSI and Walnut Street continue to defend themselves vigorously against these litigation matters. Some individual sales practices claims have been resolved through settlement, won by dispositive motions, or have gone to trial. The outcomes of trials have varied, and appeals are pending in several matters. 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, mutual funds and other products may be commenced in the future. 118 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, General American, MSI and Walnut Street. Asbestos-Related Claims Metropolitan Life received approximately 18,500 asbestos-related claims in 2005. During the three months ended March 31, 2006 and 2005, Metropolitan Life received approximately 2,220 and 5,900 asbestos-related claims, respectively. Metropolitan Life continues to study its claims experience, review external literature regarding asbestos claims experience in the United States and consider numerous variables that can affect its asbestos liability exposure, including bankruptcies of other companies involved in asbestos litigation and legislative and judicial developments, to identify trends and to assess their impact on the recorded asbestos liability. See Note 12 of Notes to Consolidated Financial Statements included in the 2005 Annual Report for historical information concerning asbestos claims and MetLife's increase of its recorded liability at December 31, 2002. The Company believes adequate provision has been made in its interim condensed consolidated financial statements for all probable and reasonably estimable losses for asbestos-related claims. The ability of Metropolitan Life to estimate its ultimate asbestos exposure is subject to considerable uncertainty due to numerous factors. The availability of data is limited and it is difficult to predict with any certainty numerous variables that can affect liability estimates, including the number of future claims, the cost to resolve claims, the disease mix and severity of disease, the jurisdiction of claims filed, tort reform efforts and the impact of any possible future adverse verdicts and their amounts. The number of asbestos cases that may be brought or the aggregate amount of any liability that Metropolitan Life may ultimately incur is uncertain. Accordingly, it is reasonably possible that the Company's total exposure to asbestos claims may be greater than the liability recorded by the Company in its unaudited interim condensed consolidated financial statements and that future charges to income may be necessary. While the potential future charges could be material in particular quarterly or annual periods in which they are recorded, based on information currently known by management, management does not believe any such charges are likely to have a material adverse effect on the Company's consolidated financial position. During 1998, Metropolitan Life paid $878 million in premiums for excess insurance policies for asbestos-related claims. The excess insurance policies for asbestos-related claims provide for recovery of losses up to $1,500 million, which is in excess of a $400 million self-insured retention. The asbestos-related policies are also subject to annual and per-claim sublimits. Amounts are recoverable under the policies annually with respect to claims paid during the prior calendar year. Although amounts paid by Metropolitan Life in any given year that may be recoverable in the next calendar year under the policies will be reflected as a reduction in the Company's operating cash flows for the year in which they are paid, management believes that the payments will not have a material adverse effect on the Company's liquidity. Each asbestos-related policy contains an experience fund and a reference fund that provides for payments to Metropolitan Life at the commutation date if the reference fund is greater than zero at commutation or pro rata reductions from time to time in the loss reimbursements to Metropolitan Life if the cumulative return on the reference fund is less than the return specified in the experience fund. The return in the reference fund is tied to performance of the Standard & Poor's 500 Index and the Lehman Brothers Aggregate Bond Index. A claim with respect to the prior year was made under the excess insurance policies in 2003, 2004 and 2005 for the amounts paid with respect to asbestos litigation in excess of the retention. As the performance of the indices impacts the return in the reference fund, it is possible that loss reimbursements to the Company and the recoverable with respect to later periods may be less than the amount of the recorded losses. Such foregone loss reimbursements may be recovered upon commutation depending upon future performance of the reference fund. If at some point in the future, the Company believes the liability for probable and reasonably estimable losses for asbestos-related claims should be increased, an expense would be recorded and the insurance recoverable would be adjusted subject to the terms, conditions and limits of the excess insurance policies. Portions of the change in the insurance recoverable would be recorded as a deferred gain and amortized into income over the estimated remaining settlement period of the insurance policies. The foregone 119 loss reimbursements were approximately $8.3 million with respect to 2002 claims, $15.5 million with respect to 2003 claims, $15.1 million with respect to 2004 claims, $12.7 million with respect to 2005 claims and estimated as of March 31, 2006, to be approximately $60.7 million in the aggregate, including future years. Property