-----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, KJQfLF+wxq8omYM3z7Iaq6U+uYxe9O45gt3FrY77UqyTax6A4l1m2LX+n0Sv7spk xM4YUW7rw5YaYo5l5e6VBA== 0000950123-06-010140.txt : 20060808 0000950123-06-010140.hdr.sgml : 20060808 20060808171950 ACCESSION NUMBER: 0000950123-06-010140 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060808 DATE AS OF CHANGE: 20060808 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: 061014200 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 y23754e10vq.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 JUNE 30, 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 August 3, 2006, 759,393,465 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 June 30, 2006 (Unaudited) and December 31, 2005................. 4 Interim Condensed Consolidated Statements of Income for the Three Months Ended and Six Months Ended June 30, 2006 and 2005 (Unaudited).............................. 5 Interim Condensed Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30, 2006 (Unaudited)............................................ 6 Interim Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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.................... 62 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 136 ITEM 4. CONTROLS AND PROCEDURES........................... 139 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS................................. 140 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS............................................... 145 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 146 ITEM 5. OTHER INFORMATION................................. 146 ITEM 6. EXHIBITS.......................................... 148 SIGNATURES................................................ 149 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 JUNE 30, 2006 (UNAUDITED) AND DECEMBER 31, 2005 (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, DECEMBER 31, 2006 2005 ----------- --------------- ASSETS Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $238,741 and $223,926, respectively)... $237,093 $230,050 Trading securities, at fair value (cost: $526 and $830, respectively)........................................... 519 825 Equity securities available-for-sale, at fair value (cost: $2,937 and $3,084, respectively)........................ 3,202 3,338 Mortgage and consumer loans............................... 38,665 37,190 Policy loans.............................................. 10,065 9,981 Real estate and real estate joint ventures held-for-investment..................................... 4,507 4,356 Real estate held-for-sale................................. 279 309 Other limited partnership interests....................... 4,805 4,276 Short-term investments.................................... 4,067 3,306 Other invested assets..................................... 9,652 8,078 -------- -------- Total investments....................................... 312,854 301,709 Cash and cash equivalents................................... 4,126 4,018 Accrued investment income................................... 3,275 3,036 Premiums and other receivables.............................. 13,216 12,186 Deferred policy acquisition costs and value of business acquired.................................................. 20,814 19,641 Current income tax recoverable.............................. 154 -- Goodwill.................................................... 4,913 4,797 Other assets................................................ 8,171 8,389 Separate account assets..................................... 132,782 127,869 -------- -------- Total assets............................................ $500,305 $481,645 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Future policy benefits.................................... $123,802 $123,204 Policyholder account balances............................. 130,518 128,312 Other policyholder funds.................................. 8,721 8,331 Policyholder dividends payable............................ 961 917 Policyholder dividend obligation.......................... 176 1,607 Short-term debt........................................... 2,253 1,414 Long-term debt............................................ 10,737 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.............................. -- 69 Deferred income taxes payable............................. 485 1,706 Payables for collateral under securities loaned and other transactions............................................ 46,612 34,515 Other liabilities......................................... 13,165 12,300 Separate account liabilities.............................. 132,782 127,869 -------- -------- Total liabilities....................................... 472,624 452,544 -------- -------- Stockholders' Equity: Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 84,000,000 shares issued and outstanding at June 30, 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 June 30, 2006 and December 31, 2005; 759,183,472 shares outstanding at June 30, 2006 and 757,537,064 shares outstanding at December 31, 2005......................................... 8 8 Additional paid-in capital.................................. 17,372 17,274 Retained earnings........................................... 12,196 10,865 Treasury stock, at cost; 27,583,192 shares at June 30, 2006 and 29,229,600 shares at December 31, 2005................ (905) (959) Accumulated other comprehensive income (loss)............... (991) 1,912 -------- -------- Total stockholders' equity.............................. 27,681 29,101 -------- -------- Total liabilities and stockholders' equity.............. $500,305 $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 AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------- 2006 2005 2006 2005 -------- -------- ------- ------- REVENUES Premiums............................................... $ 6,428 $ 6,034 $12,856 $12,000 Universal life and investment-type product policy fees................................................. 1,185 813 2,360 1,604 Net investment income.................................. 4,204 3,474 8,439 6,684 Other revenues......................................... 335 301 663 600 Net investment gains (losses).......................... (743) 333 (1,328) 318 ------- ------- ------- ------- Total revenues.................................... 11,409 10,955 22,990 21,206 ------- ------- ------- ------- EXPENSES Policyholder benefits and claims....................... 6,331 6,259 12,736 12,181 Interest credited to policyholder account balances..... 1,272 820 2,487 1,615 Policyholder dividends................................. 425 416 846 835 Other expenses......................................... 2,545 2,005 5,043 3,976 ------- ------- ------- ------- Total expenses.................................... 10,573 9,500 21,112 18,607 ------- ------- ------- ------- Income from continuing operations before provision for income taxes......................................... 836 1,455 1,878 2,599 Provision for income taxes............................. 217 450 511 799 ------- ------- ------- ------- Income from continuing operations...................... 619 1,005 1,367 1,800 Income (loss) from discontinued operations, net of income taxes......................................... 31 1,240 30 1,432 ------- ------- ------- ------- Net income............................................. 650 2,245 1,397 3,232 Preferred stock dividends.............................. 33 -- 66 -- ------- ------- ------- ------- Net income available to common shareholders............ $ 617 $ 2,245 $ 1,331 $ 3,232 ======= ======= ======= ======= Income from continuing operations available to common shareholders per common share Basic............................................. $ 0.77 $ 1.36 $ 1.71 $ 2.45 ======= ======= ======= ======= Diluted........................................... $ 0.76 $ 1.35 $ 1.69 $ 2.42 ======= ======= ======= ======= Net income available to common shareholders per common share Basic............................................. $ 0.81 $ 3.05 $ 1.75 $ 4.39 ======= ======= ======= ======= Diluted........................................... $ 0.80 $ 3.02 $ 1.73 $ 4.35 ======= ======= ======= =======
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 METLIFE, INC. INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 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........ 98 54 Dividends on preferred stock............ (66) Comprehensive income (loss): Net income............................ 1,397 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.................. Foreign currency translation adjustments, net of income taxes............................. Other comprehensive income (loss)... Comprehensive income (loss)........... -- -- ------- ------- ------- Balance at June 30, 2006................ $1 $8 $17,372 $12,196 $ (905) == == ======= ======= ======= 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........ 152 Dividends on preferred stock............ (66) Comprehensive income (loss): Net income............................ 1,397 Other comprehensive income (loss): Unrealized gains (losses) on derivative instruments, net of income taxes...................... (31) (31) Unrealized investment gains (losses), net of related offsets and income taxes.................. (2,901) (2,901) Foreign currency translation adjustments, net of income taxes............................. 29 29 ------- Other comprehensive income (loss)... (2,903) ------- Comprehensive income (loss)........... (1,506) ------- --- ---- ------- Balance at June 30, 2006................ $ (990) $40 $(41) $27,681 ======= === ==== =======
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 METLIFE, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED) (IN MILLIONS)
SIX MONTHS ENDED JUNE 30, ------------------- 2006 2005 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 4,013 $ 3,619 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Sales, maturities and repayments of: Fixed maturities........................................ 61,885 67,893 Equity securities....................................... 619 483 Mortgage and consumer loans............................. 3,890 2,789 Real estate and real estate joint ventures.............. 282 3,042 Other limited partnership interests..................... 592 466 Purchases of: Fixed maturities........................................ (76,804) (75,304) Equity securities....................................... (475) (905) Mortgage and consumer loans............................. (5,387) (4,108) Real estate and real estate joint ventures.............. (612) (598) Other limited partnership interests..................... (692) (668) Net change in short-term investments...................... (763) 592 Proceeds from sales of businesses, net of cash disposed of $0 and $33, respectively................................ 48 252 Net change in other invested assets....................... (1,624) (956) Other, net................................................ (132) (100) -------- -------- Net cash used in investing activities....................... (19,173) (7,122) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits................................................ 26,967 20,729 Withdrawals............................................. (25,451) (17,312) Net change in payables for collateral under securities loaned and other transactions........................... 12,097 2,954 Net change in short-term debt............................. 839 534 Long-term debt issued..................................... 969 3,106 Long-term debt repaid..................................... (124) (1,156) Preferred stock issued.................................... -- 2,100 Dividends on preferred stock.............................. (66) -- Junior subordinated debt securities issued................ -- 2,134 Stock options exercised................................... 42 38 Debt and equity issuance costs............................ (13) (121) Other, net................................................ 8 -- -------- -------- Net cash provided by financing activities................... 15,268 13,006 -------- -------- Change in cash and cash equivalents......................... 108 9,503 Cash and cash equivalents, beginning of period.............. 4,018 4,106 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 4,126 $ 13,609 ======== ======== Cash and cash equivalents, subsidiaries held-for-sale, beginning of period....................................... $ -- $ 58 ======== ======== CASH AND CASH EQUIVALENTS, SUBSIDIARIES HELD-FOR-SALE, END OF PERIOD................................................. $ -- $ 6 ======== ======== Cash and cash equivalents, from continuing operations, beginning of period....................................... $ 4,018 $ 4,048 ======== ======== CASH AND CASH EQUIVALENTS, FROM CONTINUING OPERATIONS, END OF PERIOD................................................. $ 4,126 $ 13,603 ======== ======== Supplemental disclosures of cash flow information: Net cash paid during the period for: Interest................................................ $ 360 $ 229 ======== ======== Income taxes............................................ $ 248 $ 228 ======== ======== 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 ======== ======== Real estate acquired in satisfaction of debt............ $ 6 $ -- ======== ======== Accrual for stock purchase contracts related to common equity units........................................... $ -- $ 97 ======== ======== Additional consideration related to purchase of business............................................... $ 115 $ -- ======== ======== See Note 3 for description of non-cash deconsolidation of subsidiary
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 $1,339 million and $1,291 million at June 30, 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 $834 million relating to net bank deposits reclassified from net cash provided by operating activities to cash flows from financing activities for the six months ended June 30, 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, $2,954 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 six months ended June 30, 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 June 30, 2006, its consolidated results of operations for the three months and six months ended June 30, 2006 and 2005, its consolidated cash flows for the six months ended June 30, 2006 and 2005 and its consolidated statement of stockholders' equity for the six months ended June 30, 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 9. 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 9. 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 SEC 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 six months ended June 30, 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 9. 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 9. 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 flows. 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 should be accounted for as 11 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 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 12 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 No. 115, Accounting for Certain Investments in Debt and Equity Securities, that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment but has issued FSP FAS 115-1 and FAS 124-1, 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 June 30, 2005, the Company was evaluating the impacts of the repatriation provision of the AJCA and during the six months ended June 30, 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. As of January 1, 2006, the repatriation provision of the AJCA no longer applies to the Company. FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the FASB issued FSP FAS 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction ("FSP 13-2"). FSP 13-2 amends SFAS No. 13, Accounting for Leases, to require that a lessor review the projected timing of income tax cash flows generated by a leveraged lease annually or more frequently if events or circumstances indicate that a change in timing has occurred or is projected to occur. In addition, FSP 13-2 requires that the change in the net investment balance resulting from the recalculation be recognized as a gain or loss from continuing operations in the same line item in which leveraged lease income is recognized in the year in which the assumption is changed. The guidance in FSP 13-2 is effective for fiscal years beginning after December 15, 2006. FSP 13-2 is not expected to have a material impact on the Company's consolidated financial statements. In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, treatment of interest and penalties, and disclosure of such positions. FIN 48 will be applied prospectively and will be effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating FIN 48 and does not expect adoption to have a material impact on the Company's consolidated financial statements. In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets -- an amendment of FASB Statement No. 140 ("SFAS 156"). 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. 13 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) In September 2005, the American Institute of Certified Public Accountants 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 DAC 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 DAC, unearned revenue and deferred sales inducements associated with the replaced contract. The guidance 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 $12.1 billion. The results of Travelers' operations were included in the Company's 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 provides the Company with one of the broadest distribution networks in the industry. The initial consideration paid by the Holding Company for the acquisition 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. As described more fully below, additional consideration of $115 million was paid by the Holding Company to Citigroup in 2006. 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. Purchase Price Allocation and Goodwill 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, and the resulting goodwill, as revised, are presented below. The Company revised the purchase price as a result of the finalization by both parties of their review of the June 30, 2005 financial statements and final resolution as to the interpretation of the provisions of the acquisition agreement which resulted in a payment of additional consideration of $115 million by the Company to Citigroup. Further consideration paid to Citigroup of $115 million, as well as additional transaction costs of $3 million, resulted in an increase in the purchase price of $118 million. The allocation of purchase price was updated as a result of the additional consideration of $118 million, an increase of $20 million in the value of the future policy benefit liabilities and other policyholder funds acquired resulting from the finalization of the evaluation of the Travelers' underwriting criteria, an increase in equity securities of $24 million resulting from the finalization of the determination of the fair value of such 14 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) securities, a decrease in other assets and an increase in other liabilities of $1 million and $4 million, respectively, due to the receipt of additional information, and the net impact of aforementioned adjustments increasing deferred tax assets by $4 million. Goodwill increased by $115 million as a consequence of such revisions to the purchase price and the purchase price allocation.
AS OF JULY 1, 2005 ------------------- (IN MILLIONS) SOURCES: Cash...................................................... $ 4,316 Debt...................................................... 2,716 Junior subordinated debt securities associated with common equity units........................................... 2,134 Preferred stock........................................... 2,100 Common stock.............................................. 1,010 ------- TOTAL SOURCES OF FUNDS...................................... $12,276 ======= USES: Debt and equity issuance costs............................ $ 128 Investment in MetLife Capital Trusts II and III........... 64 Acquisition costs......................................... 116 Purchase price paid to Citigroup.......................... 11,968 ------- TOTAL PURCHASE PRICE........................................ 12,084 ------- TOTAL USES OF FUNDS......................................... $12,276 ======= TOTAL PURCHASE PRICE........................................ $12,084 NET ASSETS ACQUIRED FROM TRAVELERS.......................... $ 9,412 ADJUSTMENTS TO REFLECT ASSETS ACQUIRED AT FAIR VALUE: Fixed maturities available-for-sale....................... (7) Mortgage and consumer loans............................... 72 Real estate and real estate joint ventures held-for-investment.................................... 17 Real estate held-for-sale................................. 22 Other limited partnerships................................ 51 Other invested assets..................................... 201 Premiums and other receivables............................ 1,008 Elimination of historical deferred policy acquisition costs.................................................. (3,210) Value of business acquired................................ 3,780 Value of distribution agreement acquired.................. 645 Value of customer relationships acquired.................. 17 Elimination of historical goodwill........................ (197) Net deferred income tax assets............................ 2,102 Other assets.............................................. (89) ADJUSTMENTS TO REFLECT LIABILITIES ASSUMED AT FAIR VALUE: Future policy benefits.................................... (4,089) Policyholder account balances............................. (1,905) Other liabilities......................................... (38) ------- NET FAIR VALUE OF ASSETS AND LIABILITIES ASSUMED............ 7,792 ------- GOODWILL RESULTING FROM THE ACQUISITION..................... $ 4,292 =======
15 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Goodwill resulting from the acquisition has been allocated to the Company's segments, as well as Corporate & Other, that are expected to benefit from the acquisition as follows:
AS OF JULY 1, 2005 ------------------ (IN MILLIONS) Institutional............................................... $ 916 Individual.................................................. 2,769 International............................................... 201 Corporate & Other........................................... 406 ------ TOTAL....................................................... $4,292 ======
Of the goodwill of $4.3 billion, approximately $1.6 billion is estimated to be deductible for income tax purposes. 16 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Condensed Statement of Net Assets Acquired The condensed statement of net assets acquired reflects the fair value of Travelers net assets as of July 1, 2005 as follows:
AS OF JULY 1, 2005 ------------------ (IN MILLIONS) ASSETS: Fixed maturities securities available-for-sale............ $44,370 Trading securities........................................ 555 Equity securities available-for-sale...................... 641 Mortgage and consumer loans............................... 2,365 Policy loans.............................................. 884 Real estate and real estate joint ventures held-for-investment.................................... 77 Real estate held-for-sale................................. 49 Other limited partnership interests....................... 1,124 Short-term investments.................................... 2,801 Other invested assets..................................... 1,686 ------- Total investments...................................... 54,552 ------- Cash and cash equivalents................................. 844 Accrued investment income................................. 539 Premiums and other receivables............................ 4,886 Value of business acquired................................ 3,780 Goodwill.................................................. 4,292 Other intangible assets................................... 662 Deferred tax assets....................................... 1,091 Other assets.............................................. 736 Separate account assets................................... 30,799 ------- Total assets acquired.................................. 102,181 ------- LIABILITIES: Future policy benefits.................................... 18,520 Policyholder account balances............................. 36,634 Other policyholder funds.................................. 324 Short-term debt........................................... 25 Current income taxes payable.............................. 66 Other liabilities......................................... 3,729 Separate account liabilities.............................. 30,799 ------- Total liabilities assumed.............................. 90,097 ------- Net assets acquired....................................... $12,084 =======
17 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Restructuring Costs and Other Charges 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. The estimate of terminations has not changed. At June 30, 2006 and December 31, 2005, MetLife accrued restructuring costs of approximately $12 million and $28 million, respectively, which included severance, relocation and outplacement services for Travelers' employees. During the three months and six months ended June 30, 2006, the Company made cash payments of approximately $9 million and $16 million, respectively. The estimated total restructuring expenses may change as management continues to execute the approved plan. Decreases to these estimates are recorded as an adjustment to goodwill. Increases to these estimates 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 13 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:
JUNE 30, 2006 -------------------------------------------------- COST OR GROSS UNREALIZED AMORTIZED ----------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL --------- ------- ------- ---------- ----- (IN MILLIONS) U.S. corporate securities.............. $ 76,260 $1,353 $2,457 $ 75,156 31.7% Residential mortgage-backed securities........................... 52,128 193 1,185 51,136 21.6 Foreign corporate securities........... 35,302 1,393 1,084 35,611 15.0 U.S. Treasury/agency securities........ 26,359 678 853 26,184 11.0 Commercial mortgage-backed securities........................... 19,063 116 566 18,613 7.8 Asset-backed securities................ 13,112 79 124 13,067 5.5 Foreign government securities.......... 10,433 999 142 11,290 4.8 State and political subdivision securities........................... 4,897 106 121 4,882 2.1 Other fixed maturity securities........ 1,001 15 42 974 0.4 -------- ------ ------ -------- ----- Total bonds.......................... 238,555 4,932 6,574 236,913 99.9 Redeemable preferred stock............. 186 2 8 180 0.1 -------- ------ ------ -------- ----- Total fixed maturities............... $238,741 $4,934 $6,582 $237,093 100.0% ======== ====== ====== ======== ===== Common stock........................... $ 1,843 $ 305 $ 43 $ 2,105 65.7% Non-redeemable preferred stock......... 1,094 33 30 1,097 34.3 -------- ------ ------ -------- ----- Total equity securities.............. $ 2,937 $ 338 $ 73 $ 3,202 100.0% ======== ====== ====== ======== =====
18 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% ======== ====== ====== ======== =====
19 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 June 30, 2006 and December 31, 2005:
JUNE 30, 2006 ----------------------------------------------------------------------------- EQUAL TO OR GREATER THAN LESS THAN 12 MONTHS 12 MONTHS TOTAL ----------------------- ------------------------- ----------------------- GROSS GROSS GROSS ESTIMATED UNREALIZED ESTIMATED UNREALIZED ESTIMATED UNREALIZED FAIR VALUE LOSS FAIR VALUE LOSS FAIR VALUE LOSS ---------- ---------- ----------- ----------- ---------- ---------- (IN MILLIONS, EXCEPT NUMBER OF SECURITIES) U.S. corporate securities..... $ 43,877 $2,250 $ 3,891 $207 $ 47,768 $2,457 Residential mortgage-backed securities.................. 40,901 1,040 3,420 145 44,321 1,185 Foreign corporate securities.................. 18,232 975 1,839 109 20,071 1,084 U.S. Treasury/agency securities.................. 18,143 849 103 4 18,246 853 Commercial mortgage-backed securities.................. 14,216 530 718 36 14,934 566 Asset-backed securities....... 6,503 111 377 13 6,880 124 Foreign government securities.................. 2,884 125 345 17 3,229 142 State and political subdivision securities...... 2,128 121 36 -- 2,164 121 Other fixed maturity securities.................. 194 10 82 32 276 42 -------- ------ ------- ---- -------- ------ Total bonds................. 147,078 6,011 10,811 563 157,889 6,574 Redeemable preferred stock.... 13 7 48 1 61 8 -------- ------ ------- ---- -------- ------ Total fixed maturities...... $147,091 $6,018 $10,859 $564 $157,950 $6,582 ======== ====== ======= ==== ======== ====== Equity securities............. $ 819 $ 61 $ 131 $ 12 $ 950 $ 73 ======== ====== ======= ==== ======== ====== Total number of securities in an unrealized loss position.................... 16,146 1,470 17,616 ======== ======= ========
20 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 ----------------------- ------------------------- ----------------------- GROSS GROSS GROSS ESTIMATED UNREALIZED ESTIMATED UNREALIZED ESTIMATED UNREALIZED FAIR VALUE LOSS FAIR VALUE LOSS FAIR VALUE 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 ======= ====== ========
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 June 30, 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:
JUNE 30, 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 NUMBER OF SECURITIES) Less than six months................ $ 94,474 $359 $2,774 $105 9,608 254 Six months or greater but less than nine months....................... 16,486 17 711 4 1,606 6 Nine months or greater but less than twelve months..................... 42,648 5 2,482 3 4,657 15 Twelve months or greater............ 11,557 9 573 3 1,460 10 -------- ---- ------ ---- ------ --- Total............................. $165,165 $390 $6,540 $115 17,331 285 ======== ==== ====== ==== ====== ===
21 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 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 June 30, 2006, $6,540 million of unrealized losses related to securities with an unrealized loss position of less than 20% of cost or amortized cost, which represented 4% 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 of less than 20% of cost or amortized cost, which represented 2% of the cost or amortized cost of such securities. As of June 30, 2006, $115 million of unrealized losses related to securities with an unrealized loss position of 20% or more of cost or amortized cost, which represented 29% of the cost or amortized cost of such securities. Of such unrealized losses of $115 million, $105 million relates to securities that were 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 relates to securities that were in an unrealized loss position for a period of less than six months. The Company held 27 fixed maturities and equity securities with a gross unrealized loss at June 30, 2006 of greater than $10 million each. These securities represented approximately 11% or $721 million in the aggregate of the gross unrealized loss on fixed maturities and equity securities. 22 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) As of June 30, 2006 and December 31, 2005, the Company had $6,655 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:
JUNE 30, DECEMBER 31, 2006 2005 ----------- --------------- SECTOR: U.S. corporates........................................... 37% 37% Residential mortgage-backed............................... 18 21 Foreign corporates........................................ 16 20 U.S. Treasury/agency securities........................... 13 4 Commercial mortgage-backed................................ 9 9 Other..................................................... 7 9 --- --- Total.................................................. 100% 100% === === INDUSTRY: Mortgage-backed........................................... 26% 30% Industrial................................................ 20 22 Government................................................ 15 5 Finance................................................... 12 11 Utility................................................... 9 6 Other..................................................... 18 26 --- --- Total.................................................. 100% 100% === ===
The increase in the unrealized losses during the period ended June 30, 2006 is principally driven by an increase in interest rates. As disclosed in Note 1 to the Notes to Consolidated Financial Statements included in the 2005 Annual Report, 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. One of the criteria which the Company considers in its other-than-temporary impairment analysis is its intent and ability to hold securities for a period of time sufficient to allow for the recovery of their value to an amount equal to or greater than cost or amortized cost. The Company's intent and ability to hold securities considers broad portfolio management objectives such as asset/liability duration management, issuer and industry segment exposures, interest rate views and the overall total return focus. In following these portfolio management objectives, changes in facts and circumstances that were present in past reporting periods may trigger a decision to sell securities that were held in prior reporting periods. Decisions to sell are based on current conditions or the Company's need to shift the portfolio to maintain its portfolio management objectives including liquidity needs or duration targets on asset/liability managed portfolios. The Company attempts to anticipate these types of changes and if a sale decision has been made on an impaired security and that security is not expected to recover prior to the expected time of sale, the security will be deemed other-than-temporarily impaired in the period that the sale decision was made and an other-than- temporary impairment loss will be recognized. Based upon the Company's current 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 current 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. 23 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2006 2005 2006 2005 ------- ------- ------ ------ (IN MILLIONS) Fixed maturities................................. $3,514 $2,518 $6,909 $4,958 Equity securities................................ 22 18 49 32 Mortgage and consumer loans...................... 601 548 1,210 1,077 Policy loans..................................... 147 139 293 277 Real estate and real estate joint ventures....... 245 197 499 351 Other limited partnership interests.............. 256 258 464 363 Cash, cash equivalents and short-term investments.................................... 103 98 194 169 Other invested assets............................ 100 89 231 171 ------ ------ ------ ------ Total.......................................... 4,988 3,865 9,849 7,398 Less: Investment expenses........................ 784 391 1,410 714 ------ ------ ------ ------ Net investment income.......................... $4,204 $3,474 $8,439 $6,684 ====== ====== ====== ======
NET INVESTMENT GAINS (LOSSES) Net investment gains (losses) were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------ 2006 2005 2006 2005 ------- ------ ------- ----- (IN MILLIONS) Fixed maturities.............................. $(381) $(89) $ (793) $(203) Equity securities............................. 25 (6) 58 87 Mortgage and consumer loans................... 3 (8) 7 (19) Real estate and real estate joint ventures.... 57 (1) 78 (1) Other limited partnership interests........... -- 18 (6) 20 Derivatives................................... (349) 383 (561) 393 Other......................................... (98) 36 (111) 41 ----- ---- ------- ----- Net investment gains (losses)............... $(743) $333 $(1,328) $ 318 ===== ==== ======= =====
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, are attributable to declines in fair value occurring in the period of the disposition or are as a result of management's decision to sell securities based on current conditions or the Company's need to shift the portfolio to maintain its portfolio management objectives. Losses from fixed maturity and equity securities deemed other-than-temporarily impaired, and included within net investment gains and losses, were $27 million and $36 million, for the three months and six months ended June 30, 2006, respectively, and $29 million and $48 million for the three months and six months ended June 30, 2005, respectively. 24 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 June 30, 2006 and December 31, 2005, trading securities are $519 million and $825 million, respectively, and liabilities associated with the repurchase agreements in the trading securities portfolio, which are included in other liabilities, are approximately $208 million and $460 million, respectively. 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. At December 31, 2005, MetLife was the majority owner of the feeder fund and consolidated the fund within its consolidated financial statements. At December 31, 2005, approximately $452 million of trading securities were related to Tribeca and approximately $190 million of the repurchase agreements were related to Tribeca. Net investment income related to the trading activities of Tribeca for the three months and six months ended June 30, 2006 includes $1 million and $12 million, respectively, of interest and dividends earned and net realized and unrealized gains (losses). During the second quarter of 2006, MetLife's ownership interests in Tribeca declined to a position whereby Tribeca is no longer consolidated and as of June 30, 2006 is accounted for under the equity method of accounting. The equity method investment at June 30, 2006 of $103 million is included in other limited partnership interests. Net investment income related to the Company's equity method investment in Tribeca was $3 million for the three months and six months ended June 30, 2006. During the three months and six months ended June 30, 2006, 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 $7 million and $8 million, respectively, and $1 million and $3 million for the three months and six months ended June 30, 2005, respectively. Changes in the fair value of such trading securities and repurchase agreement liabilities, excluding Tribeca, total ($11) million and ($4) million for the three months and six months ended June 30, 2006, respectively, and $1 million and $0 million for the three months and six months ended June 30, 2005, respectively. 25 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:
JUNE 30, 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................. $ 18,585 $ 710 $ 432 $20,444 $ 653 $ 69 Interest rate floors................ 41,237 243 -- 10,975 134 -- Interest rate caps.................. 34,588 309 -- 27,990 242 -- Financial futures................... 1,355 5 13 1,159 12 8 Foreign currency swaps.............. 17,163 681 1,169 14,274 527 991 Foreign currency forwards........... 3,556 60 45 4,622 64 92 Options............................. 968 403 4 815 356 6 Financial forwards.................. 3,811 34 26 2,452 13 4 Credit default swaps................ 6,569 4 10 5,882 13 11 Synthetic GICs...................... 3,718 -- -- 5,477 -- -- Other............................... 250 22 -- 250 9 -- -------- ------ ------ ------- ------ ------ Total............................. $131,800 $2,471 $1,699 $94,340 $2,023 $1,181 ======== ====== ====== ======= ====== ======
The above table does not include notional values for equity futures, equity financial forwards, and equity options. At June 30, 2006 and December 31, 2005, the Company owned 1,639 and 3,305 equity futures contracts, respectively. Equity futures market values are included in financial futures in the preceding table. At both June 30, 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 June 30, 2006 and December 31, 2005, the Company owned 74,506,808 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:
JUNE 30, 2006 DECEMBER 31, 2005 ------------------------------- ------------------------------- FAIR VALUE FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- (IN MILLIONS) Fair value.......................... $ 7,141 $ 167 $ 71 $ 4,506 $ 51 $ 104 Cash flow........................... 3,383 108 172 8,301 31 505 Foreign operations.................. 1,176 7 67 2,005 13 70 Non-qualifying...................... 120,100 2,189 1,389 79,528 1,928 502 -------- ------ ------ ------- ------ ------ Total............................. $131,800 $2,471 $1,699 $94,340 $2,023 $1,181 ======== ====== ====== ======= ====== ======
26 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2006 2005 2006 2005 ----- ----- ----- ----- (IN MILLIONS) Qualifying hedges: Net investment income........................... $ 5 $ 9 $ 28 $ 4 Interest credited to policyholder account balances..................................... (35) 5 (41) 12 Other expenses.................................. 1 (2) 1 (3) Non-qualifying hedges: Net investment gains (losses)................... 71 12 106 36 ---- --- ---- --- Total........................................ $ 42 $24 $ 94 $49 ==== === ==== ===
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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------- 2006 2005 2006 2005 ------- ------ ------ ----- (IN MILLIONS) Changes in the fair value of derivatives......... $ 161 $(93) $ 155 $(71) Changes in the fair value of the items hedged.... (125) 94 (140) 73 ----- ---- ----- ---- Net ineffectiveness of fair value hedging activities..................................... $ 36 $ 1 $ 15 $ 2 ===== ==== ===== ====
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 and six months ended June 30, 2006, the Company recognized no net investment gains (losses) as the ineffective portion of all cash flow hedges. For the three months and six months ended June 30, 2005, the Company recognized net investment gains (losses) of $14 million and ($28) 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 27 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 and six months ended June 30, 2006, related to such discontinued cash flow hedges were $3 million and $2 million, respectively, and for the three months and six months ended June 30, 2005, related to such discontinued cash flow hedges were ($3) million and ($28) 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 SIX MONTHS ENDED YEAR ENDED THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2006 JUNE 30, 2006 DECEMBER 31, 2005 JUNE 30, 2005 JUNE 30, 2005 ------------------ ---------------- -------------------- ------------------ ---------------- (IN MILLIONS) Other comprehensive income (loss) balance at the beginning of the period................... $(141) $(142) $(456) $(340) $(456) Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges.............. (37) (41) 270 123 214 Amounts reclassified to net investment gains (losses)................. (11) (6) 44 6 31 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............ $(189) $(189) $(142) $(211) $(211) ===== ===== ===== ===== =====
HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS The Company uses forward exchange contracts, foreign currency swaps, options and non-derivative financial instruments to hedge portions of its net investments 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 and six months ended June 30, 2006 and 2005. The Company's consolidated statements of stockholders' equity for the six months ended June 30, 2006 and the year ended December 31, 2005 include gains (losses) of ($22) 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 June 30, 2006 and December 31, 2005, the cumulative foreign currency translation loss recorded in accumulated other comprehensive income related to these hedges was $194 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 economically hedge its exposure to interest rate volatility; (ii) foreign currency forwards, swaps 28 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) and option contracts to economically hedge its exposure to adverse movements in exchange rates; (iii) swaptions to sell embedded call options in fixed rate liabilities; (iv) credit default swaps to economically hedge its exposure to adverse movements in credit; (v) credit default swaps to economically hedge 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 economically hedge invested assets against the risk of changes in credit spreads; (viii) financial forwards to buy and sell securities; (ix) synthetic guaranteed interest contracts ("GICs") to synthetically create traditional GICs; (x) credit default swaps and total rate of return swaps used in replication synthetic asset transactions ("RSATs") to synthetically create investments; and (xi) basis swaps to better match the cash flows of assets and related liabilities. For the three months and six months ended June 30, 2006, the Company recognized as net investment gains (losses) changes in fair value of ($453) million and ($694) million, respectively, related to derivatives that do not qualify for hedge accounting. For the three months and six months ended June 30, 2005, the Company recognized as net investment gains (losses) changes in fair value of $392 million and $432 million, respectively, related to derivatives that do not qualify for hedge accounting. For the three months and six months ended June 30, 2006, the Company recorded changes in fair value of $4 million and ($16) million, respectively, as policyholder benefits and claims related to derivatives that do not qualify for hedge accounting. For the three months and six months ended June 30, 2005, the Company recorded changes in fair value of $9 million and $11 million, respectively, as policyholder benefits and claims related to derivatives that do not qualify for hedge accounting. For the three months and six months ended June 30, 2006, the Company recorded changes in fair value of ($2) million and ($19) million as net investment income related to economic hedges of equity method investments in joint ventures that do not qualify for hedge accounting, respectively. The Company had no economic hedges of equity method investments in joint ventures for the three months and six months ended June 30, 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 $82 million and $50 million at June 30, 2006 and December 31, 2005, respectively. The fair value of the Company's embedded derivative liabilities was $3 million and $45 million at June 30, 2006 and December 31, 2005, respectively. The amounts recorded and included in net investment gains (losses) related to derivatives that do not qualify for hedge accounting during the three months and six months ended June 30, 2006 were gains (losses) of ($27) million and $74 million, respectively, and during the three months and six months ended June 30, 2005 were gains (losses) of $47 million and $37 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 29 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 June 30, 2006 and December 31, 2005, the Company was obligated to return cash collateral under its control of $329 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 June 30, 2006 and December 31, 2005, the Company had also accepted collateral consisting of various securities with a fair market value of $430 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 June 30, 2006 and December 31, 2005, none of the collateral had been sold or repledged. As of June 30, 2006 and December 31, 2005, the Company provided collateral of $216 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. 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. 30 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Liabilities and assets designated to the closed block are as follows:
JUNE 30, DECEMBER 31, 2006 2005 ----------- --------------- (IN MILLIONS) CLOSED BLOCK LIABILITIES Future policy benefits...................................... $42,798 $42,759 Other policyholder funds.................................... 271 257 Policyholder dividends payable.............................. 733 693 Policyholder dividend obligation............................ 176 1,607 Payables for collateral under securities loaned and other transactions.............................................. 5,394 4,289 Other liabilities........................................... 313 200 ------- ------- Total closed block liabilities......................... 49,685 49,805 ------- ------- ASSETS DESIGNATED TO THE CLOSED BLOCK Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $29,673 and $27,892, respectively).... 29,797 29,270 Trading securities, at fair value (cost: $0 and $3, respectively).......................................... -- 3 Equity securities available-for-sale, at fair value (cost: $1,199 and $1,180, respectively)....................... 1,383 1,341 Mortgage loans on real estate............................. 7,444 7,790 Policy loans.............................................. 4,161 4,148 Short-term investments.................................... 7 41 Other invested assets..................................... 512 477 ------- ------- Total investments...................................... 43,304 43,070 Cash and cash equivalents................................... 402 512 Accrued investment income................................... 503 506 Deferred income taxes....................................... 765 902 Premiums and other receivables.............................. 249 270 ------- ------- Total assets designated to the closed block............ 45,223 45,260 ------- ------- Excess of closed block liabilities over assets designated to the closed block.......................................... 4,462 4,545 ------- ------- Amounts included in accumulated other comprehensive income (loss): Net unrealized investment gains, net of deferred income taxes of $111 and $554, respectively................... 197 985 Unrealized derivative gains (losses), net of deferred income tax benefit of ($20) and ($17), respectively.... (36) (31) Allocated to policyholder dividend obligation, net of deferred income tax benefit of ($63) and ($538), respectively........................................... (113) (954) ------- ------- Total amounts included in accumulated other comprehensive income (loss).......................................... 48 -- ------- ------- Maximum future earnings to be recognized from closed block assets and liabilities.................................... $ 4,510 $ 4,545 ======= =======
31 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Information regarding the closed block policyholder dividend obligation is as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ---------------- ------------ 2006 2005 ---------------- ------------ (IN MILLIONS) Balance at beginning of period.......................... $ 1,607 $2,243 Impact on revenues, net of expenses and income taxes.... (115) (9) Change in unrealized investment and derivative gains (losses).............................................. (1,316) (627) ------- ------ Balance at end of period................................ $ 176 $1,607 ======= ======