and Casualty Actions Ten lawsuits are pending against MPC (five in Louisiana and five in Missouri) relating to Hurricane Katrina including two purported class actions in Louisiana. It is reasonably possible other actions will be filed. The Company intends to vigorously defend these matters. Demutualization Actions Several lawsuits were brought in 2000 challenging the fairness of Metropolitan Life's plan of reorganization, as amended (the "plan") and the adequacy and accuracy of Metropolitan Life's disclosure to policyholders regarding the plan. These actions named as defendants some or all of Metropolitan Life, the Holding Company, the individual directors, the New York Superintendent of Insurance (the "Superintendent") and the underwriters for MetLife, Inc.'s initial public offering, Goldman Sachs & Company and Credit Suisse First Boston. In 2003, a trial court within the commercial part of the New York State court granted the defendants' motions to dismiss two purported class actions. In 2004, the appellate court modified the trial court's order by reinstating certain claims against Metropolitan Life, the Holding Company and the individual directors. Plaintiffs in these actions have filed a consolidated amended complaint. On May 2, 2006, the trial court issued a decision granting plaintiffs' motion to certify a litigation class with respect to their claim that defendants violated section 7312 of the New York Insurance Law, but finding that plaintiffs had not met the requirements for certifying a class with respect to a fraud claim. Defendants have a right to appeal this decision. Another purported class action filed in New York State court in Kings County has been consolidated with this action. The plaintiffs in the state court class actions seek compensatory relief and punitive damages. Five persons 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 sought to vacate the Superintendent's Opinion and Decision and enjoin him from granting final approval of the plan. On November 10, 2005, the trial court granted respondents' motions to dismiss this proceeding. Petitioners have filed a notice of appeal. In a class action against Metropolitan Life and the Holding Company pending in the United States District Court for the Eastern District of New York, plaintiffs served a second consolidated amended complaint in 2004. In this action, plaintiffs assert violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 in connection with the plan, claiming that the Policyholder Information Booklets failed to disclose certain material facts and contained certain material misstatements. They seek rescission and compensatory damages. On June 22, 2004, the court denied the defendants' motion to dismiss the claim of violation of the Securities Exchange Act of 1934. The court had previously denied defendants' motion to dismiss the claim for violation of the Securities Act of 1933. In 2004, the court reaffirmed its earlier decision denying defendants' motion for summary judgment as premature. On July 19, 2005, this federal trial court certified a class action against Metropolitan Life and the Holding Company. Metropolitan Life and the Holding Company filed a petition seeking permission for an interlocutory appeal from this order; on or about March 29, 2006, the United States Court of Appeals for the Second Circuit denied the petition. 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. Other A putative class action which commenced in October 2000 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 120 receiving deferred vested annuity payments under the retirement plan and who were allegedly eligible to receive the ad hoc pension increases. In September 2005, Metropolitan Life's motion for summary judgment was granted. Plaintiffs have moved for reconsideration. In May 2003, the American Dental Association and three individual providers sued MetLife and Cigna in a purported class action lawsuit brought in the United States District Court for the Southern District of Florida. 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 matter. The district court has granted in part and denied in part MetLife's motion to dismiss. MetLife has filed another motion to dismiss. The court has issued a tag-along order, related to a medical managed care trial, which will stay the lawsuit indefinitely. In April 2006, the SEC and Metropolitan Life Insurance Company resolved a formal investigation of Metropolitan Life relating to certain sales by a former MetLife sales representative to the Sheriff's Department of Fulton County, Georgia. The settlement includes a payment to the SEC of a $250,000 fine. The Company has received a number of subpoenas and other requests from the Office of the Attorney General of the State of New York seeking, among other things, information regarding and relating to compensation agreements between insurance brokers and the Company, whether MetLife has provided or is aware of the provision of "fictitious" or "inflated" quotes, and information regarding tying arrangements with respect to reinsurance. Based upon an internal review, the Company advised the Attorney General for the State of New York that MetLife was not aware of any instance in which MetLife had provided a "fictitious" or "inflated" quote. MetLife also has received subpoenas, including sets of interrogatories, from the Office of the Attorney General of the State of Connecticut seeking information and documents including contingent commission payments to brokers and MetLife's awareness of any "sham" bids for business. MetLife also has received a Civil Investigative