Closed block revenues and expenses are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2006 2005 2006 2005 ------- ------- ------ ------ (IN MILLIONS) REVENUES Premiums......................................... $ 730 $ 757 $1,428 $1,476 Net investment income and other revenues......... 578 612 1,172 1,211 Net investment gains (losses).................... (51) 33 (115) 12 ------ ------ ------ ------ Total revenues.............................. 1,257 1,402 2,485 2,699 ------ ------ ------ ------ EXPENSES Policyholder benefits and claims................. 867 865 1,688 1,677 Policyholder dividends........................... 366 364 732 727 Change in policyholder dividend obligation....... (27) 47 (115) 35 Other expenses................................... 63 68 127 134 ------ ------ ------ ------ Total expenses.............................. 1,269 1,344 2,432 2,573 ------ ------ ------ ------ Revenues, net of expenses before income taxes.... (12) 58 53 126 Income taxes..................................... (5) 21 18 45 ------ ------ ------ ------ Revenues, net of expenses and income taxes....... $ (7) $ 37 $ 35 $ 81 ====== ====== ====== ======
The change in maximum future earnings of the closed block is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2006 2005 2006 2005 ------- ------- ------ ------ (IN MILLIONS) Balance at end of period......................... $4,510 $4,631 $4,510 $4,631 Balance at beginning of period................... 4,503 4,668 4,545 4,712 ------ ------ ------ ------ Change during period............................. $ 7 $ (37) $ (35) $ (81) ====== ====== ====== ======
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. Metropolitan Life also charges the closed block for expenses of maintaining the policies included in the closed block. 32 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 6. DEBT On June 28, 2006, a subsidiary of Reinsurance Group of America, Incorporated ("RGA"), Timberlake Financial L.L.C., completed an offering of $850 million of 30-year notes, which is included in long-term debt. The notes represent senior, secured indebtedness of Timberlake Financial, L.L.C. and its assets with no recourse to RGA or its other subsidiaries. Up to $150 million of additional notes may be offered in the future. The proceeds of the offering will provide long-term collateral to support Regulation Triple X reserves on approximately 1.5 million term life insurance policies with guaranteed level premium periods reinsured by RGA Reinsurance Company, a U.S. subsidiary of RGA. RGA repaid a $100 million 7.25% senior note which matured on April 1, 2006. 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"). See Note 7 for a description of the Company's liability for repurchase agreements with the FHLB of NY as of June 30, 2006 and December 31, 2005, which is included in long-term debt. 7. 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 June 30, 2006. 33 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 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 June 30, 2006, there are approximately 324 sales practices litigation matters pending against Metropolitan Life; approximately 45 sales practices litigation matters pending against New England Mutual, New England Life Insurance Company, and New England Securities Corporation (collectively, "New England"); approximately 45 sales practices litigation matters pending against General American; and approximately 29 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, 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. 34 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 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 six months ended June 30, 2006 and 2005, Metropolitan Life received approximately 3,886 and 9,110 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 35 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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, 2005 and 2006 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 June 30, 2006, to be approximately $91.8 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 36 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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. A number of lawsuits are pending against MPC (in Louisiana and in Mississippi) relating to Hurricane Katrina, including purported class actions. 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 action 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, 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. 37 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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. On June 26, 2006, the appellate court affirmed the trial court's order dismissing the action. 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 moved for reconsideration. Plaintiffs' motion for reconsideration was denied. Plaintiffs have filed an appeal to the United States Court of Appeals for the District of Columbia Circuit. 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 and the Company and the SEC currently are involved in good faith settlement discussions. 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. 38 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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. On or about May 16, 2006, the Oklahoma Insurance Department apprised Metropolitan Life Insurance Company that it had concluded its Limited Market Conduct Examination without issuing a report. 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 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 is defending these cases vigorously. 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. 39 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 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 Company and the NASD currently are involved in good faith settlement negotiations. The Company 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. MSI and the NASD staff have been engaged in good faith settlement discussions. 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. 40 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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, a number of NASD arbitration matters and litigation matters were commenced in 2005 and 2006 against Tower Square. It is reasonably possible that other actions will be brought regarding this matter. In an unrelated 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, as appropriate, with respect to the matters described above. Metropolitan Life also has been named as a defendant in numerous silicosis, welding and mixed dust cases pending in various state or federal courts. 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 and six months ended June 30, 2006, the Company reduced its net losses recognized related to the catastrophe by $0.3 million and $2 million, respectively, to $132 million, net of income taxes and reinsurance recoverables, and including reinstatement premiums and other reinsurance-related premium adjustments. During the three months and six months ended June 30, 2006, the Auto & Home segment reduced its net losses recognized related to the catastrophe by $0.3 million and $2 million, respectively, to $118 million, net of income taxes and reinsurance recoverables, and including reinstatement premiums and other reinsurance-related premium adjustments. 41 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 June 30, 2006. During the three months and six months ended June 30, 2006, MetLife's gross losses from Katrina, primarily arising from the Company's homeowners business, were reduced by $0 million and $1 million, respectively, to approximately $334 million at June 30, 2006. On October 24, 2005, Hurricane Wilma made landfall across the state of Florida. During the three months and six months ended June 30, 2006, the Company's Auto & Home segment reduced its total net losses recognized related to the catastrophe by $1 million and $3 million, respectively, to $29 million, net of income taxes and reinsurance recoverables. During the three months and six months ended June 30, 2006, MetLife's gross losses from Hurricane Wilma were increased by $2 million and $4 million to approximately $61 million at June 30, 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, 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 June 30, 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 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 of Citigroup's insurance operations in Argentina, 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 $2,992 million and $2,684 million at June 30, 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 $4,190 million and $2,974 million at June 30, 2006 and December 31, 2005, respectively. 42 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) COMMITMENTS TO FUND REVOLVING CREDIT FACILITIES AND BRIDGE LOANS The Company commits to lend funds under revolving credit facilities and bridge loans. The amounts of these unfunded commitments were $604 million and $346 million at June 30, 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 is $926 million and $1.1 billion at June 30, 2006 and December 31, 2005, respectively, which is included in policyholder account balances. MetLife Bank is a member of the FHLB of NY and holds $52 million and $43 million of common stock of the FHLB of NY, at June 30, 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 is $951 million and $855 million at June 30, 2006 and December 31, 2005, respectively, which is included in long-term debt. 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 in the Company's ownership percentage of RGA to approximately 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 June 30, 2006, the Company's ownership percentage of RGA remains at approximately 53%. 43 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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. During the six months ended June 30, 2006, the Company did not record any additional liabilities for indemnities, guarantees and commitments. During 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 June 30, 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 $599 million at June 30, 2006. The credit default swaps expire at various times during the next ten years. 8. 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. 44 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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:
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS -------------------------------------- -------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, ------------------- ---------------- ------------------- ---------------- 2006 2005 2006 2005 2006 2005 2006 2005 ------- ------- ------ ------ ------ ------ ----- ----- (IN MILLIONS) Service cost............ $ 40 $ 35 $ 80 $ 71 $ 8 $ 10 $ 17 $ 19 Interest cost........... 80 81 165 160 28 32 58 62 Expected return on plan assets................ (110) (113) (225) (225) (19) (19) (40) (39) Amortization of prior service cost.......... 3 4 5 8 (9) (5) (18) (10) Amortization of prior actuarial losses...... 31 29 64 58 5 3 11 7 ----- ----- ----- ----- ---- ---- ---- ---- Net periodic benefit cost.................. $ 44 $ 36 $ 89 $ 72 $ 13 $ 21 $ 28 $ 39 ===== ===== ===== ===== ==== ==== ==== ====
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. As of June 30, 2006, contributions of $172 million have been made to the pension plans and it is anticipated that certain subsidiaries will contribute an additional $16 million to fund such pension plans in 2006, for a total of $188 million. As of June 30, 2006, contributions of $47 million have been made to the other postretirement benefit plans and it is anticipated that certain subsidiaries will contribute an additional $79 million to fund such other postretirement benefit in 2006, for a total of $126 million. 9. 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 May 16, 2006, the Holding Company's board of directors declared dividends of $0.3775833 per share, for a total of $9 million, on its Series A preferred shares, and $0.4062500 per share, for a total of 45 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) $24 million, on its Series B preferred shares. Both dividends were paid on June 15, 2006 to shareholders of record as of May 31, 2006. 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 six months ended June 30, 2006 and 2005. During the six months ended June 30, 2006 and 2005, 1,646,408 and 1,401,585 shares of common stock were issued from treasury stock for $54 million and $46 million, respectively. At June 30, 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. 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 46 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 12,334,823 as of June 30, 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 is 2,000,000. As of June 30, 2006, the aggregate number of shares remaining available for issuance pursuant to the 2005 Stock Plan and the 2005 Directors Stock Plan was 66,527,259 and 1,941,734, 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 $24 million and $74 million, and income tax benefits of $8 million and $25 million, related to the Incentive Plans was recognized for the three months and six months ended June 30, 2006, respectively. Compensation expense of $23 million and $46 million, and income tax benefits of $8 million and $16 million, related to the Incentive Plans was recognized for the three months and six months ended June 30, 2005, respectively. Compensation 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 and $52 million, rather than $24 million and $74 million, for the three months and six months ended June 30, 2006, respectively. 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, pro forma compensation expense would have been $18 million and $61 million, for the three months and six months ended June 30, 2006, respectively, and $38 million and $61 million for the three months and six months ended June 30, 2005, respectively. 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 47 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 and six months ended June 30, 2006 is presented. The aggregate intrinsic value was computed using the closing share price of $51.21 on June 30, 2006 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............................ 3,667,850 $50.12 Exercised.......................... (1,394,915) $30.01 Canceled/Expired................... (64,950) $34.73 Forfeited.......................... (204,860) $32.40 ---------- Outstanding at June 30, 2006......... 26,384,908 $34.40 6.99 $444 ========== ====== ==== ==== Aggregate number of stock options expected to vest at June 30, 2006............................... 25,746,249 $34.16 6.95 $439 ========== ====== ==== ==== Exercisable, June 30, 2006........... 18,374,223 $30.59 6.17 $379 ========== ====== ==== ====
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 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. 48 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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. 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:
SIX MONTHS ENDED JUNE 30, --------------------------- 2006 2005 ------------ ------------ Dividend yield......................................... 1.04% 1.20% Risk-free rate of return............................... 4.16%-4.94% 3.33%-5.42% Expected volatility.................................... 22.08% 23.23% Exercise multiple...................................... 1.52 1.48 Post-vesting termination rate.......................... 4.11% 5.19% Contractual term (years)............................... 10 10 Weighted average exercise price of stock options granted.............................................. $50.12 $38.47 Weighted average fair value of stock options granted... $13.82 $10.00
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 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 $12 million and $35 million, related to Stock Options was recognized for the three months and six months ended June 30, 2006, respectively, and $14 million and $24 million, related to Stock Options was recognized for the three months and six months ended June 30, 2005, respectively. 49 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Had compensation expense for grants awarded prior to January 1, 2003 been determined based on the fair value at the date of grant rather than the intrinsic value method, the Company's earnings and earnings per common share amounts would have been reduced to the following pro forma amounts for the three months and six months ended June 30, 2005:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2005 JUNE 30, 2005 ------------------ ---------------- (IN MILLIONS, EXCEPT PER SHARE DATA) Net income available to common shareholders........ $2,245 $3,232 Add: Stock-option based employee compensation expense included in reported net income, net of income taxes............................... 9 16 Deduct: Total stock-option based employee compensation determined under fair value based method for all awards, net of income taxes........................................ (9) (17) ------ ------ Pro forma net income available to common shareholders..................................... $2,245 $3,231 ====== ====== BASIC EARNINGS PER COMMON SHARE As reported........................................ $ 3.05 $ 4.39 ====== ====== Pro forma.......................................... $ 3.05 $ 4.39 ====== ====== DILUTED EARNINGS PER COMMON SHARE As reported........................................ $ 3.02 $ 4.35 ====== ====== Pro forma.......................................... $ 3.02 $ 4.35 ====== ======
As of June 30, 2006, there was $61 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 1.88 years. The following is a summary of Stock Option exercise activity for the:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------- 2006 2005 2006 2005 ----- ----- ----- ----- (IN MILLIONS) Total intrinsic value of stock options exercised....................................... $17 $ 9 $30 $16 Cash received from exercise of stock options...... $24 $19 $42 $38 Tax benefit realized from stock options exercised....................................... $ 6 $ 3 $10 $ 5
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 (subject to certain contingencies) and will be payable entirely in shares of the Holding Company common stock. 50 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) The following is a summary of Performance Share activity for the period ended June 30, 2006:
WEIGHTED AVERAGE GRANT PERFORMANCE DATE FAIR SHARES VALUE ----------- ------------- Outstanding at January 1, 2006.............................. 1,029,700 $36.87 Granted................................................... 881,375 $48.40 Forfeited................................................. (33,250) $39.85 --------- Outstanding at June 30, 2006................................ 1,877,825 $42.19 ========= Performance Shares expected to vest at June 30, 2006........ 1,817,445 $42.79 =========
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 and six months ended June 30, 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. 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 $8 million and $32 million, related to Performance Shares was recognized for the three months and six months ended June 30, 2006, respectively, and $3 million and $6 million, related to Performance Shares was recognized for the three months and six months ended June 30, 2005, respectively. As of June 30, 2006, there was $55 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 1.84 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 and six months ended June 30, 2006 and 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 51 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 $4 million and $7 million, related to LTPCP Opportunity Awards was recognized for the three months and six months ended June 30, 2006, respectively, and $6 million and $16 million, related to LTPCP Opportunity Awards was recognized for the three months and six months ended June 30, 2005, respectively. The aggregate fair value of LTPCP Opportunity Awards outstanding at June 30, 2006 was $39 million, of which $6 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 during the three months ended June 30, 2006. 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2006 2005 2006 2005 -------- ------- ------- ------ (IN MILLIONS) Net income....................................... $ 650 $2,245 $ 1,397 $3,232 Other comprehensive income (loss): Unrealized gains (losses) on derivative instruments, net of income taxes............ (32) 88 (31) 188 Unrealized investment gains (losses), net of related offsets and income taxes............ (1,578) 815 (2,901) (69) Foreign currency translation adjustment........ 29 22 29 (41) Minimum pension liability adjustment........... -- -- -- 47 ------- ------ ------- ------ Other comprehensive income (loss):............... (1,581) 925 (2,903) 125 ------- ------ ------- ------ Comprehensive income (loss)................. $ (931) $3,170 $(1,506) $3,357 ======= ====== ======= ======
52 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 10. OTHER EXPENSES Other expenses were comprised of the following:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 2006 2005 2006 2005 ------- ------- ------- ------- (IN MILLIONS) Compensation................................... $ 832 $ 748 $ 1,632 $ 1,423 Commissions.................................... 914 727 1,760 1,417 Interest and debt issue cost................... 214 137 425 268 Amortization of DAC and VOBA................... 485 564 1,087 1,107 Capitalization of DAC.......................... (890) (858) (1,773) (1,625) Rent, net of sublease income................... 66 64 136 158 Minority interest.............................. 68 9 127 59 Insurance taxes................................ 161 119 321 238 Other.......................................... 695 495 1,328 931 ------ ------ ------- ------- Total other expenses......................... $2,545 $2,005 $ 5,043 $ 3,976 ====== ====== ======= =======
53 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 11. 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 SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 2006 2005 2006 2005 ------------ ------------ ------------ ------------ (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) Weighted average common stock outstanding for basic earnings per common share............ 763,063,769 736,516,503 762,588,178 736,148,078 Incremental common shares from assumed: Exercise or issuance of stock-based awards................................ 6,843,470 6,619,044 6,859,225 6,191,971 ------------ ------------ ------------ ------------ Weighted average common stock outstanding for diluted earnings per common share.......... 769,907,239 743,135,547 769,447,403 742,340,049 ============ ============ ============ ============ EARNINGS PER COMMON SHARE BEFORE PREFERRED STOCK DIVIDENDS: INCOME FROM CONTINUING OPERATIONS.......... $ 619 $ 1,005 $ 1,367 $ 1,800 ============ ============ ============ ============ Basic.................................... $ 0.81 $ 1.36 $ 1.79 $ 2.45 ============ ============ ============ ============ Diluted.................................. $ 0.80 $ 1.35 $ 1.78 $ 2.42 ============ ============ ============ ============ INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES...................... $ 31 $ 1,240 $ 30 $ 1,432 ============ ============ ============ ============ Basic.................................... $ 0.04 $ 1.68 $ 0.04 $ 1.95 ============ ============ ============ ============ Diluted.................................. $ 0.04 $ 1.67 $ 0.04 $ 1.93 ============ ============ ============ ============ NET INCOME................................. $ 650 $ 2,245 $ 1,397 $ 3,232 ============ ============ ============ ============ Basic.................................... $ 0.85 $ 3.05 $ 1.83 $ 4.39 ============ ============ ============ ============ Diluted.................................. $ 0.84 $ 3.02 $ 1.82 $ 4.35 ============ ============ ============ ============ EARNINGS PER COMMON SHARE AFTER PREFERRED STOCK DIVIDENDS: INCOME FROM CONTINUING OPERATIONS.......... $ 619 $ 1,005 $ 1,367 $ 1,800 Preferred stock dividends.................. 33 -- 66 -- ------------ ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS AVAILABLE TO COMMON SHAREHOLDERS................... $ 586 $ 1,005 $ 1,301 $ 1,800 ============ ============ ============ ============ Basic.................................... $ 0.77 $ 1.36 $ 1.71 $ 2.45 ============ ============ ============ ============ Diluted.................................. $ 0.76 $ 1.35 $ 1.69 $ 2.42 ============ ============ ============ ============ NET INCOME................................. $ 650 $ 2,245 $ 1,397 $ 3,232 Preferred stock dividends.................. 33 -- 66 -- ------------ ------------ ------------ ------------ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS............................. $ 617 $ 2,245 $ 1,331 $ 3,232 ============ ============ ============ ============ Basic.................................... $ 0.81 $ 3.05 $ 1.75 $ 4.39 ============ ============ ============ ============ Diluted.................................. $ 0.80 $ 3.02 $ 1.73 $ 4.35 ============ ============ ============ ============
54 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 June 30, 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. 12. 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 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 13 for disclosures regarding discontinued operations, including real estate. 55 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 and six months ended June 30, 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. The Company allocates certain non-recurring items, such as expenses associated with certain legal proceedings, to Corporate & Other.
FOR THE THREE MONTHS ENDED AUTO & CORPORATE & JUNE 30, 2006 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE OTHER TOTAL - -------------------------------------- ------------- ---------- ------ ------------- ----------- ----------- ------ (IN MILLIONS) Premiums.............................. $2,836 $1,102 $726 $676 $1,078 $ 10 $6,428 Universal life and investment-type product policy fees................. 201 790 -- 194 -- -- 1,185 Net investment income................. 1,756 1,689 42 238 155 324 4,204 Other revenues........................ 169 135 8 4 13 6 335 Net investment gains (losses)......... (364) (287) (4) 13 (14) (87) (743) Policyholder benefits and claims...... 3,108 1,359 431 550 871 12 6,331 Interest credited to policyholder account balances.................... 620 518 -- 86 48 -- 1,272 Policyholder dividends................ -- 422 1 1 -- 1 425 Other expenses........................ 559 816 211 346 271 342 2,545 ------ ------ ---- ---- ------ ----- ------ Income (loss) from continuing operations before provision (benefit) for income taxes.......... 311 314 129 142 42 (102) 836 Provision (benefit) for income taxes............................... 99 106 30 41 15 (74) 217 Income (loss) from discontinued operations, net of income taxes..... (3) -- -- -- -- 34 31 ------ ------ ---- ---- ------ ----- ------ Net income............................ $ 209 $ 208 $ 99 $101 $ 27 $ 6 $ 650 ====== ====== ==== ==== ====== ===== ======
56 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
FOR THE THREE MONTHS ENDED AUTO & CORPORATE & JUNE 30, 2005 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE OTHER TOTAL - --------------------------------- ------------- ---------- --------- ------------- ----------- -------------- ------ (IN MILLIONS) Premiums......................... $2,834 $1,061 $738 $470 $928 $ 3 $6,034 Universal life and investment-type product policy fees............ 185 501 -- 125 2 -- 813 Net investment income............ 1,342 1,565 46 195 137 189 3,474 Other revenues................... 163 105 8 (1) 21 5 301 Net investment gains (losses).... 190 180 (4) 7 (7) (33) 333 Policyholder benefits and claims......................... 3,196 1,347 446 484 828 (42) 6,259 Interest credited to policyholder account balances............... 326 395 -- 55 43 1 820 Policyholder dividends........... -- 418 2 -- -- (4) 416 Other expenses................... 537 697 204 192 204 171 2,005 ------ ------ ---- ---- ---- ---- ------ Income (loss) from continuing operations before provision (benefit) for income taxes..... 655 555 136 65 6 38 1,455 Provision (benefit) for income taxes.......................... 225 181 38 19 (1) (12) 450 Income (loss) from discontinued operations, net of income taxes.......................... 160 208 -- (1) -- 873 1,240 ------ ------ ---- ---- ---- ---- ------ Net income....................... $ 590 $ 582 $ 98 $ 45 $ 7 $923 $2,245 ====== ====== ==== ==== ==== ==== ======
FOR THE SIX MONTHS ENDED AUTO & CORPORATE & JUNE 30, 2006 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE OTHER TOTAL - ------------------------------------ ------------- ---------- ------ ------------- ----------- ----------- ------- (IN MILLIONS) Premiums............................ $5,825 $2,184 $1,450 $1,307 $2,071 $ 19 $12,856 Universal life and investment-type product policy fees............... 402 1,580 -- 378 -- -- 2,360 Net investment income............... 3,516 3,430 87 473 330 603 8,439 Other revenues...................... 339 260 15 8 28 13 663 Net investment gains (losses)....... (685) (550) (3) 33 (7) (116) (1,328) Policyholder benefits and claims.... 6,472 2,624 883 1,053 1,684 20 12,736 Interest credited to policyholder account balances.................. 1,209 994 -- 173 111 -- 2,487 Policyholder dividends.............. -- 841 2 3 -- -- 846 Other expenses...................... 1,092 1,667 412 673 546 653 5,043 ------ ------ ------ ------ ------ ----- ------- Income (loss) from continuing operations before provision (benefit) for income taxes........ 624 778 252 297 81 (154) 1,878 Provision (benefit) for income taxes............................. 201 265 62 92 28 (137) 511 Income (loss) from discontinued operations, net of income taxes... (1) (1) -- -- -- 32 30 ------ ------ ------ ------ ------ ----- ------- Net income.......................... $ 422 $ 512 $ 190 $ 205 $ 53 $ 15 $ 1,397 ====== ====== ====== ====== ====== ===== =======
57 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
FOR THE SIX MONTHS ENDED AUTO & CORPORATE & JUNE 30, 2005 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE OTHER TOTAL - -------------------------------- ------------- ---------- --------- ------------- ----------- -------------- ------- (IN MILLIONS) Premiums........................ $5,678 $2,085 $1,466 $936 $1,831 $ 4 $12,000 Universal life and investment-type product policy fees.......................... 378 980 -- 244 2 -- 1,604 Net investment income........... 2,557 3,089 89 344 287 318 6,684 Other revenues.................. 324 217 17 2 32 8 600 Net investment gains (losses)... 212 232 (4) 7 21 (150) 318 Policyholder benefits and claims........................ 6,307 2,548 924 878 1,567 (43) 12,181 Interest credited to policyholder account balances...................... 627 787 -- 102 99 -- 1,615 Policyholder dividends.......... -- 831 2 2 -- -- 835 Other expenses.................. 1,047 1,345 403 367 457 357 3,976 ------ ------ ------ ---- ------ ------ ------- Income (loss) from continuing operations before provision (benefit) for income taxes.... 1,168 1,092 239 184 50 (134) 2,599 Provision (benefit) for income taxes......................... 399 365 65 61 14 (105) 799 Income (loss) from discontinued operations, net of income taxes......................... 170 222 -- (2) -- 1,042 1,432 ------ ------ ------ ---- ------ ------ ------- Net income...................... $ 939 $ 949 $ 174 $121 $ 36 $1,013 $ 3,232 ====== ====== ====== ==== ====== ====== =======
The following table presents assets with respect to the Company's segments, as well as Corporate & Other, at:
JUNE 30, DECEMBER 31, 2006 2005 ----------- --------------- (IN MILLIONS) Institutional............................................... $182,842 $176,401 Individual.................................................. 233,722 228,295 Auto & Home................................................. 5,378 5,397 International............................................... 19,725 18,624 Reinsurance................................................. 17,559 16,049 Corporate & Other........................................... 41,079 36,879 -------- -------- Total..................................................... $500,305 $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 for the three months ended and six months ended June 30, 2006 and 2005. Revenues from U.S. operations were $9,841 million and $19,942 million for the three months and six months ended June 30, 2006, respectively, which represented 86% and 87%, respectively, of consolidated revenues. Revenues from U.S. operations were $9,769 million and $18,918 million for the three months and six months ended June 30, 2005, respectively, which both represented 89% of consolidated revenues. 58 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 13. 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 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ---------------- 2006 2005 2006 2005 ----- ------- ---- ------ (IN MILLIONS) Investment income.............................. $ 8 $ 50 $ 19 $ 144 Investment expense............................. (3) (29) (10) (78) Net investment gains (losses).................. (3) 1,905 (8) 1,923 --- ------ ---- ------ Total revenues............................... 2 1,926 1 1,989 Provision (benefit) for income taxes........... 1 685 1 706 --- ------ ---- ------ Income (loss) from discontinued operations, net of income taxes....................... $ 1 $1,241 $ -- $1,283 === ====== ==== ======
The carrying value of real estate related to discontinued operations was $279 million and $309 million at June 30, 2006 and December 31, 2005, respectively. The following table shows the discontinued real estate operations by segment:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ---------------- 2006 2005 2006 2005 ----- ------- ---- ------ (IN MILLIONS) Net investment income Institutional................................. $ 2 $ 8 $ 6 $ 22 Individual.................................... 2 7 2 16 Corporate & Other............................. 1 6 1 28 --- ------ --- ------ Total net investment income................ $ 5 $ 21 $ 9 $ 66 === ====== === ====== Net investment gains (losses) Institutional................................. $(7) $ 239 $(7) $ 241 Individual.................................... (2) 320 (4) 332 Corporate & Other............................. 6 1,346 3 1,350 --- ------ --- ------ Total net investment gains (losses)........ $(3) $1,905 $(8) $1,923 === ====== === ======
In the second quarter of 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 gains, net of income taxes, of $431 million and $762 million, respectively. Net investment income on One Madison Avenue and 200 Park Avenue was $4 million and $1 million, respectively, for the three months ended June 30, 2005 and $15 million and $17 million, respectively, for the six months ended June 30, 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 59 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 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 income (loss) from discontinued operations of ($1) million and ($2) million, both net of income taxes, for the three months and six months ended June 30, 2005, respectively. 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 have been combined with the discontinued real estate operations in the interim condensed consolidated income statements:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2005 2005 ------------------ ---------------- (IN MILLIONS) Revenues........................................... $ 2 $ 4 Expenses........................................... 3 6 --- --- Income (loss) before provision for income taxes.... (1) (2) Provision (benefit) for income taxes............... -- -- --- --- Income (loss) from discontinued operations, net of income taxes............................... $(1) $(2) === ===
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. Upon finalization of the computation, the Company received payments of $30 million, net of income taxes, in the second quarter of 2006 and $12 million, net of income taxes, in the fourth quarter of 2005 due to the retention of these specific customer accounts. The Company reported the operations of SSRM in 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, is reported in Corporate & Other. The Company's discontinued operations for the six months ended June 30, 2005 also includes expenses of approximately $6 million, net of income taxes, related to the sale of SSRM. 60 METLIFE, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) The operations of SSRM include affiliated revenue of $5 million for the six months ended June 30, 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 AND SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------- ---------------- 2006 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............. 30 165 --- ---- Income (loss) from discontinued operations, net of income taxes.................................... $30 $151 === ====
14. SUBSEQUENT EVENTS On July 18, 2006, the Company announced that it is evaluating options with respect to its Peter Cooper Village and Stuyvesant Town properties, including the possibility of marketing the assets for sale. The Peter Cooper Village and Stuyvesant Town properties together make up the largest apartment complex in Manhattan, New York totaling over 11,200 units, spread over 80 contiguous acres. The properties are owned by the Holding Company's subsidiary Metropolitan Tower Life Insurance Company. The sale of these properties is contingent on pricing that meets the Company's expectations. 61 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 and ($2) million, both net 62 of income taxes, for the three months and six months ended June 30, 2005, respectively. 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 $12.1 billion. The results of Travelers' operations were included in the Company's 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 provides the Company with one of the broadest distribution networks in the industry. The initial consideration paid by the Holding Company for the acquisition 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. Additional consideration of $115 million was paid by the Holding Company to Citigroup in 2006 as a result of the finalization by both parties of their review of the June 30, 2005 financial statements and final resolution as to the interpretation of the provisions of the acquisition agreement. 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. Upon finalization of the computation, the Company received payments of $30 million, net of income taxes, in the second quarter of 2006 and $12 million, net of income taxes, in the fourth quarter of 2005 due to the retention of these specific customer accounts. The Company reported the operations of SSRM in 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, is reported in Corporate & Other. The Company's discontinued operations for the six months ended June 30, 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 and six months ended June 30, 2006, the Company reduced its net losses recognized related to the catastrophe by $0.3 million and $2 million, respectively, to $132 million, net of income taxes and reinsurance recoverables, and including reinstatement premiums and other reinsurance-related premium adjustments. During the three months and six months ended June 30, 2006, the Auto & Home segment reduced its net losses recognized related to the catastrophe by $0.3 million and $2 million, respectively, to $118 million, net of income taxes and reinsurance recoverables, and including reinstatement premiums and other reinsurance-related premium adjustments. There was no change in the Institutional segment's total net losses recognized related to the catastrophe of 63 $14 million, net of income taxes and reinsurance recoverables and including reinstatement premiums and other reinsurance-related premium adjustments at June 30, 2006. During the three months and six months ended June 30, 2006, MetLife's gross losses from Katrina, primarily arising from the Company's homeowners business, were reduced by $0 million and $1 million, respectively, to approximately $334 million at June 30, 2006. On October 24, 2005, Hurricane Wilma made landfall across the state of Florida. During the three months and six months ended June 30, 2006, the Company's Auto & Home segment reduced its total net losses recognized related to the catastrophe by $1 million and $3 million, respectively, to $29 million, net of income taxes and reinsurance recoverables. During the three months and six months ended June 30, 2006, MetLife's gross losses from Hurricane Wilma were increased by $2 million and $4 million to approximately $61 million at June 30, 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, 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 June 30, 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 64 assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the market value has been below cost 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 65 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 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, 66 particularly those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. If the Company determines that a reinsurance contract does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the contract using the deposit method of accounting. LITIGATION The Company is a party to a number of legal actions and 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 67 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. 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 JUNE 30, 2006 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2005 The Company reported $617 million in net income available to common shareholders and diluted earnings per common share of $0.80 for the three months ended June 30, 2006 compared to $2,245 million in net income available to common shareholders and diluted earnings per common share of $3.02 for the three months ended June 30, 2005. The acquisition of Travelers contributed $171 million to net income available to common shareholders for the three months ended June 30, 2006. Excluding the impact of the Travelers acquisition, net income available to common shareholders decreased by $1,799 million for the three months ended June 30, 2006 compared to the 2005 period. Net income available to common shareholders for the three months ended June 30, 2005 includes the impact of certain transactions or events, the timing, nature and amount of which are generally unpredictable. These transactions are described in each applicable segment's discussion. These items contributed a benefit of $40 million, net of income taxes, to the three months ended June 30, 2005 period. Excluding the impact of these items, net income available to common shareholders decreased by $1,759 million for the three months ended June 30, 2006 compared to the prior period. Income from discontinued operations and, correspondingly, net income, decreased by $1,209 million for the three months ended June 30, 2006 compared to the 2005 period. The decrease in discontinued operations and net income is primarily due to a gain of $1,193 million, net of income taxes, in the three months ended June 30, 2005, on the sales of the One Madison Avenue and 200 Park Avenue properties in Manhattan, New York, partially offset by a gain on the sale of SSRM of $30 million, net of income taxes, for the three months ended June 30, 2006. In addition, net investment losses increased by $699 million, net of income taxes, for the three months ended June 30, 2006 as compared to the corresponding period in 2005. The current period includes $65 million, net of income taxes, of net investment losses related to the acquisition of Travelers. Excluding the acquisition of Travelers, net investment losses increased by $634 million, net of income taxes, largely due to changes in the market value of derivatives from increases in U.S. interest rates and the weakening of the dollar against the major currencies the Company hedges, notably the Euro and the Pound. Also contributing to the increase are losses on fixed maturities resulting from continued portfolio management activity in a higher interest rate environment. During the three months ended June 30, 2006, the Company also paid $33 million in dividends on its preferred shares issued in connection with financing the acquisition of Travelers. The prior period did not include such dividends. Partially offsetting these decreases is an increase of $117 million in net income available to common shareholders for the three months ended June 30, 2006 compared to the 2005 period. This increase is primarily due to an increase in premiums, fees and other revenues attributable to continued business growth across most of the Company's operating segments. Partially offsetting these increases is a decrease in net investment income primarily due to lower variable income on corporate and real estate joint ventures and lower long-term yields on fixed maturities, partially offset by higher income on short-term investments due to higher short-term interest rates, as well as an increase in the asset base. Net interest margins declined for the three months ended June 30, 2006. Underwriting results were generally favorable for the three months ended June 30, 2006. Other expenses increased primarily due to higher interest expense on debt and bankholder deposits, higher general spending and corporate support expenses, an increase in minority interest expense, a charge related to the pending sale of certain small market recordkeeping businesses in the current quarter, higher legal costs and 68 overall business growth. These increases in other expenses are partially offset by lower DAC amortization due to higher net investment losses and lower integration costs. SIX MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2005 The Company reported $1,331 million in net income available to common shareholders and diluted earnings per common share of $1.73 for the six months ended June 30, 2006 compared to $3,232 million in net income available to common shareholders and diluted earnings per common share of $4.35 for the six months ended June 30, 2005. The acquisition of Travelers contributed $317 million to net income available to common shareholders for the six months ended June 30, 2006. Excluding the impact of the Travelers acquisition, net income available to common shareholders decreased by $2,218 million for the six months ended June 30, 2006 compared to the 2005 period. Net income available to common shareholders for the six months ended June 30, 2005 includes the impact of certain transactions or events, the timing, nature and amount of which are generally unpredictable. These transactions are described in each applicable segment's discussion. These items contributed a benefit of $40 million, net of income taxes, to the six months ended June 30, 2005 period. Excluding the impact of these items, net income available to common shareholders decreased by $2,178 million for the six months ended June 30, 2006 compared to the prior period. Income from discontinued operations and, correspondingly, net income, decreased by $1,402 million for the six months ended June 30, 2006 compared to the 2005 period. The decrease in discontinued operations and net income is due to a gain of $1,193 million, net of income taxes, on the sales of the One Madison Avenue and 200 Park Avenue properties in Manhattan, New York during the six months ended June 30, 2005. Also contributing to the decrease was a gain on the sale of SSRM of $165 million, net of income taxes, which was recorded in the six months ended June 30 2005, partially offset by a related gain of $30 million, net of income taxes, on the sale of SSRM which was recorded during the six months ended June 30, 2006. In addition, net investment losses increased by $1,070 million, net of income taxes, for the six months ended June 30, 2006 as compared to the corresponding period in 2005. The current period includes $177 million, net of income taxes, of net investment losses related to the acquisition of Travelers. Excluding the acquisition of Travelers, net investment losses increased by $893 million, net of income taxes, largely due to changes in the market value of derivatives from increases in U.S. interest rates and the weakening of the dollar against the major currencies the Company hedges, notably the Euro and the Pound. Also contributing to the increase are losses on fixed maturities resulting from continued portfolio management activity in a higher interest rate environment. During the six months ended June 30, 2006, the Company also paid $66 million in dividends on its preferred shares issued in connection with financing the acquisition of Travelers. The prior period did not include such dividends. Partially offsetting these decreases is an increase of $183 million in net income available to common shareholders for the six months ended June 30, 2006 compared to the 2005 period. This increase was primarily due to an increase in premiums, fees and other revenues attributable to continued business growth across most of the Company's operating segments. In addition, contributing to the increase was higher net investment income primarily due to higher income on short-term investments due to higher short-term interest rates, as well as an increase in the asset base, partially offset by lower variable income on corporate and real estate joint ventures and lower long-term yields on fixed maturities. Net interest margins declined for the six months ended June 30, 2006. Underwriting results were generally favorable for the six months ended June 30, 2006. Other expenses increased primarily due to higher interest expense on debt and bankholder deposits, higher general spending, an increase in minority interest expense, a charge related to the pending sale of certain small market recordkeeping businesses in the current quarter, higher legal costs and overall business growth. These increases in other expenses are partially offset by lower DAC amortization due to higher net investment losses and lower integration costs. 69 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 a flat or inverted 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 or inverting 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 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. Steady Economy. A steady economy provides improving 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 continue at low historical levels due to the steady 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 market. 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 70 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. DISCUSSION OF RESULTS The following table presents consolidated financial information for the Company for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------- 2006 2005 2006 2005 -------- -------- ------- ------- (IN MILLIONS) REVENUES Premiums......................................... $ 6,428 $ 6,034 $12,856 $12,000 Universal life and investment-type product policy fees........................................... 1,185 813 2,360 1,604 Net investment income............................ 4,204 3,474 8,439 6,684 Other revenues................................... 335 301 663 600 Net investment gains (losses).................... (743) 333 (1,328) 318 ------- ------- ------- ------- Total revenues................................. 11,409 10,955 22,990 21,206 ------- ------- ------- ------- EXPENSES Policyholder benefits and claims................. 6,331 6,259 12,736 12,181 Interest credited to policyholder account balances....................................... 1,272 820 2,487 1,615 Policyholder dividends........................... 425 416 846 835 Other expenses................................... 2,545 2,005 5,043 3,976 ------- ------- ------- ------- Total expenses................................. 10,573 9,500 21,112 18,607 ------- ------- ------- ------- Income from continuing operations before provision for income taxes..................... 836 1,455 1,878 2,599 Provision for income taxes....................... 217 450 511 799 ------- ------- ------- ------- Income from continuing operations................ 619 1,005 1,367 1,800 Income (loss) from discontinued operations, net of income taxes................................ 31 1,240 30 1,432 ------- ------- ------- ------- Net income....................................... 650 2,245 1,397 3,232 Preferred stock dividends........................ 