Demand from the Office of the Attorney General for the State of Massachusetts seeking information and documents concerning bids and quotes that the Company submitted to potential customers in Massachusetts, the identity of agents, brokers, and producers to whom the Company submitted such bids or quotes, and communications with a certain broker. The Company has received two subpoenas from the District Attorney of the County of San Diego, California. The subpoenas seek numerous documents including incentive agreements entered into with brokers. The Florida Department of Financial Services and the Florida Office of Insurance Regulation also have served subpoenas on the Company asking for answers to interrogatories and document requests concerning topics that include compensation paid to intermediaries. The Office of the Attorney General for the State of Florida has also served a subpoena on the Company seeking, among other things, copies of materials produced in response to the subpoenas discussed above. The Company has received a subpoena from the Office of the U.S. Attorney for the Southern District of California asking for documents regarding the insurance broker, Universal Life Resources. The Insurance Commissioner of Oklahoma has served a subpoena, including a set of interrogatories, on the Company seeking, among other things, documents and information concerning the compensation of insurance producers for insurance covering Oklahoma entities and persons. The Ohio Department of Insurance has requested documents regarding a broker and certain Ohio public entity groups. The Company continues to cooperate fully with these inquiries and is responding to the subpoenas and other requests. MetLife is continuing to conduct an internal review of its commission payment practices. Approximately sixteen broker-related lawsuits in which the Company was named as a defendant were filed. Voluntary dismissals and consolidations have reduced the number of pending actions to four. In one of these, the California Insurance Commissioner is suing in California state court Metropolitan Life, Paragon Life Insurance Company and other companies alleging that the defendants violated certain provisions of the California Insurance Code. Another of these actions is pending in a multi-district proceeding established in the federal district court in the District of New Jersey. In this proceeding, plaintiffs have filed an amended class action complaint consolidating the claims from separate actions that had been filed in or transferred to the District of New Jersey. The consolidated amended complaint alleges that the Holding Company, Metropolitan Life, several other insurance companies and several insurance brokers violated RICO, ERISA, 121 and antitrust laws and committed other misconduct in the context of providing insurance to employee benefit plans and to persons who participate in such employee benefit plans. Plaintiffs seek to represent classes of employers that established employee benefit plans and persons who participated in such employee benefit plans. A motion for class certification has been filed. Plaintiffs in several other actions have voluntarily dismissed their claims. The Company intends to vigorously defend these cases. In addition to those discussed above, regulators and others have made a number of inquiries of the insurance industry regarding industry brokerage practices and related matters and other inquiries may begin. It is reasonably possible that MetLife will receive additional subpoenas, interrogatories, requests and lawsuits. MetLife will fully cooperate with all regulatory inquiries and intends to vigorously defend all lawsuits. The Company has received a subpoena from the Connecticut Attorney General requesting information regarding its participation in any finite reinsurance transactions. MetLife has also received information requests relating to finite insurance or reinsurance from other regulatory and governmental authorities. MetLife believes it has appropriately accounted for its transactions of this type and intends to cooperate fully with these information requests. The Company believes that a number of other industry participants have received similar requests from various regulatory and governmental authorities. It is reasonably possible that MetLife or its subsidiaries may receive additional requests. MetLife and any such subsidiaries will fully cooperate with all such requests. In February 2006, the SEC commenced a formal investigation of NES in connection with the suitability of its sales of variable universal life insurance policies. The Company believes that others in the insurance industry are the subject of similar investigations by the SEC. NES is cooperating fully with the SEC. In August 1999, an amended putative class action complaint was filed in Connecticut state court against MetLife Life and Annuity Company of Connecticut ("MLAC"), formerly The Travelers Life and Annuity Company, Travelers Equity Sales, Inc. and certain former affiliates. The amended complaint alleges Travelers Property Casualty Corporation, a former MLAC affiliate, purchased structured settlement annuities from MLAC and spent less on the purchase of those structured settlement annuities than agreed with claimants, and that commissions paid to brokers for the structured settlement annuities, including an affiliate of MLAC, were paid in part to Travelers Property Casualty Corporation. On May 26, 2004, the Connecticut Superior Court certified a nationwide class action involving the following claims against MLAC: violation of the Connecticut