33 -- 66 -- ------- ------- ------- ------- Net income available to common shareholders...... $ 617 $ 2,245 $ 1,331 $ 3,232 ======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2005 -- THE COMPANY Income from Continuing Operations Income from continuing operations decreased by $386 million, or 38%, to $619 million for the three months ended June 30, 2006 from $1,005 million in the comparable 2005 period. The current period includes $171 million of income from continuing operations related to the acquisition of Travelers. Excluding the acquisition of Travelers, income from continuing operations decreased by $557 million, or 55%. Income from continuing operations for the three months ended June 30, 2005 includes the impact of certain transactions or events, the timing, nature and amount of which are generally unpredictable. These transactions are described in each applicable segment's discussion. These items contributed a benefit of $40 million, net of income taxes, to the three months ended June 30, 2005 period. Excluding the impact of these items and the acquisition of Travelers, income from continuing operations decreased by $517 million for the three months ended June 30, 2006 compared to the prior 2005 period. The Institutional segment contributed $262 million, net of income taxes, to this decrease primarily due to net investment losses, a decline in interest margins and an increase in 71 expenses due to a charge in the second quarter of 2006 associated with costs related to the pending sale of certain small market recordkeeping businesses, partially offset by favorable underwriting results. The Individual segment contributed $209 million, net of income taxes, to the decrease in income from continuing operations, as a result of net investment losses, a decline in interest rate spreads, higher expenses and an increase in policyholder dividends. These decreases were partially offset by lower DAC amortization, increased fee income related to the growth in separate account products, a decrease in the closed block-related policyholder dividend obligation, favorable underwriting and lower annuity benefits in the Individual segment. In addition, income from continuing operations in Corporate & Other decreased by $94 million, net of income taxes, primarily due to higher net investment losses, higher interest expense on debt, growth in interest credited to bankholder deposits, higher legal related costs and corporate support expenses, partially offset by higher net investment income and a decrease in integration costs. Partially offsetting the decreases in income from continuing operations is an increase in the International segment of $35 million, net of income taxes, and an increase in the Reinsurance segment of $12 million, net of income taxes. The increase in the International segment is primarily due to a decrease in certain policyholder liabilities caused by a decrease in the unrealized investment gains on invested assets supporting those liabilities during the quarter, a decrease in policyholder benefits associated with a large group policy that was not renewed by the policyholder, lower DAC amortization, as well as the unfavorable impact in the prior year of contingent liabilities all within Mexico. In addition, South Korea's income from continuing operations increased primarily due to continued growth of the in-force business. These increases in the International segment were partially offset by a decrease in Brazil primarily due to an increase in a policyholder liability due to higher than expected mortality on specific blocks of business, a decrease in Canada due to the realignment of economic capital as well as higher home office and infrastructure expenditures in support of segment growth. The increase in the Reinsurance segment is largely attributable to added business in-force from facultative and automatic treaties and renewal premiums on existing blocks of business in the U.S. and international operations, partially offset by unfavorable mortality experience in the prior period and an increase in other expenses. The Auto & Home segment increased by $1 million primarily due to favorable development of prior year loss reserves and a reduction in loss adjustment expenses, partially offset by higher catastrophe losses in the second quarter of 2006, a decrease in net earned premiums and an increase in other expenses. Revenues and Expenses Premiums, fees and other revenues increased by $800 million, or 11%, to $7,948 million for the three months ended June 30, 2006 from $7,148 million from the comparable 2005 period. The current period includes $463 million of premiums, fees and other revenues related to the acquisition of Travelers. Excluding the acquisition of Travelers, premiums, fees and other revenues increased by $337 million, or 5%. The Reinsurance segment contributed $140 million, or 42%, to the Company's period over period increase in premiums, fees and other revenues. This growth is primarily attributable to added in-force from facultative and automatic treaties and renewal premiums on existing blocks of business in the U.S. and international operations. The International segment contributed $118 million, or 35%, 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. In addition, Chile's premiums, fees and other revenues increased due to higher annuity premiums and an increase in institutional premiums through its bank distribution channel. The Individual segment contributed $78 million, or 23%, to the period over period increase primarily due to higher fee income from variable annuity and universal life products and an increase in premiums in other life and annuity products, partially offset by a decline in premiums in the Company's closed block business as this business continues to run-off. The Institutional segment contributed $11 million, or 3%, to the period over period increase primarily due to growth in the dental, disability, accidental death and dismemberment products and continued growth in the long-term care products all within the non-medical health & other business, as well as improved sales and favorable persistency in the group life business. These increases in the non-medical health & other and group life businesses were partially offset by a decrease in the retirement & savings business. The decrease in retirement & savings is primarily due to a decline in premiums from structured settlement sales, partially offset by an increase in pension close-outs. The increases in premiums, fees and other revenues were partially offset by a decrease of $12 million in the Auto & Home 72 segment. This decline is primarily due to a decrease in earned premiums resulting from additional catastrophe reinsurance costs and a decrease in the involuntary assumed business. Net investment income increased by $730 million, or 21%, to $4,204 million for the three months ended June 30, 2006 from $3,474 million from the comparable 2005 period. The current period includes $749 million of net investment income related to the acquisition of Travelers. Excluding the acquisition of Travelers, net investment income decreased by $19 million, or 1%. This decrease is primarily due to a decline in investment income from lower variable income including corporate and real estate joint venture income, bond and commercial mortgage prepayment fees and securities lending, as well as a decline in fixed maturity yields. These decreases were partially offset by an increase due to higher short-term interest rates and an overall increase in the asset base. Interest margins, which generally represent the difference between net investment income and interest credited to policyholder account balances, decreased in the Individual segment and in the retirement & savings and group life businesses in the Institutional segment for the three months ended June 30, 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 $1,076 million to a loss of $743 million for the three months ended June 30, 2006 from a gain of $333 million for the comparable 2005 period. The current period includes $100 million of net investment losses related to the acquisition of Travelers. Excluding the acquisition of Travelers, net investment losses increased by $976 million. The increase in net investment gains (losses) is largely due to changes in the market value of derivatives from increases in U.S. interest rates and the weakening of the dollar against the major currencies the Company hedges, notably the Euro and the Pound. Also contributing to the increase are losses on fixed maturities resulting from continued portfolio management activity in a higher interest rate environment. Underwriting results were favorable within the life products in the Individual and Reinsurance segments, as well as in the group life and non-medical health & other products in the Institutional segment, while underwriting results were unfavorable in the retirement & savings 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 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 June 30, 2006, as the combined ratio, excluding catastrophes, decreased to 84.5% from 86.4% in the three months ended June 30, 2005. Underwriting results in the International segment increased commensurate with the growth in the business as discussed above. Other expenses increased by $540 million, or 27%, to $2,545 million for the three months ended June 30, 2006 from $2,005 million for the comparable 2005 period. The current period includes $322 million of other expenses related to the acquisition of Travelers. Excluding the acquisition of Travelers, other expenses increased by $218 million, or 11%. The three months ended June 30, 2005 includes a $28 million benefit associated with the reduction of a previously established real estate transfer tax liability related to the Company's demutualization in 2000. Excluding the impact of the reduction in such liability and the acquisition of Travelers, other expenses increased by $190 million, or 9%, from the comparable 2005 period. Corporate & Other contributed $109 million, or 57%, to the period over period variance primarily due to higher interest expense, growth in interest credited to bankholder deposits at MetLife Bank, National Association ("MetLife Bank" or "MetLife Bank, N.A."), higher legal related costs and corporate support expenses, partially offset by a decrease in integration costs. The Reinsurance segment also contributed 73 $67 million, or 35%, to the increase in other expenses primarily due to an increase in minority interest expense and expenses associated with DAC, as well as an increase in interest expense and compensation and overhead related expenses, including equity compensation expense. In addition, $38 million, or 20%, 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. These increases in the International segment were partially offset by a decrease in Mexico due to lower DAC amortization and the unfavorable impact in the prior period of contingent liabilities that were established related to potential employment matters, partially offset by an increase in commissions. The Institutional segment contributed $23 million, or 12%, to the period over period increase primarily due to a charge in the second quarter of 2006 associated with costs related to the pending sale of certain small market recordkeeping businesses and higher corporate support expenses, partially offset by lower non-deferrable volume-related expenses. In addition, the Auto & Home segment contributed $7 million, or 4%, to the period over period increase primarily due to expenditures related to information technology and advertising. Partially offsetting the increases in other expenses is a decrease in the Individual segment of $54 million, or 28%. This decrease is primarily due to lower DAC amortization. Higher general spending, which is partially offset by a reduction in pension and postretirement liabilities in the current period and an increase in premium tax liabilities and certain expense liabilities in the prior period, increased other expenses in the current period within the Individual segment. Net Income Income tax expense for the three months ended June 30, 2006 is $217 million, or 26% of income from continuing operations before provision for income taxes, compared with $450 million, or 31%, of such income, for the comparable 2005 period. The current period includes $65 million of income tax expense related to the acquisition of Travelers. Excluding the acquisition of Travelers, income tax expense for the three months ended June 30, 2006 is $152 million, or 25% of income from continuing operations before provision for income taxes, compared with $450 million, or 31%, of such income, 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 June 30, 2006, the operations and gain upon disposal from the sale of SSRM on January 31, 2005, and for the three months ended June 30, 2005, the operations of MetLife Indonesia which was sold on September 29, 2005. Income from discontinued operations, net of income taxes, decreased by $1,209 million, or 98% to $31 million for the three months ended June 30, 2006 from $1,240 million for the comparable 2005 period. The decrease is primarily due to a gain of $1,193 million, net of income taxes, in the three months ended June 30, 2005, on the sales of the One Madison Avenue and 200 Park Avenue properties in Manhattan, New York, partially offset by a gain on the sale of SSRM of $30 million, net of income taxes, in the three months ended June 30, 2006. During the three months ended June 30, 2006, the Company also paid $33 million in dividends on its preferred shares issued in connection with financing the acquisition of Travelers. The prior period did not include such dividends. SIX MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2005 -- THE COMPANY Income from Continuing Operations Income from continuing operations decreased by $433 million, or 24%, to $1,367 million for the six months ended June 30, 2006 from $1,800 million in the comparable 2005 period. The current period includes $317 million of income from continuing operations related to the acquisition of Travelers. Excluding the acquisition of Travelers, income from continuing operations decreased by $750 million, or 42%. Income from continuing operations for the six months ended June 30, 2005 includes the impact of certain transactions or 74 events, the timing, nature and amount of which are generally unpredictable. These transactions are described in each applicable segment's discussion. These items contributed a benefit of $40 million, net of income taxes, to the six month period ended June 30, 2005. Excluding the impact of these items and the acquisition of Travelers, income from continuing operations decreased by $710 million for the six months ended June 30, 2006 compared to the prior 2005 period. The Institutional segment contributed $402 million, net of income taxes, to this decrease primarily due to net investment losses, a decline in interest margins and an increase in expenses due to a charge in the second quarter of 2006 associated with costs related to the pending sale of certain small market recordkeeping businesses, partially offset by favorable underwriting results. The Individual segment contributed $326 million, net of income taxes, to the decrease as a result of net investment losses, higher expenses, a decline in interest rate spreads, higher annuity benefits and an increase in policyholder dividends. 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, lower DAC amortization and favorable underwriting in the Individual segment. In addition, income from continuing operations in Corporate & Other decreased by $51 million, net of income taxes, primarily due to higher interest expense on debt, growth in interest credited to bankholder deposits, higher legal related costs and corporate support expenses, partially offset by lower net investment losses, higher net investment income and a decrease in integration costs. Partially offsetting the decreases in income from continuing operations is an increase in the International segment of $44 million, net of income taxes. The increase in the International segment is primarily due to a decrease in certain policyholder liabilities caused by a decrease in the unrealized investment gains on invested assets supporting those liabilities, a decrease in policyholder benefits associated with a large group policy that was not renewed by the policyholder, lower DAC amortization, as well as the unfavorable impact in the prior year of contingent liabilities all within Mexico. In addition, South Korea's income from continuing operations increased primarily due to continued growth of the in-force business. These increases in the International segment were partially offset by a decrease in Canada due to the realignment of economic capital, a decrease in Brazil primarily due to an increase in a policyholder liability due to higher than expected mortality on specific blocks of business and higher home office and infrastructure expenditures in support of segment growth. In addition, income from continuing operations in the Auto & Home segment increased $16 million primarily due to favorable development of prior year loss reserves and a reduction in loss adjustment expenses, partially offset by higher catastrophe losses in the first six months of 2006, a decrease in net earned premiums and an increase in other expenses. The Reinsurance segment increased $9 million which is largely attributable to added business in-force from facultative and automatic treaties and renewal premiums on existing blocks of business in the U.S. and international operations, partially offset by unfavorable mortality experience in the prior period and an increase in other expenses. Revenues and Expenses Premiums, fees and other revenues increased by $1,675 million, or 12%, to $15,879 million for the six months ended June 30, 2006 from $14,204 million from the comparable 2005 period. The current period includes $946 million of premiums, fees and other revenues related to the acquisition of Travelers. Excluding the acquisition of Travelers, premiums, fees and other revenues increased by $729 million, or 5%. The Reinsurance segment contributed $234 million, or 32%, to the Company's period over period increase in premiums, fees and other revenues. This growth is primarily attributable to added in-force from facultative and automatic treaties and renewal premiums on existing blocks of business in the U.S. and international operations. The International segment contributed $211 million, or 29%, 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. In addition, Chile's premiums, fees and other revenues increased due to an increase in institutional premiums through its bank distribution channel, partially offset by lower annuity sales in the first quarter of 2006. The Individual segment contributed $165 million, or 23%, to the period over period increase primarily due to higher fee income from variable annuity and universal life products, higher premiums from the active marketing of income annuity products and an increase in premiums of other life products, partially offset by a decline in premiums in the Company's closed block business as this business continues to run-off. The Institutional segment contributed $129 million, or 18%, to the period over period increase primarily due to improved sales and favorable persistency in the group life 75 business and growth in the dental, disability, accidental death and dismemberment products and continued growth in the long-term care products, all within the non-medical health & other business. These increases in the group life and non-medical health & other businesses were partially offset by a decrease in the retirement & savings business. The decrease in retirement & savings is primarily due to a decrease in premiums from pension close-outs and structured settlement due to lower sales, partially offset by an increase in master terminal funding products. The increases in premiums, fees and other revenues were partially offset by a decrease of $18 million in the Auto & Home segment. This decrease is primarily due to a decrease in earned premiums resulting from additional catastrophe reinsurance costs and a decrease in the involuntary assumed business. Net investment income increased by $1,755 million, or 26%, to $8,439 million for the six months ended June 30, 2006 from $6,684 million from the comparable 2005 period. The current period includes $1,473 million of net investment income related to the acquisition of Travelers. Excluding the acquisition of Travelers, net investment income increased by $282 million, or 4%. This increase is primarily due to higher short-term interest rates and an overall increase in the asset base. These increases were partially offset by a decline in investment income from lower variable income including corporate and real estate joint venture income, bond and commercial mortgage prepayment fees and securities lending, as well as a decline in fixed maturity yields. Interest margins, which generally represent the difference between net investment income and interest credited to policyholder account balances, decreased in the Individual segment and in the group life and retirement & savings businesses in the Institutional segment and increased in the non-medical health & other business in the Institutional segment for the six months ended June 30, 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 $1,646 million to a loss of $1,328 million for the six months ended June 30, 2006 from a gain of $318 million for the comparable 2005 period. The current period includes $272 million of net investment losses related to the acquisition of Travelers. Excluding the acquisition of Travelers, net investment losses increased by $1,374 million. The increase in net investment gains (losses) is largely due to changes in the market value of derivatives from increases in U.S. interest rates and the weakening of the dollar against the major currencies the Company hedges, notably the Euro and the Pound. Also contributing to the increase are losses on fixed maturities resulting from continued portfolio management activity in a higher interest rate environment. Underwriting results were favorable within the life products in the Individual and Reinsurance segments, as well as in the group life and non-medical health & other products in the Institutional segment, while underwriting results were unfavorable in the retirement & savings 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 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 six months ended June 30, 2006, as the combined ratio, excluding catastrophes, decreased to 85.6% from 88.5% in the six months ended June 30, 2005. Underwriting results in the International segment increased commensurate with the growth in the business as discussed above. Other expenses increased by $1,067 million, or 27%, to $5,043 million for the six months ended June 30, 2006 from $3,976 million for the comparable 2005 period. The current period includes $612 million of other expenses related to the acquisition of Travelers. Excluding the acquisition of Travelers, other expenses increased by $455 million, or 11%. The six months ended June 30, 2005 includes a $28 million benefit 76 associated with the reduction of a previously established real estate transfer tax liability related to the Company's demutualization in 2000. Excluding the impact of the reduction in such liability and the acquisition of Travelers, other expenses increased by $427 million, or 11%, from the comparable 2005 period. Corporate & Other contributed $224 million, or 52%, to the period over period variance primarily due to higher interest expense, growth in interest credited to bankholder deposits at MetLife Bank, higher legal related costs and corporate support expenses, partially offset by a decrease in integration costs. The International segment contributed $93 million, or 22%, to the period over period variance primarily attributable to business growth commensurate with the increase in revenues discussed above and changes in foreign currency rates. 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. In addition, the Reinsurance segment contributed $89 million, or 21%, to the increase in other expenses primarily due to an increase in minority interest expense and expenses associated with DAC, as well as an increase in interest expense and compensation and overhead related expenses, including equity compensation expense. The Institutional segment contributed $39 million, or 9%, to the period over period increase primarily due to a charge in the second quarter of 2006 associated with costs related to the pending sale of certain small market recordkeeping businesses, partially offset by lower non-deferrable volume-related expenses. In addition, the Auto & Home segment contributed $9 million, or 2%, to the period over period increase primarily due to expenditures related to information technology and advertising. Partially offsetting the increases in other expenses is a decrease in the Individual segment of $27 million, or 6%. This decrease is primarily due to lower DAC amortization. Higher general spending, which was partially offset by a reduction in pension and postretirement liabilities in the current period and an increase in premium tax liabilities and certain expense liabilities in the prior period, increased other expenses in the current period within the Individual segment. Net Income Income tax expense for the six months ended June 30, 2006 is $511 million, or 27% of income from continuing operations before provision for income taxes, compared with $799 million, or 31%, of such income, for the comparable 2005 period. The current period includes $126 million of income tax expense related to the acquisition of Travelers. Excluding the acquisition of Travelers, income tax expense for the six months ended June 30, 2006 is $385 million, or 27% of income from continuing operations before provision for income taxes, compared with $799 million, or 31%, of such income, 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 six months ended June 30, 2006 and 2005, the operations and gain upon disposal from the sale of SSRM on January 31, 2005 and for the six months ended June 30, 2005, the operations of MetLife Indonesia which was sold on September 29, 2005. Income from discontinued operations, net of income taxes, decreased by $1,402 million, or 98%, to $30 million for the six months ended June 30, 2006 from $1,432 million for the comparable 2005 period. The decrease is due to a gain of $1,193 million, net of income taxes, on the sales of the One Madison Avenue and 200 Park Avenue properties in Manhattan, New York during the six months ended June 30, 2005. Also contributing to the decrease is a gain on the sale of SSRM of $165 million, net of income taxes, which was recorded in the six months ended June 30 2005, partially offset by a related gain of $30 million, net of income taxes, on the sale of SSRM which was recorded during the six months ended June 30, 2006. During the six months ended June 30, 2006, the Company also paid $66 million in dividends on its preferred shares issued in connection with financing the acquisition of Travelers. The prior period did not include such dividends. 77 INSTITUTIONAL The following table presents consolidated financial information for the Institutional segment for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ----------------- 2006 2005 2006 2005 ------- ------- ------- ------- (IN MILLIONS) REVENUES Premiums.......................................... $2,836 $2,834 $5,825 $5,678 Universal life and investment-type product policy fees............................................ 201 185 402 378 Net investment income............................. 1,756 1,342 3,516 2,557 Other revenues.................................... 169 163 339 324 Net investment gains (losses)..................... (364) 190 (685) 212 ------ ------ ------ ------ Total revenues.................................. 4,598 4,714 9,397 9,149 ------ ------ ------ ------ EXPENSES Policyholder benefits and claims.................. 3,108 3,196 6,472 6,307 Interest credited to policyholder account balances........................................ 620 326 1,209 627 Other expenses.................................... 559 537 1,092 1,047 ------ ------ ------ ------ Total expenses.................................. 4,287 4,059 8,773 7,981 ------ ------ ------ ------ Income from continuing operations before provision for income taxes................................ 311 655 624 1,168 Provision for income taxes........................ 99 225 201 399 ------ ------ ------ ------ Income from continuing operations................. 212 430 423 769 Income (loss) from discontinued operations, net of income taxes.................................... (3) 160 (1) 170 ------ ------ ------ ------ Net income........................................ $ 209 $ 590 $ 422 $ 939 ====== ====== ====== ======
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 JUNE 30, 2006 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2005 -- INSTITUTIONAL Income from Continuing Operations Income from continuing operations decreased by $218 million, or 51%, to $212 million for the three months ended June 30, 2006 from $430 million for the comparable 2005 period. The acquisition of Travelers contributed $44 million to income from continuing operations, which includes a decline of $39 million, net of income taxes, of net investment gains (losses). Excluding the impact of Travelers, income from continuing operations decreased $262 million, or 61%, from the comparable 2005 period. Included in this decrease is a decline of $318 million, net of income taxes, in net investment gains (losses), partially offset by a benefit of $61 million, net of income taxes, resulting from a decrease in policyholder benefit and claims related to net investment gains (losses). Excluding the impact of Travelers 78 and the decline in net investment gains (losses), income from continuing operations decreased by $5 million, net of income taxes, from the comparable 2005 period. Interest margins decreased $78 million, net of income taxes, compared to the prior year period across all business segments. Interest margins for the retirement & savings and group life businesses decreased $50 million and $26 million, both net of income taxes, respectively, primarily due to a decline in net variable items, which includes income from corporate and real estate joint ventures and the impact of a reduction in interest spreads compared to the prior year period. Non-medical health & other business decreased $2 million, net of income taxes. 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 June 30, 2006 decreased to 1.50% and 1.55% from 2.15% and 2.08%, 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. In addition, the three months ended June 30, 2006, includes a charge of $11 million, net of income taxes, associated with costs related to the pending sale of certain small market recordkeeping businesses. Partially offsetting the decrease in interest margins and the charge associated with costs related to the pending sale of certain small market recordkeeping businesses is an increase in underwriting of $81 million, net of income taxes, compared to the prior period. This increase is primarily due to favorable results of $69 million and $30 million, both net of income taxes, in the group life and the non-medical health & other businesses, respectively. The results in group life are primarily due to favorable mortality experience in the current period combined with the impact of unfavorable mortality experience in the prior year period. The increase in non-medical health & other business' underwriting results are primarily due to favorable morbidity experience, partially due to policyholder liability refinements in the individual disability insurance ("IDI") and the long-term care ("LTC") products, partially offset by unfavorable underwriting experience in the disability product. Overall, these favorable results were partially offset by a decrease of $18 million, net of income taxes, in retirement & savings' underwriting results, largely due to unfavorable 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. The remaining decrease in income from continuing operations is largely attributable to higher premiums, fees and other revenue which are more than offset by the remaining increase in operating expenses. Revenues Total revenues, excluding net investment gains (losses), increased by $438 million, or 10%, to $4,962 million for the three months ended June 30, 2006 from $4,524 million for the comparable 2005 period. The acquisition of Travelers contributed $388 million to the period over period increase. Excluding the impact of the Travelers acquisition, such revenues increased by $50 million, or 1%, from the comparable 2005 period. This increase is comprised of higher net investment income of $39 million and growth in premiums, fees and other revenues of $11 million. Net investment income increased by $39 million, primarily due to higher income from growth in the asset base driven by sales throughout 2005 and 2006, particularly in the GIC and structured settlement business. In addition, 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 investment income from corporate and real estate 79 joint ventures. Additionally, net investment income declined resulting from lower average yields on fixed maturities, primarily due to the impact from investment turnover. In addition, the increase of $11 million in premiums, fees, and other revenues is largely due to an increase in non-medical health & other business of $94 million, primarily due to growth in the dental, disability, and accidental death and dismemberment products of $51 million. In addition, continued growth in the LTC business contributed $36 million. The group life business contributed $48 million, which management primarily attributes to improved sales and favorable persistency. Retirement & savings' premiums, fees and other revenues decreased by $131 million, which is largely due to a decrease in premiums resulting primarily from a decline of $141 million in structured settlements, partially offset by a $7 million increase in pension close-outs. Premiums, fees and other revenues from retirement & savings products are significantly influenced by large transactions, and as a result, can fluctuate from period to period. Expenses Total expenses increased by $228 million, or 6%, to $4,287 million for the three months ended June 30, 2006 from $4,059 million for the comparable 2005 period. The acquisition of Travelers contributed $258 million to the period over period increase. Excluding the impact of the Travelers acquisition, total expenses decreased $30 million, or 1%, from the comparable 2005 period. This decrease is comprised of lower policyholder benefits and claims of $190 million, which includes a $96 million benefit related to net investment gains (losses). Offsetting this decrease is an increase of $137 million in interest credited to policyholder account balances and an increase of $23 million in other expenses. Excluding the benefit related to net investment gains (losses), policyholder benefits and claims decreased $94 million. Retirement & savings business' policyholder benefits and claims decreased $97 million, predominantly due to the aforementioned decrease in revenue, partially offset by less favorable mortality experience. Group life business decreased $37 million, primarily due to favorable mortality experience in the current period combined with the impact of unfavorable mortality experience in the prior period, partially offset by the aforementioned revenue growth. Partially offsetting these decreases is an increase in non-medical health & other business of $40 million, primarily due to the aforementioned growth in revenue and the impact of higher claim incidence and morbidity experience in the disability product in the current period. Partially offsetting this increase is the impact of favorable morbidity experience in the IDI and LTC products. The favorable morbidity in IDI is largely due to the impact of an establishment of a $25 million liability for future losses in the prior year period. LTC's favorable morbidity experience is primarily due to policyholder liability refinements in both the prior and current period. Partially offsetting the decrease in policyholder benefits and claims is an increase of $137 million in interest credited to policyholder account balances. This is largely due to an increase of $108 million and $29 million in the retirement & savings and group life businesses, respectively. The increase in the retirement & savings business is primarily attributable to a combination of growth in policyholder account balances, 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 revenue, as well as the increase in the short-term interest rates. The increase in other expense of $23 million is primarily due to a $17 million charge associated with costs related to the pending sale of certain small market recordkeeping businesses and an increase of $12 million in corporate support expenses, partially offset by a net decrease of $6 million in non-deferrable volume related expenses. SIX MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2005 -- INSTITUTIONAL Income from Continuing Operations Income from continuing operations decreased by $346 million, or 45%, to $423 million for the six months ended June 30, 2006 from $769 million for the comparable 2005 period. The acquisition of Travelers 80 contributed $56 million to income from continuing operations, which includes a decline of $102 million, net of income taxes, of net investment gains (losses). Excluding the impact of Travelers, income from continuing operations decreased $402 million, or 52%, from the comparable 2005 period. Included in this decrease is a decline of $476 million, net of income taxes, in net investment gains (losses), partially offset by a benefit of $56 million, net of income taxes, resulting from a decrease 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 $18 million, net of income taxes, from the comparable 2005 period. Underwriting results increased by $74 million, net of income taxes, compared to the prior period. This increase is primarily due to favorable results of $61 million and $15 million, both net of income taxes, in the group life and non-medical health & other businesses, respectively. The results in group life are primarily due to favorable mortality experience. Non-medical health & other business' favorable results are primarily due to an improvement in IDI, primarily as a result of the impact of prior year policyholder liability refinements and favorable claim experience in the current period, partially offset by unfavorable results in the disability product. Overall, these favorable results were partially offset by a decrease of $2 million, net of income taxes, in retirement & savings' underwriting results due to unfavorable 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. Partially offsetting the increase in underwriting is a decline in interest margins of $59 million, net of income taxes, compared to the prior year period, primarily in the group life and retirement & savings businesses. Interest margins for the group life and retirement & savings businesses decreased $36 million and $34 million, both net of income taxes, respectively, primarily due to a decline in net variable items, which includes income from corporate and real estate joint ventures and the impact of a reduction in interest spreads compared to the prior year period. Partially offsetting these decreases is an increase of $11 million, net of income taxes, in the non-medical health & other business, which is largely due to growth in the business. 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 six months ended June 30, 2006 decreased to 1.46% and 1.61% from 1.90% and 2.05%, 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. In addition, the increase in operating expenses for the six months ended June 30, 2006 includes a charge of $11 million, net of income taxes, associated with costs related to the pending sale of certain small market recordkeeping businesses. The remaining increase in income from continuing operations is largely attributable to higher premiums, fees and other revenues which more than offset the remaining increase in operating expenses. Revenues Total revenues, excluding net investment gains (losses), increased by $1,145 million, or 13%, to $10,082 million for the six months ended June 30, 2006 from $8,937 million for the comparable 2005 period. The acquisition of Travelers contributed $797 million to the period over period increase. Excluding the impact of the Travelers acquisition, such revenues increased by $348 million, or 4%, from the comparable 2005 81 period. This increase is comprised of higher net investment income of $219 million and growth in premiums, fees and other revenues of $129 million. Net investment income increased by $219 million, primarily due to higher income from growth in the asset base driven by sales throughout 2005 and 2006, particularly in the GIC and structured settlement business. In addition, 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 investment income from corporate and real estate joint ventures. Additionally, net investment income declined resulting from lower average yields on fixed maturities, primarily due to the impact from investment turnover. The increase of $129 million in premiums, fees, and other revenues is largely due to an increase in the group life business of $239 million, which management primarily attributes to improved sales and favorable persistency, as well as a significant increase in premiums from two large customers. The non-medical health & other business contributed $215 million, primarily due to growth in the dental, disability and accidental death and dismemberment products of $126 million. In addition, continued growth in the LTC business contributed $76 million. Partially offsetting these increases is a decline in retirement & savings' premiums, fees and other revenues of $325 million, resulting primarily from declines of $189 million and $185 million in pension close-outs and structured settlements, respectively, predominately due to the impact of lower sales, partially offset by a $46 million increase in master terminal funding premiums. Premiums, fees and other revenues from retirement & savings products are significantly influenced by large transactions, and as a result, can fluctuate from period to period. Expenses Total expenses increased by $792 million, or 10%, to $8,773 million for the six months ended June 30, 2006 from $7,981 million for the comparable 2005 period. The acquisition of Travelers contributed $551 million to the period over period increase. Excluding the impact of the Travelers acquisition, total expenses increased $241 million, or 3%, from the comparable 2005 period. The increase is comprised of higher interest credited to policyholder account balances of $262 million and higher operating expenses of $39 million, partially offset by a decrease to policyholder benefits and claims of $60 million. The increase in interest credited to policyholder account balances is primarily attributable to increases of $208 million and $54 million in the retirement & savings and group life businesses, respectively. The increase in the retirement & savings business is primarily due to a combination of growth in policyholder account balances, 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 an increase in the short-term interest rates. The increase in other expenses of $39 million is primarily due to an increase of $22 million in non-deferrable volume related expenses and a $17 million charge associated with costs related to the pending sale of certain small market recordkeeping businesses. Corporate support expenses were level period over period, however, the first three months of the current period includes an $11 million increase in expenses related to stock-based compensation. Offsetting the increases in interest credited to policyholder account balances and other expenses is a decline in policyholder benefits and claims of $60 million, which includes a benefit of $88 million related to net investment gains (losses). Excluding the benefit related to net investment gains (losses), policyholder benefits and claims increased $28 million. Non-medical health & other business' policyholder benefits and claims increased $174 million, predominately due to the aforementioned revenue growth and unfavorable results in the disability product, primarily due to the impact of higher claim incidence and morbidity experience in the current period. Partially offsetting this increase is favorable morbidity experience in IDI, primarily due to the impact of an establishment of a $25 million liability for future losses in the prior year period. Group life's policyholder benefits and claims increased $157 million, largely due to the aforementioned growth in revenue, partially offset by favorable mortality experience. Partially offsetting these increases is a decline in retirement & savings business' policyholder benefits and claims of $303 million, which is predominantly due to the aforementioned decrease in revenues. 82 INDIVIDUAL The following table presents consolidated financial information for the Individual segment for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ----------------- 2006 2005 2006 2005 ------- ------- ------- ------- (IN MILLIONS) REVENUES Premiums.......................................... $1,102 $1,061 $2,184 $2,085 Universal life and investment-type product policy fees............................................ 790 501 1,580 980 Net investment income............................. 1,689 1,565 3,430 3,089 Other revenues.................................... 135 105 260 217 Net investment gains (losses)..................... (287) 180 (550) 232 ------ ------ ------ ------ Total revenues.................................. 3,429 3,412 6,904 6,603 ------ ------ ------ ------ EXPENSES Policyholder benefits and claims.................. 1,359 1,347 2,624 2,548 Interest credited to policyholder account balances........................................ 518 395 994 787 Policyholder dividends............................ 422 418 841 831 Other expenses.................................... 816 697 1,667 1,345 ------ ------ ------ ------ Total expenses.................................. 3,115 2,857 6,126 5,511 ------ ------ ------ ------ Income from continuing operations before provision for income taxes................................ 314 555 778 1,092 Provision for income taxes........................ 106 181 265 365 ------ ------ ------ ------ Income from continuing operations................. 208 374 513 727 Income (loss) from discontinued operations, net of income taxes.................................... -- 208 (1) 222 ------ ------ ------ ------ Net income........................................ $ 208 $ 582 $ 512 $ 949 ====== ====== ====== ======
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 JUNE 30, 2006 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2005 -- INDIVIDUAL Income from Continuing Operations Income from continuing operations decreased by $166 million, or 44%, to $208 million for the three months ended June 30, 2006 from $374 million for the comparable 2005 period. The acquisition of Travelers contributed $43 million to income from continuing operations, which includes $42 million, net of income taxes, of net investment losses. Included in the Travelers results is a $21 million increase to the excess mortality liability on specific blocks of life policies. Excluding the impact of Travelers, income from continuing operations decreased by $209 million, or 56%, to $165 million for the three months ended June 30, 2006 from $374 million for the comparable 2005 period. Included in this decrease are net investment losses of $267 million, net of income taxes. Excluding the impact of net investment gains (losses) and the acquisition of Travelers, income from continuing operations increased by $58 million from the comparable 2005 period. 83 Lower DAC amortization resulting from investment losses and adjustments for management's update of assumptions used to determine estimated gross margins contributed $56 million, net of income taxes, to the increase in income from continuing operations. Fee income from separate account products increased income from continuing operations by $34 million, net of income taxes, primarily related to fees being earned on a higher account balance resulting from a combination of growth in the business and overall market performance. 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 $25 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. Also contributing to the increase in income from continuing operations are lower annuity benefits of $7 million, net of income taxes, primarily due to a revision to future policyholder benefits partially offset by increased costs of the guaranteed annuity benefit riders and the related hedging. These aforementioned increases in income from continuing operations are partially offset by lower net investment income on blocks of business that are not driven by interest rate spreads of $32 million, net of income taxes. In addition, the increase in income from continuing operations is partially offset by declines in interest margins of $30 million, net of income taxes. 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. The increase in income from continuing operations is partially offset by higher expenses of $21 million, net of income taxes, due to higher general spending partially offset by a reduction in pension and post-retirement liabilities in the current period, partially offset by an increase in certain premium tax liabilities and expense liabilities in the prior period. In addition, offsetting the increase in income from continuing operations, is an increase in policyholder dividends of $3 million, net of income taxes, due to growth in the business. The change in effective tax rates between periods accounts for the remainder of the increase in income from continuing operations. Revenues Total revenues, excluding net investment gains (losses), increased by $484 million, or 15%, to $3,716 million for the three months ended June 30, 2006 from $3,232 million for the comparable 2005 period. The acquisition of Travelers contributed $501 million to the period over period increase. Excluding the impact of Travelers, such revenues decreased by $17 million, or 1%, from the comparable 2005 period. Net investment income decreased by $95 million resulting from lower variable income including corporate and real estate joint venture income, bond and commercial mortgage prepayment fees and securities lending, as well as a decline in fixed maturity yields on a larger asset base. 84 Offsetting this decrease are higher universal life and investment type product policy fees combined with other revenues of $66 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 investment performance. Also contributing to this offset is an increase of $12 million in premiums associated with an increase of $39 million in other life and annuity products, partially offset by a $27 million expected decline in premiums associated with the Company's closed block of business. Expenses Total expenses increased by $258 million, or 9%, to $3,115 million for the three months ended June 30, 2006 from $2,857 million for the comparable 2005 period. The acquisition of Travelers contributed $374 million to the period over period increase. Included in the Travelers results is a $33 million increase to the excess mortality liability on specific blocks of life policies. Excluding the impact of Travelers, total expenses decreased by $116 million, or 4%, from the comparable 2005 period. Policyholder benefits decreased by $65 million primarily due to a reduction in the closed block-related policyholder dividend obligation of $45 million driven by higher net investment losses, and lower net investment income. Additionally, favorable mortality in the life products contributed $22 million to the decrease in policyholder benefits. In addition, annuity policyholder benefits declined by $10 million due to a revision to future policyholder benefits partially offset by increased costs of the guaranteed annuity benefit riders and the related hedging. Partially offsetting these decreases is an increase in policyholder benefits, commensurate with the increase in premiums of $39 million from annuity and other life products partially offset by a decline commensurate with the decline in premiums in the Company's closed-block of business of $27 million. Lower other expenses of $54 million include lower DAC amortization of $85 million resulting from net investment losses and adjustments for management's update of assumptions used to determine estimated gross margins. Partially offsetting this decrease is an increase in other expenses, excluding DAC amortization, of $31 million primarily due to higher general spending in connection with technology, postage and travel expenses partially offset by a reduction in pension and postretirement liabilities in the current period and an increase in premium tax liabilities and certain expense liabilities in the prior period. Partially offsetting these decreases in total expenses is a $4 million increase in policyholder dividends associated with growth in the business. Interest credited to policyholder account balances decreased slightly due to lower general account liabilities, partially offset by higher crediting rates. SIX MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2005 -- INDIVIDUAL Income from Continuing Operations Income from continuing operations decreased by $214 million, or 29%, to $513 million for the six months ended June 30, 2006 from $727 million for the comparable 2005 period. The acquisition of Travelers contributed $112 million to income from continuing operations, which includes $88 million, net of income taxes, of net investment losses. Included in the Travelers results is a $21 million increase to the excess mortality liability on specific blocks of life policies. Excluding the impact of Travelers, income from continuing operations decreased by $326 million, or 45%, to $401 million for the six months ended June 30, 2006 from $727 million for the comparable 2005 period. Included in this decrease are net investment losses of $428 million, net of income taxes. Excluding the impact of net investment gains (losses) and the acquisition of Travelers, income from continuing operations increased by $102 million from the comparable 2005 period. 85 Fee income from separate account products increased income from continuing operations by $69 million, net of income taxes, primarily related to fees being earned on a higher account balance resulting from a combination of growth in the business and overall market performance. The decrease in the closed-block related policyholder dividend obligation of $60 million, net of income taxes, also contributed to the increase in income from continuing operations. Lower DAC amortization resulting from investment losses and adjustments for management's update of assumptions used to determine estimated gross margins contributed $53 million, net of income taxes, to the increase in income from continuing operations. Favorable underwriting results in life products contributed $42 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. These aforementioned increases in income from continuing operations are partially offset by lower net investment income on blocks of business that are not driven by interest rate spreads of $34 million, net of income taxes. The increase in income from continuing operations is partially offset by higher expenses of $36 million, net of income taxes, due to higher general spending and the net impact of revisions to pension and postretirement liabilities and policy holder liabilities in the current period, partially offset by revisions to certain premium tax liabilities and commissions expense liabilities in the prior period. In addition, the increase in income from continuing operations is partially offset by a decline in interest rate spreads of $25 million, net of income taxes. 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. Also offsetting the increase in income from continuing operations, are higher annuity benefits of $16 million, net of income taxes, primarily due to the costs of the guaranteed annuity benefit riders and the related hedging. In addition, 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 change in effective tax rates between periods accounts for the remainder of the increase in income from continuing operations. Revenues Total revenues, excluding net investment gains (losses), increased by $1,083 million, or 17%, to $7,454 million for the six months ended June 30, 2006 from $6,371 million for the comparable 2005 period. The acquisition of Travelers contributed $1,009 million to the period over period increase. Excluding the impact of Travelers, such revenues increased by $74 million, or 1%, from the comparable 2005 period. This increase includes higher universal life and investment type product policy fees combined with other revenues of $135 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 86 as a percentage of the average assets in policyholder accounts. The value of these assets can fluctuate depending on equity performance. In addition, premiums increased $30 million of which management attributes higher premiums of $13 million 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 $48 million, this decline was more than offset by a $65 million increase in premiums from other life products due to growth in the business. Net investment income decreased by $91 million primarily resulting from lower variable income including real estate and corporate joint venture income, bond and commercial mortgage prepayment fees and securities lending, as well as a decline in the fixed maturity yield on a larger asset base. Expenses Total expenses increased by $615 million, or 11%, to $6,126 million for the six months ended June 30, 2006 from $5,511 million for the comparable 2005 period. The acquisition of Travelers contributed $706 million to the period over period increase. Included in the Travelers results is a $33 million increase to the excess mortality liability on specific blocks of life policies. Excluding the impact of Travelers, total expenses decreased by $91 million, or 2%, from the comparable 2005 period. Policyholder benefits decreased by $72 million primarily due to a reduction in the closed block-related policyholder dividend obligation of $91 million driven by higher net investment losses, and lower net investment income. Additionally, favorable mortality in the life products contributed $23 million to the decrease in policyholder benefits. 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 $38 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. Partially offsetting these decreases in policyholder benefits, policyholder benefits increased commensurate with the increase in premiums of $65 million from other life products partially offset by a decline commensurate with the decline in premiums in the Company's closed-block of business of $48 million. Lower other expenses of $27 million include lower DAC amortization of $81 million resulting from investment losses and adjustments for management's update of assumptions used to determine estimated gross margins. Partially offsetting this decrease is an increase in other expenses, excluding DAC amortization, of $54 million primarily due to higher general spending in connection with technology, postage and travel expenses, partially offset by a reduction in pension and postretirement and policyholder liabilities in the current period and an increase in premium tax liabilities and certain expense liabilities in the prior period. Partially offsetting these decreases in total expenses is a $10 million increase in policyholder dividends associated with growth in the business. Interest credited to policyholder account balances decreased slightly due to lower general account liabilities partially offset by higher crediting rates. 87 AUTO & HOME The following table presents consolidated financial information for the Auto & Home segment for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------- 2006 2005 2006 2005 ------ ------ ------- ------- (IN MILLIONS) REVENUES Premiums.......................................... $726 $738 $1,450 $1,466 Net investment income............................. 42 46 87 89 Other revenues.................................... 8 8 15 17 Net investment gains (losses)..................... (4) (4) (3) (4) ---- ---- ------ ------ Total revenues.................................. 772 788 1,549 1,568 ---- ---- ------ ------ EXPENSES Policyholder benefits and claims.................. 431 446 883 924 Policyholder dividends............................ 1 2 2 2 Other expenses.................................... 211 204 412 403 ---- ---- ------ ------ Total expenses.................................. 643 652 1,297 1,329 ---- ---- ------ ------ Income before provision for income taxes.......... 129 136 252 239 Provision for income taxes........................ 30 38 62 65 ---- ---- ------ ------ Net income........................................ $ 99 $ 98 $ 190 $ 174 ==== ==== ====== ======