Unfair Trade Practice Statute, unjust enrichment, and civil conspiracy. On June 15, 2004, the defendants appealed the class certification order. In March 2006, the Connecticut Supreme Court reversed the trial court's certification of a class. Plaintiff may seek upon remand to the trial court to file another motion for class certification. MLAC and Travelers Equity Sales, Inc. intend to continue to vigorously defend the matter. A former registered representative of Tower Square Securities, Inc. ("Tower Square"), a broker-dealer subsidiary of MetLife Insurance Company of Connecticut, formerly The Travelers Insurance Company, is alleged to have defrauded individuals by diverting funds for his personal use. In June 2005, the SEC issued a formal order of investigation with respect to Tower Square and served Tower Square with a subpoena. The Securities and Business Investments Division of the Connecticut Department of Banking and the NASD are also reviewing this matter. On April 18, 2006, the Connecticut Department of Banking issued a notice to Tower Square asking it to demonstrate its prior compliance with applicable Connecticut securities laws and regulations. In the context of the above, two arbitration matters were commenced in 2005 against Tower Square. In one of the matters, defendants include other unaffiliated broker-dealers with whom the registered representative was formerly registered. In May 2006, Tower Square received a lawsuit filed by two claimants in Connecticut state court. It is reasonably possible that other actions will be brought regarding this matter. Tower Square intends to defend itself vigorously in all such cases. In another matter, the NASD has made a preliminary determination that Tower Square violated certain NASD rules relating to supervisory procedures, documentation and compliance with the firm's anti-money laundering program. Tower Square intends to fully cooperate with the SEC, the NASD and the Connecticut Department of Banking. Metropolitan Life also has been named as a defendant in numerous silicosis, welding and mixed dust cases in various states. The Company intends to defend itself vigorously against these cases. 122 Various litigation, including purported or certified class actions, and various 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. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Purchases of Common Stock made by or on behalf of the Holding Company or its affiliates during the three months ended March 31, 2006 are set forth below:
(D) MAXIMUM NUMBER (C) TOTAL NUMBER OF (OR APPROXIMATE DOLLAR SHARES PURCHASED AS VALUE) OF SHARES (A) TOTAL NUMBER (B) AVERAGE PART OF PUBLICLY THAT MAY YET BE OF SHARES PRICE PAID ANNOUNCED PURCHASED UNDER THE PLANS PERIOD PURCHASED(1) PER SHARE PLANS OR PROGRAMS(2) OR PROGRAMS - ---------------------------- ---------------- ----------- -------------------- ------------------------- January 1 -- January 31, 2006.......... 2,636 $50.70 -- $716,206,611 February 1 -- February 28, 2006......... 531 $50.31 -- $716,206,611 March 1 -- March 31, 2006............ 1,677 $50.71 -- $716,206,611 ----- Total....................... 4,844 $50.66 -- $716,206,611 ===== ==
- --------------- (1) During the periods January 1- January 31, 2006, February 1- February 28, 2006 and March 1- March 31, 2006, separate account affiliates of the Holding Company purchased 2,636 shares, 531 shares and 1,677 shares, respectively, of Common Stock on the open market in nondiscretionary transactions to rebalance index funds. Except as disclosed above, there were no shares of Common Stock which were repurchased by the Holding Company other than through a publicly announced plan or program. (2) On October 26, 2004, the Holding Company's board of directors authorized a $1 billion Common Stock repurchase program. Under this authorization, the Holding Company may purchase its Common Stock from the MetLife Policyholder Trust, in the open market and in privately negotiated transactions. As a result of the acquisition of Travelers, the Holding Company has suspended its Common Stock repurchase activity. Future Common Stock repurchases will be dependent upon several factors, including the Company's capital position, its financial strength and credit ratings, general market conditions and the price of the Holding Company's Common Stock. On December 16, 2004, the Holding Company repurchased 7,281,553 shares of its outstanding common stock at an aggregate cost of $300 million under an accelerated common stock repurchase agreement with a major bank. The bank borrowed the stock sold to the Holding Company from third parties and 123 purchased the common stock in the open market to return to such third parties. In April 2005, the Holding Company received a cash adjustment of approximately $7 million based on the actual amount paid by the bank to purchase the common stock, for a final purchase price of approximately $293 million. The Holding Company recorded the shares initially repurchased as treasury stock and recorded the amount received as an adjustment to the cost of the treasury stock. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Holding Company's Annual Meeting of stockholders was held on April 25, 2006 (the "2006 Annual Meeting"). The matters that were voted upon at the 2006 Annual Meeting, and the number of votes cast for, against or withheld, as well as the number of abstentions as to each such matter, as applicable, are set forth below: (1) Election of Directors -- The stockholders elected four Class I Directors, each for a term expiring at the Holding Company's 2009 Annual Meeting.