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. THREE MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2005 -- AUTO & HOME Net Income Net income increased by $1 million, or 1%, to $99 million for the three months ended June 30, 2006 from $98 million for the comparable 2005 period. The increase in net income is primarily attributable to favorable development of prior year loss reserves which contributed $16 million, net of income taxes, and a reduction in loss adjustment expenses which contributed $10 million, net of income taxes. These increases were offset by higher catastrophe losses in the second quarter of 2006, resulting in a decrease to net income of $10 million, net of income taxes. Also impacting net income is a decrease in net earned premiums of $8 million, net of income taxes, resulting primarily from an increase of $5 million, net of income taxes, in catastrophe reinsurance costs, and a reduction of $5 million, net of income taxes, in involuntary assumed business. In addition, net income decreased due to an increase in other expenses of $5 million, net of income taxes, and a decrease in net investment income of $3 million, net of income taxes, partially offset by a decrease of $1 million in policyholder dividends, net of income taxes. Revenues Total revenues, excluding net investment gains (losses), decreased by $16 million, or 2%, to $776 million for the three months ended June 30, 2006 from $792 million for the comparable 2005 period. 88 The decrease in total revenues is primarily due to a $12 million decrease in earned premiums resulting from $6 million in additional catastrophe reinsurance costs and a decrease of $6 million in involuntary assumed business, mainly associated with the Massachusetts involuntary market. Net investment income decreased by $4 million primarily due to a $6 million decrease in net investment income related to a realignment of economic capital, partially offset by higher income as a result of a slightly higher asset base. Expenses Total expenses decreased by $9 million, or 1%, to $643 million for the three months ended June 30, 2006 from $652 million for the comparable 2005 period. The decrease in total expenses is primarily due to an increase of $20 million in favorable development of prior year losses and a $13 million decrease in unallocated loss expenses. These decreases were partially offset by a $14 million increase in catastrophe losses and a $3 million increase in claims from additional exposure. Improvements in claim frequencies were essentially offset by higher claim severity. In addition, expenses increased by $7 million primarily due to expenditures related to information technology and advertising, partially offset by a $1 million decrease in policyholder dividends. Underwriting results, excluding catastrophes, in the Auto & Home segment were favorable for the three months ended June 30, 2006, as the combined ratio, excluding catastrophes, decreased to 84.5% from 86.4% in the three months ended June 30, 2005. SIX MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2005 -- AUTO & HOME Net Income Net income increased by $16 million, or 9%, to $190 million for the six months ended June 30, 2006 from $174 million for the comparable 2005 period. The increase in net income is primarily attributable to favorable development of prior year loss reserves which contributed $24 million, net of income taxes, a reduction in loss adjustment expenses which contributed $16 million, net of income taxes, and an $11 million decline in non-catastrophe losses, net of income taxes. These increases were partially offset by higher catastrophe losses in the first six months of 2006 resulting in a decrease to net income of $16 million, net of income taxes. Also impacting net income is a decrease in net earned premiums of $11 million, net of income taxes, resulting primarily from an increase of $6 million, net of income taxes, in catastrophe reinsurance costs, and a $6 million, net of income taxes, reduction in involuntary assumed business. In addition, net income decreased due to an increase in other expenses of $7 million, net of income taxes, and decreases in net investment income of $1 million, net of income taxes, net investment losses of $1 million, net of income taxes, and other revenue of $1 million, net of income taxes. Revenues Total revenues, excluding net investment gains (losses), decreased by $20 million, or 1%, to $1,552 million for the six months ended June 30, 2006 from $1,572 million for the comparable 2005 period. The decrease in total revenues is primarily due to a $16 million decrease in earned premium resulting from $8 million in additional catastrophe reinsurance costs and an $8 million decrease in involuntary assumed business, mainly associated with the Massachusetts involuntary market. Net investment income decreased by $2 million primarily due to a $7 million decrease in net investment income related to a realignment of economic capital, partially offset by higher income as a result of a slightly higher asset base. In addition, other revenues decreased by $2 million as a result of lower revenues associated with a funded reinsurance contract. 89 Expenses Total expenses decreased by $32 million, or 2%, to $1,297 million for the six months ended June 30, 2006 from $1,329 million for the comparable 2005 period. The decrease in total expenses is primarily due to an increase of $30 million in favorable development of prior year losses, an $18 million decrease in unallocated loss expenses and a $15 million decrease in non-catastrophe losses primarily due to lower claims frequencies, partially offset by higher claims severities and a slight increase in claims from additional exposure. These decreases were partially offset by $22 million in additional catastrophe losses. In addition, expenses increased by $9 million primarily due to expenditures related to information technology and advertising. Underwriting results, excluding catastrophes, in the Auto & Home segment were favorable for the six months ended June 30, 2006, as the combined ratio, excluding catastrophes, decreased to 85.6% from 88.5% in the six months ended June 30, 2005. INTERNATIONAL The following table presents consolidated financial information for the International segment for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 2006 2005 2006 2005 ------- ----- ------ --------- (IN MILLIONS) REVENUES Premiums......................................... $ 676 $470 $1,307 $ 936 Universal life and investment-type product policy fees........................................... 194 125 378 244 Net investment income............................ 238 195 473 344 Other revenues................................... 4 (1) 8 2 Net investment gains (losses).................... 13 7 33 7 ------ ---- ------ ------ Total revenues................................. 1,125 796 2,199 1,533 ------ ---- ------ ------ EXPENSES Policyholder benefits and claims................. 550 484 1,053 878 Interest credited to policyholder account balances....................................... 86 55 173 102 Policyholder dividends........................... 1 -- 3 2 Other expenses................................... 346 192 673 367 ------ ---- ------ ------ Total expenses................................. 983 731 1,902 1,349 ------ ---- ------ ------ Income from continuing operations before provision for income taxes..................... 142 65 297 184 Provision for income taxes....................... 41 19 92 61 ------ ---- ------ ------ Income from continuing operations................ 101 46 205 123 Loss from discontinued operations, net of income taxes.......................................... -- (1) -- (2) ------ ---- ------ ------ Net income....................................... $ 101 $ 45 $ 205 $ 121 ====== ==== ====== ======
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. 90 THREE MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2005 -- INTERNATIONAL Income from Continuing Operations Income from continuing operations increased by $55 million, or 120%, to $101 million for the three months ended June 30, 2006 from $46 million for the comparable 2005 period. The acquisition of Travelers contributed $20 million to income from continuing operations, which includes $11 million, net of income taxes, of net investment gains. Included in the Travelers results is an increase to policyholder benefits and claims of $10 million, net of income taxes, resulting from the increase in policyholder liabilities due to higher than expected mortality in Brazil on specific blocks of business written in the Travelers entity since the acquisition, and consistent with the increase on the existing MetLife entities as described more fully below. Excluding the impact of Travelers, income from operations increased by $35 million, or 76%, over the comparable 2005 period. This increase includes the impact of net investment losses of $6 million, net of income taxes. Excluding the impact of Travelers and of net investment gains (losses), income from continuing operations increased $41 million from the comparable 2005 period. Mexico's income from continuing operations increased by $66 million, net of income taxes, primarily due to a decrease in certain policyholder liabilities caused by a decrease in the unrealized investment gains on invested assets supporting those liabilities during the quarter, a decrease in policyholder benefits associated with a large group policy that was not renewed by the policyholder, lower DAC amortization resulting from management's update of assumptions used to determine estimated gross profits, as well as the unfavorable impact in the prior year of contingent liabilities that were established related to potential employment matters in that year. South Korea's income from continuing operations increased by $11 million, net of income taxes, primarily due to continued growth of the in-force business. Partially offsetting these increases in income from continuing operations is a decrease in Brazil of $8 million, net of income taxes, primarily due to a $10 million, net of income taxes, increase to policyholder benefits and claims related to an increase in policyholder liabilities on specific blocks of business in the Brazilian operations. This increase is due to significantly higher than expected mortality experience, of which a total of $20 million, net of income taxes, of additional liabilities were recorded, $10 million, net of income taxes, of which is associated with the acquired Travelers' business written since the acquisition, and $10 million, net of income taxes, of which is related to existing MetLife entities. Also decreasing income from continuing operations was a reduction of investment income in Canada of $10 million, net of income taxes, primarily due to the realignment of economic capital. The home office recorded higher infrastructure expenditures in support of segment growth of $15 million, net of income taxes. The remainder of the increase in income from continuing operations can be attributed to contributions from the other countries. Revenues Total revenues, excluding net investment gains (losses), increased by $323 million, or 41%, to $1,112 million for the three months ended June 30, 2006 from $789 million for the comparable 2005 period. The acquisition of Travelers contributed $209 million to the period over period increase. Excluding the impact of Travelers, such revenues increased by $114 million, or 14%, over the comparable 2005 period. Premiums, fees, and other revenues increased by $118 million, or 20%, to $712 million for the three months ended June 30, 2006 from $594 million for the comparable 2005 period. Mexico's premiums, fees, and other revenues increased by $35 million, primarily due to growth in the institutional business as well as higher fees and growth in its universal life and pension businesses. South Korea's premiums, fees and other revenues increased by $35 million primarily due to increased sales in its variable universal life business. Chile's premiums, fees, and other revenues increased by $28 million, primarily due to higher annuity premiums resulting from a more favorable pricing environment, as well as an increase in institutional premiums through its bank distribution channel. Premiums, fees, and other revenues increased in Brazil and Taiwan by $16 million and $3 million, respectively, primarily due to continued growth in the business. Net investment income decreased by $4 million, or 2%, to $191 million for the three months ended June 30, 2006 from $195 million for the comparable 2005 period. Net investment income in Canada decreased 91 by $14 million due to the realignment of economic capital. Net investment income decreased in Mexico by $3 million due to lower average investment yields and lower inflation rates, largely offset by increases in invested assets. The invested asset valuations and returns on these invested assets are linked to inflation rates in most of the Latin America countries in which the Company conducts business. These decreases were partially offset by increases in net investment income in South Korea, Brazil, and Taiwan of $6 million, $2 million and $1 million, respectively, primarily due to increases in invested assets. Net investment income in Chile increased by $5 million due completely to the favorable impact of foreign exchange rates. The remainder of the change in such revenues, can be attributed to contributions from other countries. Changes in foreign currency exchange rates had a favorable impact of $25 million on total revenues, excluding net investment gains (losses). Expenses Total expenses increased by $252 million, or 34%, to $983 million for the three months ended June 30, 2006 from $731 million for the comparable 2005 period. The acquisition of Travelers contributed $201 million to the period over period increase. Excluding the impact of Travelers, total expenses increased by $51 million, or 7%, over the comparable 2005 period. Policyholder benefits and claims, policyholder dividends and interest credited to policyholder account balances increased by $13 million, or 2%, to $552 million for the three months ended June 30, 2006 from $539 million for the comparable 2005 period. Brazil's policyholder benefits and claims increased by $20 million primarily due to an increase in policyholder liabilities on specific blocks of business in the Brazilian operations as discussed above. Chile, South Korea and Taiwan's policyholder benefits and claims, policyholder dividends and interest credited to policyholders accounts increased by $27 million, $7 million and $3 million, respectively, commensurate with the revenue growth discussed above. Policyholder benefits and claims, policyholder dividends and interest credited to policyholders accounts in Mexico decreased by $75 million, primarily due to a decrease in certain policyholder liabilities of $65 million caused by a decrease in the unrealized investment gains on the invested assets supporting those liabilities, as well as a $10 million benefit from a decrease in policyholder benefits associated with a large group policy that was not renewed by the policyholder. Partially offsetting this decrease in Mexico is an increase in other policyholder benefits and claims of $19 million and in interest credited to policyholders account balances of $10 million commensurate with the growth in business discussed above. Other expenses increased by $38 million, or 20%, to $230 million for the three months ended June 30, 2006 from $192 million for the comparable 2005 period. South Korea's other expenses increased by $22 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. Brazil and Taiwan's other expenses increased by $4 million and $3 million, respectively, 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. Other expenses associated with the home office increased by $22 million primarily due to an increase in expenditures 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. Mexico's other expenses decreased by $13 million, primarily due to lower DAC amortization resulting from management's update of assumptions used to determine estimated gross profits and the prior period unfavorable impact of contingent liabilities that were established related to potential employment matters, partially offset by an increase in commissions commensurate with the revenue growth discussed above. The remainder of the change in total expenses can be attributed to contributions from other countries. Changes in foreign currency exchange rates account for $25 million of the increase in total expenses. 92 SIX MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2005 -- INTERNATIONAL Income from Continuing Operations Income from continuing operations increased by $82 million, or 67%, to $205 million for the six months ended June 30, 2006 from $123 million for the comparable 2005 period. The acquisition of Travelers contributed $38 million to income from continuing operations, which includes $18 million, net of income taxes, of net investment gains. Included in the Travelers results is an increase to policyholder benefits and claims of $10 million, net of income taxes, resulting from the increase in policyholder liabilities due to higher than expected mortality in Brazil on specific blocks of business written in the Travelers entity since the acquisition, and consistent with the increase on the existing MetLife entities as described more fully below. Excluding the impact of Travelers, income from operations increased by $44 million, or 36%, over the comparable 2005 period. Mexico's income from continuing operations increased by $79 million, net of income taxes, primarily due to a decrease in certain policyholder liabilities caused by a decrease in the unrealized investment gains on invested assets supporting those liabilities during the quarter, a decrease in policyholder benefits associated with a large group policy that was not renewed by the policyholder, lower DAC amortization resulting from management's update of assumptions used to determine estimated gross profits, as well as the unfavorable impact in the prior year of contingent liabilities that were established related to potential employment matters in that year. South Korea's income from continuing operations increased by $22 million, net of income taxes, primarily due to continued growth of the in-force business. Partially offsetting these increases in income from continuing operations was a decrease in Canada of $20 million, net of income taxes, primarily due to the realignment of economic capital, and a decrease in Brazil of $8 million, net of income taxes, primarily due to a $10 million, net of income taxes, increase to policyholder benefits and claims related to an increase in future policyholder benefit liabilities on specific blocks of business in the Brazilian operations. This increase is due to significantly higher than expected mortality experience, of which a total of $20 million, net of income taxes, of additional liabilities were recorded, $10 million, net of income taxes, of which is associated with the acquired Travelers' business written since the acquisition, and $10 million, net of income taxes, of which is related to existing MetLife entities. The home office recorded higher infrastructure expenditures in support of segment growth of $27 million, net of income taxes. The remainder of the increase in income from continuing operations can be attributed to contributions from other countries. Changes in foreign currency rates account for $7 million of the increase in income from continuing operations. Revenues Total revenues, excluding net investment gains (losses), increased by $640 million, or 42%, to $2,166 million for the six months ended June 30, 2006 from $1,526 million for the comparable 2005 period. The acquisition of Travelers contributed $413 million to the period over period increase. Excluding the impact of Travelers, such revenues increased by $227 million, or 15%, over the comparable 2005 period. Premiums, fees, and other revenues increased by $211 million, or 18%, to $1,393 million for the six months ended June 30, 2006 from $1,182 million for the comparable 2005 period. Mexico's premiums, fees, and other revenues increased by $78 million, primarily due to growth in the institutional business as well as higher fees and growth in its universal life and pension businesses. South Korea's premiums, fees and other revenues increased by $72 million primarily due to increased sales in its variable universal life business. Premiums, fees, and other revenues increased in Brazil and Taiwan by $27 million and $11 million, respectively, primarily due to continued growth in the business. Chile's premiums, fees, and other revenues increased by $18 million, primarily due to an increase in institutional premiums through its bank distribution channel, partially offset by lower annuity sales in the first quarter resulting from management's decision not to match aggressive pricing in the marketplace. Net investment income increased by $16 million, or 5%, to $360 million for the six months ended June 30, 2006 from $344 million for the comparable 2005 period. Net investment income in Chile increased 93 by $15 million due to higher inflation rates, increases in invested assets and the favorable impact of foreign exchange rates. Net investment income in Mexico increased by $13 million due to increases in invested assets and higher inflation rates, partially offset by lower average investment yields. The invested asset valuations and returns on these invested assets are linked to inflation rates in most of the Latin America countries in which the Company conducts business. South Korea, Brazil, and Taiwan's net investment income increased by $11 million, $3 million and $3 million, respectively, primarily due to increases in invested assets. These increases in net investment income were partially offset by a decrease of $33 million in Canada due to the realignment of economic capital. The remainder of the change in such revenues, can be attributed to contributions from other countries. Changes in foreign currency exchange rates had a favorable impact of $74 million on total revenues, excluding net investment gains (losses). Expenses Total expenses increased by $553 million, or 41%, to $1,902 million for the six months ended June 30, 2006 from $1,349 million for the comparable 2005 period. The acquisition of Travelers contributed $388 million to the period over period increase. Excluding the impact of Travelers, total expenses increased by $165 million, or 12%, over the comparable 2005 period. Policyholder benefits and claims, policyholder dividends and interest credited to policyholder account balances increased by $72 million, or 7%, to $1,054 million for the six months ended June 30, 2006 from $982 million for the comparable 2005 period. Brazil's policyholder benefits and claims increased by $32 million primarily due to an increase in policyholder liability on specific blocks of business in the Brazilian operations as discussed above, as well as the business growth discussed above. South Korea, Chile and Taiwan's policyholder benefits and claims, policyholder dividends and interest credited to policyholders accounts increased by $24 million, $23 million and $12 million, respectively, commensurate with the revenue growth discussed above. Policyholder benefits and claims, policyholder dividends and interest credited to policyholders accounts in Mexico decreased by $84 million, primarily due to a decrease in certain policyholder liabilities of $74 million caused by a decrease in the unrealized investment gains on the invested assets supporting those liabilities as well as a $10 million benefit from a decrease in policyholder benefits associated with a large group policy that was not renewed by the policyholder. Partially offsetting this decrease in Mexico is an increase in other policyholder benefits and claims of $41 million and in interest credited to policyholders account balances of $25 million commensurate with the growth in business discussed above. Other expenses increased by $93 million, or 25%, to $460 million for the six months ended June 30, 2006 from $367 million for the comparable 2005 period. South Korea's other expenses increased by $32 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. Brazil and Taiwan's other expenses increased by $10 million and $4 million, respectively, primarily due to the growth in business discussed above. Chile's other expenses increased by $8 million, primarily due to increased commissions associated with its institutional business. Other expenses associated with the home office increased by $43 million primarily due to an increase in expenditures 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. Mexico's other expenses were unchanged from the prior year period, primarily due to an increase in commissions commensurate with the revenue 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"), offset by lower DAC amortization resulting from management's update of assumptions used to determine estimated gross profits and the prior period unfavorable impact of contingent liabilities that were established related to potential employment matters. The remainder of the change in total expenses can be attributed to contributions from other countries. Changes in foreign currency exchange rates account for $67 million of the increase in total expenses. 94 REINSURANCE The following table presents consolidated financial information for the Reinsurance segment for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ----------------- 2006 2005 2006 2005 ------- ------- ------- ------- (IN MILLIONS) REVENUES Premiums.......................................... $1,078 $ 928 $2,071 $1,831 Universal life and investment-type product policy fees............................................ -- 2 -- 2 Net investment income............................. 155 137 330 287 Other revenues.................................... 13 21 28 32 Net investment gains (losses)..................... (14) (7) (7) 21 ------ ------ ------ ------ Total revenues.................................. 1,232 1,081 2,422 2,173 ------ ------ ------ ------ EXPENSES Policyholder benefits and claims.................. 871 828 1,684 1,567 Interest credited to policyholder account balances........................................ 48 43 111 99 Other expenses.................................... 271 204 546 457 ------ ------ ------ ------ Total expenses.................................. 1,190 1,075 2,341 2,123 ------ ------ ------ ------ Income before provision for income taxes.......... 42 6 81 50 Provision (benefit) for income taxes.............. 15 (1) 28 14 ------ ------ ------ ------ Net income........................................ $ 27 $ 7 $ 53 $ 36 ====== ====== ====== ======