NOMINEE NAME VOTES FOR VOTES WITHHELD - ------------ ----------- -------------- C. Robert Henrikson....................................... 656,058,997 12,045,305 John M. Keane............................................. 659,685,370 8,418,932 Hugh B. Price............................................. 640,929,021 27,175,281 Kenton J. Sicchitano...................................... 660,551,335 7,552,967
VOTES FOR VOTES AGAINST ABSTAINED ----------- ------------- --------- (2) Ratification of Appointment of Deloitte & Touche LLP as Independent Auditor (APPROVED).... 661,887,411 2,569,984 3,646,907
The Directors whose terms continued after the 2006 Annual Meeting and the years their terms expire are as follows: Class II Directors -- Term Expires in 2007 Curtis H. Barnette Burton A. Dole, Jr. Harry P. Kamen James M. Kilts Charles M. Leighton Class III Directors -- Term Expires in 2008 Cheryl W. Grise James R. Houghton Helene L. Kaplan Sylvia M. Mathews William C. Steere, Jr. 124 ITEM 6. EXHIBITS 3.1 MetLife, Inc. Amended and Restated By-Laws effective March 20, 2006 10.1 Summary of Non-Management Director Compensation (Incorporated by reference to Exhibit 10.1 to Form 8-K of MetLife, Inc. filed on January 20, 2006) 10.2 Amendment to Management Performance Share Agreement (effective December 31, 2005) under the MetLife, Inc. 2005 Stock and Incentive Compensation Plan (the "2005 Incentive Plan")(Incorporated by reference to Exhibit 10.1 to Form 8-K of MetLife, Inc. filed on January 10, 2006 (the "January 10, 2006 Form 8-K")) 10.3 Amendment to Management Restricted Stock Unit Agreement (effective December 31, 2005) under the 2005 Incentive Plan (Incorporated by reference to Exhibit 10.2 to the January 10, 2006 Form 8-K) 10.4 Form of Management Performance Share Agreement under the 2005 Incentive Plan (Incorporated by reference to Exhibit 10.3 to the January 10, 2006 Form 8-K) 10.5 Form of Management Restricted Stock Unit Agreement under the 2005 Incentive Plan (Incorporated by reference to Exhibit 10.4 to the January 10, 2006 Form 8-K) 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
125 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. METLIFE, INC. By: /s/ Joseph J. Prochaska, Jr. ------------------------------------- Name: Joseph J. Prochaska, Jr. Title: Executive Vice-President, Finance Operations and Chief Accounting Officer (Authorized Signatory and Chief Accounting Officer) Date: May 8, 2006 126 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT NAME - ------- ------------ 3.1 MetLife, Inc. Amended and Restated By-Laws effective March 20, 2006 10.1 Summary of Non-Management Director Compensation (Incorporated by reference to Exhibit 10.1 to Form 8-K of MetLife, Inc. filed on January 20, 2006) 10.2 Amendment to Management Performance Share Agreement (effective December 31, 2005) under the MetLife, Inc. 2005 Stock and Incentive Compensation Plan (the "2005 Incentive Plan")(Incorporated by reference to Exhibit 10.1 to Form 8-K of MetLife, Inc. filed on January 10, 2006 (the "January 10, 2006 Form 8-K")) 10.3 Amendment to Management Restricted Stock Unit Agreement (effective December 31, 2005) under the 2005 Incentive Plan (Incorporated by reference to Exhibit 10.2 to the January 10, 2006 Form 8-K) 10.4 Form of Management Performance Share Agreement under the 2005 Incentive Plan (Incorporated by reference to Exhibit 10.3 to the January 10, 2006 Form 8-K) 10.5 Form of Management Restricted Stock Unit Agreement under the 2005 Incentive Plan (Incorporated by reference to Exhibit 10.4 to the January 10, 2006 Form 8-K) 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
E-1 EX-3.1 2 y20450exv3w1.txt AMENDED AND RESTATED BY-LAWS Exhibit 3.1 ================================================================================ METLIFE, INC. AMENDED AND RESTATED BY LAWS EFFECTIVE MARCH 20, 2006 ================================================================================ 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.................. 8 ARTICLE II BOARD OF DIRECTORS 2.01. General Powers............................................ 8 2.02. Number of Directors....................................... 8 2.03. Director Elections........................................ 8 2.04. Annual and Regular Meetings.............................. 10 2.05. Special Meetings; Notice................................. 10 2.06. Quorum; Voting........................................... 11 2.07. Adjournment.............................................. 11 2.08. Action Without a Meeting................................. 11 2.09. Regulations; Manner of Acting............................ 11 2.10. Action by Telephonic Communications...................... 11 2.11. Resignations............................................. 11 2.12. Removal of Directors..................................... 11
2.13. Vacancies and Newly Created Directorships................ 12 2.14. Compensation............................................. 12 2.15. Reliance on Accounts and Reports, etc.................... 12 ARTICLE III BOARD COMMITTEES 3.01. How Constituted, Committee Powers........................ 12 3.02. Quorum and Manner of Acting.............................. 13 3.03. Action by Telephonic Communications...................... 13 3.04. Resignations............................................. 13 3.05. Removal.................................................. 13 3.06. Vacancies................................................ 14 ARTICLE IV OFFICERS 4.01. Number................................................... 14 4.02. Election................................................. 14 4.03. Salaries................................................. 14 4.04. Removal and Resignation; Vacancies....................... 14 4.05. Authority and Duties of Officers......................... 14 4.06. The Chairman............................................. 15 4.07. The Chief Executive Officer.............................. 15 4.08. The President............................................ 15 4.09. Absence or Disability of the Chief Executive Officer..... 15 4.10. Vice Presidents.......................................... 15 4.11. The Secretary............................................ 15 4.12. The Chief Financial Officer.............................. 16 4.13. The Treasurer............................................ 16 4.14. The Controller........................................... 16 4.15. The General Counsel...................................... 16 4.16. Additional Officers...................................... 16 4.17. Security................................................. 16 ARTICLE V CAPITAL STOCK 5.01. Certificates of Stock, Uncertificated Shares............. 17 5.02. Signatures; Facsimile.................................... 17 5.03. Lost, Stolen or Destroyed Certificates................... 17 5.04. Transfer of Stock........................................ 17
5.05. Record Date.............................................. 18 5.06. Registered Stockholders.................................. 18 5.07. Transfer Agent and Registrar............................. 19 ARTICLE VI INDEMNIFICATION 6.01. Nature of Indemnity...................................... 19 6.02. Determination that Indemnification is Proper............. 20 6.03. Advance Payment of Expenses.............................. 20 6.04. Procedure for Indemnification of Directors and Officers.. 20 6.05. Survival; Preservation of Other Rights................... 21 6.06. Insurance................................................ 21 6.07. Severability............................................. 22 ARTICLE VII OFFICES 7.01. Registered Office........................................ 22 7.02. Other Offices............................................ 22 ARTICLE VIII GENERAL PROVISIONS 8.01. Dividends................................................ 22 8.02. Reserves................................................. 23 8.03. Execution of Instruments................................. 23 8.04. Corporate Indebtedness................................... 23 8.05. Deposits................................................. 23 8.06. Checks................................................... 23 8.07. Sale, Transfer, etc. of Securities....................... 24 8.08. Voting as Stockholder.................................... 24 8.09. Fiscal Year.............................................. 24 8.10. Seal..................................................... 24 ARTICLE IX EMERGENCY BOARD OF DIRECTORS 9.01. Emergency Board of Directors............................. 24
ARTICLE X AMENDMENT OF BY-LAWS 10.01. Amendment................................................. 25 ARTICLE XI CONSTRUCTION 11.01. Construction.............................................. 26
METLIFE, INC. AMENDED AND RESTATED BY LAWS EFFECTIVE MARCH 20, 2006 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 1 waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning 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 2 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 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 3 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 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 4 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 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 5 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 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; 6 (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 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 7 (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. 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. Director Elections. (a) Classified Board. 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 8 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. (b) Majority Voting Standard in Director Elections. The Company has established a majority voting standard in uncontested elections of Directors. In an uncontested election of Directors (i.e., an election where the only nominees are those recommended by the board of Directors), following certification of the shareholder vote, any nominee for election as Director who received a greater number of votes "withheld" from his or her election than votes "for" his or her election shall promptly tender his or her resignation to the Chairman of the Board. The Chairman of the Board shall inform the Chairman of the Governance Committee of such tender of resignation and the Governance Committee shall promptly consider such resignation and recommend to the board whether to accept the tendered resignation or reject it. In deciding upon its recommendation, the Governance committee shall consider all relevant factors including, without limitation, the length of service and qualifications of the Director who has tendered his or her resignation and the Director's contributions to the Corporation and the Board. (i) The Board shall act on the Governance Committee's recommendation no later than 90 days following certification of the shareholder vote. The Board shall consider the factors considered by the Governance Committee and such additional information and factors the Board deems relevant. The Corporation shall promptly publicly disclose the Board's decision and, if applicable, the reasons for rejecting the tendered resignation, in a Report on Form 8-K filed with the Securities Exchange Commission. (ii) If a Director's resignation is accepted by the board, the Governance Committee shall recommend to the board whether to fill the vacancy created by such resignation or to reduce the size of the board. Any Director who tenders his or her resignation as provided above shall not participate in the Governance Committee's or the Board's consideration of whether or not to accept his or her tendered resignation. (iii) If a majority of the members of the Governance Committee were required to tender their resignations as described above, the Directors whom the 9 Board has affirmatively determined to be independent in accordance with applicable stock exchange listing standards and who were not required to tender their resignations shall appoint a special committee of the Board to consider the tendered resignations and whether to accept or reject them. (iv) This provision shall be summarized or set forth in its entirety in each proxy statement relating to an election of Directors of the Corporation. 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 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 10 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. 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, and subject to Section 2.03(b) of these By-Laws, 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 11 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 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, 12 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. 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. 13 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 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. 14 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. 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 15 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, 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 16 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 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 17 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 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 18 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. 19 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, 20 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 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. 21 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 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. 22 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. 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. 23 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. 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 EMERGENCY BOARD OF DIRECTORS Section 9.01. Emergency Board of Directors. Notwithstanding any different provision in the Delaware General Corporation Law, the Certificate of Incorporation of the Corporation or these By-Laws, in the event of any emergency (herein defined as (i) resulting from an attack on the United States or on a locality in which the Corporation conducts business or customarily holds meetings of its Board of Directors, (ii) any nuclear, enemy or terrorist attack, or (iii) the existence of any other catastrophe, disaster or other similar emergency 24 condition), as a result of which emergency a quorum of the Board of Directors cannot readily be convened for action, this By-Law provision shall apply. All the powers and duties vested in the Board of Directors shall vest automatically in an Emergency Board of Directors, which shall consist of all members of the Board of Directors who are readily available and capable of acting. The Emergency Board of Directors shall use all reasonable efforts to promptly provide notice of the change in the status of the Board of Directors to the Securities and Exchange Commission. This Emergency Board shall have and may exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation. A meeting of the Emergency Board may be called by any Director or any member of the most senior executive management committee of the Corporation (the "Executive Group"). Notice of the time and place of the meeting shall be given by the person calling the meeting to only such of the Directors as it may be feasible to reach at the time and by such means as may be feasible at the time, including by telephone, personal delivery, facsimile or email. Such notice shall be given at such time in advance of the meeting as circumstances permit in the judgment of the person calling the meeting. Two members in attendance shall constitute a quorum at any meeting of the Emergency Board. The Emergency Board shall continue to be vested with the powers and duties of the Board of Directors until such time following the emergency as a quorum of the original members of the Board of Directors prior to such emergency can readily be convened for action. ARTICLE X AMENDMENT OF BY-LAWS Section 10.01. 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. 25 ARTICLE XI CONSTRUCTION Section 11.01. 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. 26 EX-31.1 3 y20450exv31w1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATIONS I, C. Robert Henrikson, Chief Executive Officer of MetLife, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of MetLife, Inc.; 2. Based on my knowledge, this 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(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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(s) 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: May 8, 2006 /s/ C. Robert Henrikson -------------------------- C. Robert Henrikson Chairman, President and Chief Executive Officer EX-31.2 4 y20450exv31w2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATIONS I, William J. Wheeler, Chief Financial Officer of MetLife, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of MetLife, Inc.; 2. Based on my knowledge, this 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(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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(s) 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: May 8, 2006 /s/ William J. Wheeler ---------------------------------- William J. Wheeler Executive Vice President and Chief Financial Officer EX-32.1 5 y20450exv32w1.txt CERTIFICATION EXHIBIT 32.1 SECTION 906 CERTIFICATION CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE I, C. Robert Henrikson, the Chief Executive Officer of MetLife, Inc. (the "Company"), certify that (i) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (the "Form 10-Q") 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-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 8, 2006 By: /s/ C. Robert Henrikson -------------------------- C. Robert Henrikson 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 6 y20450exv32w2.txt CERTIFICATION 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (the "Form 10-Q") 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-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 8, 2006 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-----