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. THREE MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2005 -- REINSURANCE Net Income Net income increased by $20 million, or 286%, to $27 million for the three months ended June 30, 2006 from $7 million for the comparable 2005 period. The 2005 period includes an $8 million charge, net of income taxes and minority interest, related to an increase in the liabilities associated with the Argentine pension business. Excluding the impact of this item, net income increased by $12 million for the three months ended June 30, 2006 from the comparable 2005 period. The increase in net income is attributable to a 16% increase in premiums while policyholder benefits and claims increased 5%, adding approximately $69 million, net of income taxes, to net income, and an increase in net investment income, net of the increase in interest credited to policyholder account balances of $8 million, net of income taxes. The increases in premiums and policyholder benefits and claims are primarily due to added business in-force from facultative and automatic treaties and renewal premiums on existing blocks of business in the U.S. and international operations. The increase in policyholder benefits and claims is partially offset by unfavorable mortality in the prior-year period. Net investment income growth, net of interest credited is due to growth in the invested asset base. These increases in net income were partially offset by a $43 million increase in other expenses, a $5 million decrease in other revenues, and a $5 million decrease in net investment gains (losses), all net of income taxes. The remaining offset is related to a change in the effective tax rates. The increase in other expenses is primarily related to minority interest expense, expenses associated with DAC, interest expense associated with 95 RGA's issuance of $400 million of junior subordinated notes in December 2005, and equity compensation expense. The decrease in other revenues is primarily related to currency transaction gains in the prior-year period. Revenues Total revenues, excluding net investment gains (losses), increased by $158 million, or 15%, to $1,246 million for the three months ended June 30, 2006 from $1,088 million for the comparable 2005 period. The increase in such 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 $88 million; Asia Pacific, which contributed $24 million; Canada, which contributed $20 million; and Europe and South Africa, which contributed $13 million. 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 $18 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 from RGA's $400 million junior subordinated notes offering in December 2005, partially offset by a decrease in net investment income related to a realignment of economic capital. Investment yields were down in the comparable periods, primarily due to market performance on funds withheld portfolios. Partially offsetting the increases in total revenues, excluding net investment gains (losses), is a decrease in other revenues of $8 million primarily due to foreign currency transaction gains in the prior-year period. Additionally, a component of the total revenues, excluding net investment gains (losses), increase is an $8 million increase associated with foreign currency exchange rate movements. Expenses Total expenses increased by $115 million, or 11%, to $1,190 million for the three months ended June 30, 2006 from $1,075 million for the comparable 2005 period. This increase is commensurate with the growth in revenues and is primarily attributable to an increase of $43 million in policyholder benefits and claims, primarily associated with a growth in insurance in-force of approximately $270 billion and a $5 million increase in interest credited, which is generally offset by a corresponding increase in net investment income. The increase in policyholder benefits and claims is partially offset by unfavorable mortality experience in the U.S. and United Kingdom and a $24 million increase in the liabilities associated with the Argentine pension business, both in the prior-year period. Other expenses increased $67 million due to a $33 million increase in minority interest expense on the larger earnings base in the current period, $23 million in expenses associated with DAC and $5 million in interest expense primarily associated with RGA's issuance of $400 million of junior subordinated notes in December 2005. The remaining increase of $6 million is primarily related to compensation and overhead related expenses associated with RGA's international expansion and general growth in operations, including equity compensation expense. Additionally, a component of the total expenses increase is an $8 million increase associated with foreign currency exchange rate movements. SIX MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2005 -- REINSURANCE Net Income Net income increased by $17 million, or 47%, to $53 million for the six months ended June 30, 2006 from $36 million for the comparable 2005 period. The 2005 period includes an $8 million charge, net of income taxes and minority interest, related to an increase in the liabilities associated with the Argentine pension business. Excluding the impact of this item, net income increased by $9 million for the six months ended June 30, 2006 from the comparable 2005 period. The increase in net income is attributable to a 13% increase in premiums while policyholder benefits and claims increased by 7%, adding approximately $79 million, net of income taxes, to net income, and an increase 96 in net investment income, net of interest credited of $20 million, net of income taxes. The increase in premiums and policyholder benefits and claims are primarily due to added business in-force from facultative and automatic treaties and renewal premiums on existing blocks of business in the U.S. and international operations. The increase in policyholder benefits and claims is partially offset by unfavorable mortality in the prior-year period. Net investment income growth, net of the increase in interest credited to policyholder account balances is due to growth in the invested asset base. These increases in net income were partially offset by a $58 million increase in other expenses, an $18 million decrease in net investment gains (losses), and a $3 million decrease in other revenues, all net of income taxes. The remaining offset is related to a change in the effective tax rates. The increase in other expenses is primarily related to minority interest expense, expenses associated with DAC, interest expense associated with RGA's issuance of $400 million of junior subordinated notes in December 2005, and equity compensation expense. The decrease in other revenues is primarily related to currency transaction gains in the prior-year period. Revenues Total revenues, excluding net investment gains (losses), increased by $277 million, or 13%, to $2,429 million for the six months ended June 30, 2006 from $2,152 million for the comparable 2005 period. The increase in such 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 $133 million; Asia Pacific, which contributed $45 million; Canada, which contributed $41 million; and Europe and South Africa, which contributed $17 million. 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 $43 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 from RGA's $400 million junior subordinated notes 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 in the comparable periods. Partially offsetting the increases in total revenues, excluding net investment gains (losses), is a decrease in other revenues of $4 million primarily due to foreign currency transaction gains in the prior-year period, partially offset by an increase in surrender charges on asset-intensive business and in fees associated with financial reinsurance. Additionally, the effect on total revenues, excluding net investment gains (losses), associated with foreign currency exchange rate movements was insignificant. Expenses Total expenses increased by $218 million, or 10%, to $2,341 million for the six months ended June 30, 2006 from $2,123 million for the comparable 2005 period. The increase in total expenses is commensurate with the growth in revenues and is primarily attributable to an increase of $117 million in policyholder benefits and claims, primarily associated with a growth in insurance in-force of approximately $270 billion, and a $12 million increase in interest credited, which is generally offset by a corresponding increase in net investment income. The increase in policyholder benefits and claims was partially offset by unfavorable mortality experience in the U.S. and United Kingdom and a $24 million increase in the liabilities associated with the Argentine pension business, both in the prior-year period. Other expenses increased $89 million due to a $35 million increase in minority interest expense on the larger earnings base in the current period, $24 million in expenses associated with DAC and $12 million in interest expense, primarily associated with RGA's issuance of $400 million of junior subordinated notes in December 2005. The remaining increase of $18 million is primarily related to compensation and overhead related expenses associated with RGA's international expansion and general growth in operations, including equity compensation expense. 97 Additionally, the effect on total expenses associated with foreign currency exchange rate movements was insignificant. CORPORATE & OTHER The following table presents consolidated financial information for Corporate & Other for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ---------------- 2006 2005 2006 2005 ------- ------ ------ ------- (IN MILLIONS) REVENUES Premiums.......................................... $ 10 $ 3 $ 19 $ 4 Net investment income............................. 324 189 603 318 Other revenues.................................... 6 5 13 8 Net investment gains (losses)..................... (87) (33) (116) (150) ----- ---- ----- ------ Total revenues.................................. 253 164 519 180 ----- ---- ----- ------ EXPENSES Policyholder benefits and claims.................. 12 (42) 20 (43) Interest credited to policyholder account balances........................................ -- 1 -- -- Policyholder dividends............................ 1 (4) -- -- Other expenses.................................... 342 171 653 357 ----- ---- ----- ------ Total expenses.................................. 355 126 673 314 ----- ---- ----- ------ Income (loss) from continuing operations before provision (benefit) for income taxes............ (102) 38 (154) (134) Income tax benefit................................ (74) (12) (137) (105) ----- ---- ----- ------ Income (loss) from continuing operations.......... (28) 50 (17) (29) Income (loss) from discontinued operations, net of income taxes.................................... 34 873 32 1,042 ----- ---- ----- ------ Net income........................................ 6 923 15 1,013 Preferred stock dividends......................... 33 -- 66 -- ----- ---- ----- ------ Net income (loss) available to common shareholders.................................... $ (27) $923 $ (51) $1,013 ===== ==== ===== ======
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 at rates commensurate with related borrowings, as well as intersegment transactions. THREE MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2005 -- CORPORATE & OTHER Income (loss) from Continuing Operations Income (loss) from continuing operations decreased by $78 million to ($28) million for the three months ended June 30, 2006 from $50 million for the comparable 2005 period. The acquisition of Travelers, excluding Travelers financing and integration costs incurred by the Company, contributed $64 million to income (loss) from continuing operations, which includes $7 million, net of income taxes, of net investment gains. Excluding the impact of the Travelers acquisition, income (loss) from continuing operations decreased by $142 million 98 for the three months ended June 30, 2006 from the comparable 2005 period. Included in this decrease are higher investment losses of $41 million, net of income taxes. Excluding the impact of Travelers and the increase in net investment losses, income (loss) from continuing operations decreased by $101 million. The 2005 period includes a $30 million benefit associated with the reduction of a previously established liability for settlement death benefits related to the Company's sales practices class action settlement recorded in 1999 and an $18 million benefit associated with the reduction of a previously established real estate transfer tax liability related to the Company's demutualization in 2000, both net of income taxes. Excluding the impact of these items, income (loss) from continuing operations decreased by $53 million for the three months ended June 30, 2006 from the comparable 2005 period. The decrease in income (loss) 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, legal related costs and corporate support expenses of $46 million, $15 million, $12 million and $11 million, respectively, all of which are net of income taxes. This is partially offset by higher net investment income of $18 million and a decrease in integration costs of $13 million, both net of income taxes. The remainder of the difference is primarily driven by the difference between the actual and the estimated tax rate allocated to the various segments. Revenues Total revenues, excluding net investment gains (losses), increased by $143 million, or 73%, to $340 million for the three months ended June 30, 2006 from $197 million for the comparable 2005 period. The acquisition of Travelers contributed $114 million to the period over period increase. Excluding the impact of Travelers, such revenues increased by $29 million, or 15%, 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 resulting from a higher asset base invested in real estate and mortgage loans on real estate. Also included as a component of total revenues is the elimination of intersegment amounts which is offset within total expenses. Expenses Total expenses increased by $229 million, or 182%, to $355 million for the three months ended June 30, 2006 from $126 million for the comparable 2005 period. The acquisition of Travelers, excluding Travelers financing and integration costs incurred by the Company, contributed $43 million of this increase. Excluding the impact of the acquisition of Travelers, such expenses increased by $186 million, or 148%, from the comparable 2005 period. The 2005 period includes a $47 million benefit associated with the reduction of a previously established liability for settlement death benefits related to the Company's sales practices class action settlement recorded in 1999 and a $28 million benefit associated with the reduction of a previously established real estate transfer tax liability related to the Company's demutualization in 2000. Excluding the impact of these items, total expenses increased by $111 million for the three months ended June 30, 2006 from the comparable 2005 period. This increase is attributable to higher interest expense of $73 million primarily as a result of the issuance of senior notes in 2005, which includes $57 million of expenses from the financing of the acquisition of Travelers. As a result of growth in the business and higher interest rates, interest credited to bankholder deposits also increased by $24 million at MetLife Bank. Legal related costs were higher by $19 million, predominately from the reduction of previously established liabilities related to legal disputes during the 2005 period. Corporate support expenses, which include advertising, start-up costs for new products and information technology costs were higher by $18 million, partially offset by a decrease in integration costs of $21 million. Also included as a component of total expenses is the elimination of intersegment amounts which is offset within total revenues. 99 SIX MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2005 -- CORPORATE & OTHER Income (loss) from Continuing Operations Income (loss) from continuing operations increased by $12 million, or 41%, to ($17) million for the six months ended June 30, 2006 from ($29) million for the comparable 2005 period. The acquisition of Travelers, excluding Travelers financing and integration costs incurred by the Company, contributed $111 million to income (loss) from continuing operations, which includes $3 million, net of income taxes, of net investment losses. Excluding the impact of Travelers, income (loss) from continuing operations decreased by $99 million, or 341%, from the comparable 2005 period. Offsetting this decrease in income (loss) from continuing operations are lower investment losses of $25 million, net of income taxes. Excluding the impact of Travelers and the decrease in net investment losses, income (loss) from continuing operations decreased by $124 million. The 2005 period includes a $30 million benefit associated with the reduction of a previously established liability for settlement death benefits related to the Company's sales practices class action settlement recorded in 1999 and an $18 million benefit associated with the reduction of a previously established real estate transfer tax liability related to the Company's demutualization in 2000, both net of income taxes. Excluding the impact of these items, income (loss) from continuing operations decreased by $76 million for the six months ended June 30, 2006 from the comparable 2005 period. The decrease in income (loss) 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, legal related costs and corporate support expenses of $91 million, $31 million, $9 million and $21 million, respectively, all of which are net of income taxes. This is partially offset by higher net investment income of $63 million, net of income taxes, and a decrease in integration costs of $7 million, net of income taxes, with the remainder attributable to the difference between the actual and the estimated tax rate allocated to the various segments. Revenues Total revenues, excluding net investment gains (losses), increased by $305 million, or 92%, to $635 million for the six months ended June 30, 2006 from $330 million for the comparable 2005 period. The acquisition of Travelers contributed $200 million to the period over period increase. Excluding the impact of Travelers, such revenues increased by $105 million, or 32%, 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 resulting from a higher asset base invested in corporate joint ventures, real estate and mortgage loans on real estate. Also included as a component of total revenues is the elimination of intersegment amounts which is offset within total expenses. Expenses Total expenses increased by $359 million, or 114%, to $673 million for the six months ended June 30, 2006 from $314 million for the comparable 2005 period. The acquisition of Travelers, excluding Travelers financing and integration costs, contributed $59 million to the period over period increase. Excluding the impact of Travelers, such expenses increased by $300 million, or 96%, from the comparable 2005 period. The 2005 period includes a $47 million benefit associated with the reduction of a previously established liability for settlement death benefits related to the Company's sales practices class action settlement recorded in 1999 and a $28 million benefit associated with the reduction of a previously established real estate transfer tax liability related to the Company's demutualization in 2000. Excluding the impact of these items, total expenses increased by $225 million for the six months ended June 30, 2006 from the comparable 2005 period. This increase is attributable to higher interest expense of $142 million primarily as a result of the issuance of senior notes in 2005, which includes $119 million of expenses from the financing of the acquisition of Travelers. As a result of growth in the business and higher interest rates, interest credited to bankholder deposits increased by $49 million at MetLife Bank. Legal related costs were higher by $15 million, predominantly from the reduction of previously established liabilities related to legal disputes during the 2005 period. Corporate support expenses, 100 which include advertising, start-up costs for new products and information technology costs were higher by $33 million, partially offset by a decrease in integration costs of $11 million. Also included as a component of total expenses is the elimination of intersegment amounts which is offset within total revenues. 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 on an annual basis. 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 and is calculated on an annual basis. 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 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 $7.5 billion at June 30, 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 101 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 alternatives available based on market conditions and the amount and timing of the liquidity need. These options include cash flows 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 Flows from Operations. The Company's principal cash inflows from its insurance activities come from insurance premiums, annuity considerations and deposit funds. A primary liquidity concern with respect to these cash inflows is the risk of early contractholder and policyholder withdrawal. The Company's principal cash inflows from its investment activities come from repayments of principal, proceeds from maturities and sales of invested assets and investment income. The primary liquidity concerns with respect to these cash inflows are the risk of default by debtors and market volatilities. The Company closely monitors and manages these risks through its credit risk management process. Liquid Assets. An integral part of the Company's liquidity management is the amount of liquid assets it holds. Liquid assets include cash, cash equivalents, short-term investments, and marketable fixed maturity and equity securities. Liquid assets exclude assets relating to securities lending and dollar roll activities. At June 30, 2006 and December 31, 2005, the Company had $176 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 June 30, 2006 and December 31, 2005, the Company had outstanding $2.3 billion and $1.4 billion in short-term debt, respectively, and $10.7 billion and $9.9 billion in long-term debt, respectively. Debt Issuances. During the six months ended June 30, 2006, the Company did not issue any debt except for the agreements as described below. On June 28, 2006, a subsidiary of RGA, Timberlake Financial L.L.C., completed an offering of $850 million of 30-year notes, which is included in long-term debt. The notes represent senior, secured indebtedness of Timberlake Financial, L.L.C. and its assets with no recourse to RGA or its other subsidiaries. Up to $150 million of additional notes may be offered in the future. The proceeds of the offering will provide long-term collateral to support Regulation Triple X reserves on approximately 1.5 million term life insurance policies with guaranteed level premium periods reinsured by RGA Reinsurance Company, a U.S. subsidiary of RGA. 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 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. 102 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 is $951 million and $855 million at June 30, 2006 and December 31, 2005, 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 June 30, 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 June 30, 2006 and December 31, 2005, MetLife Funding had total outstanding liabilities, including accrued interest payable, of $915 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. Credit Facilities. The Company maintains committed and unsecured credit facilities aggregating $3.9 billion as of June 30, 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 June 30, 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 June 30, 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) $260 $ -- $1,240 MetLife, Inc. and MetLife Funding, Inc. ......... April 2010 1,500(1) 334 -- 1,166 MetLife Bank, N.A........ July 2006 200 -- -- 200 Reinsurance Group of America, Incorporated........... May 2007 28 -- 28 -- Reinsurance Group of America, Incorporated........... September 2010 600 240 50 310 Reinsurance Group of America, Incorporated........... March 2011 37 -- 26 11 ------ ---- ---- ------ Total............... $3,865 $834 $104 $2,927 ====== ==== ==== ======
- --------------- (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 MetLife Reinsurance Company of South Carolina ("MetLife Re"), formerly The Travelers Life and Annuity Reinsurance Company, and various institutional lenders became effective. Under the L/C Agreement, the Holding Company agreed to unconditionally guarantee reimbursement obligations of MetLife Re with respect to reinsurance letters of credit issued pursuant to the L/C Agreement. 103 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 June 30, 2006:
LETTER OF CREDIT UNUSED ACCOUNT PARTY EXPIRATION CAPACITY ISSUANCES COMMITMENTS - ------------------------------------- ----------------- -------- --------- ----------- (IN MILLIONS) MetLife Reinsurance Company of South Carolina........................... July 2010 (1) $2,000 $2,000 $ -- Exeter Reassurance Company Ltd. and MetLife, Inc. ..................... June 2016 (2) 500 290 210 Exeter Reassurance Company Ltd. ..... March 2025 (1)(3) 225 225 -- Exeter Reassurance Company Ltd. ..... June 2025 (1)(3) 250 250 -- Exeter Reassurance Company Ltd. ..... June 2025 (1)(3) 325 21 304 ------ ------ ---- Total........................... $3,300 $2,786 $514 ====== ====== ====
- --------------- (1) The Holding Company is a guarantor under this agreement. (2) Letters of credit issued under this facility of $280 million and $10 million expire in December 2015 and March 2016, respectively. (3) On June 1, 2006, the letter of credit issuer elected to extend the initial stated termination date of each respective letter of credit to the respective dates indicated. At June 30, 2006 and December 31, 2005, the Company had outstanding $3.8 billion and $3.6 billion, respectively, in letters of credit from various banks, of which $3.6 billion and $3.4 billion, respectively, were part of committed facilities. As of June 30, 2006, these letters of credit automatically renew for one year periods except for $496 million which expire in nineteen years and $290 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. 104 The following table summarizes the Company's major contractual obligations as of June 30, 2006:
LESS THAN THREE TO FIVE MORE THAN CONTRACTUAL OBLIGATIONS TOTAL THREE YEARS YEARS FIVE YEARS - ---------------------------------------- -------- ----------- ------------- ---------- (IN MILLIONS) Other long-term liabilities(1)(2)....... $109,061 $19,448 $8,033 $81,580 Payables for collateral under securities loaned and other transactions......... 46,612 46,612 -- -- Long-term debt(3)....................... 20,607 2,935 1,425 16,247 Mortgage commitments.................... 4,190 3,641 282 267 Partnership investments(4).............. 2,992 2,992 -- -- Junior subordinated debt securities underlying common equity units(5)..... 2,381 2,381 -- -- Operating leases........................ 1,297 584 235 478 Shares subject to mandatory redemption(3)......................... 350 -- -- 350 Capital leases.......................... 68 34 8 26 Commitments to fund revolving credit facilities and bridge loans(6)........ 604 604 -- -- -------- ------- ------ ------- Total................................... $188,162 $79,231 $9,983 $98,948 ======== ======= ====== =======
- --------------- (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 $83.9 billion and policyholder account balances of $116.0 billion, at June 30, 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 $64.3 billion relating to traditional life, health and disability insurance products and policyholder account balances of approximately $40.7 billion relating to deferred annuities, $27.8 billion for group and universal life products and approximately $29.4 billion for funding agreements 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 $109.1 billion exceeds the corresponding liability amounts of $49.8 billion included in the unaudited interim condensed consolidated financial statements at June 30, 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. 105 (3) Amounts differ from the balances presented on the interim condensed 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 debt. (4) The Company anticipates that these amounts could be invested in these partnerships any time over the next five years, but such amounts 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. (6) The Company anticipates that commitments to lend funds under revolving credit facilities may be funded any time over the next five years. Such commitments are presented in the current period, as the timing of the fulfillment of the obligation cannot be predicted. Commitments to fund bridge loans are short-term obligations that may be funded and, as a result, are presented in the current period in the table above. As of June 30, 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 June 30, 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 June 30, 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. 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 June 30, 2006, the capital and surplus of MetLife Investors was in 106 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 June 30, 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 MetLife Reinsurance Company of South Carolina, formerly The Travelers Life and Annuity Reinsurance Company, at the greater of $250,000 or 10% of net loss reserves (loss reserves less DAC). 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, 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. 107 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 increased by $394 million to $4,013 million for the six months ended June 30, 2006 from $3,619 million for the comparable 2005 period. The $509 million increase in operating cash flows in 2006 over the comparable 2005 period is primarily attributable to the acquisition of Travelers. Net cash used in investing activities increased by $12,051 million to $19,173 million for the six months ended June 30, 2006 from $7,122 million for the comparable 2005 period. Net cash used in investing activities increased primarily due to the increase in net purchases of fixed maturities, the increase in the net origination of mortgage and consumer loans, the decrease in net sales of real estate and real estate joint ventures, the increase in the purchase of short-term investments and the increased investment in other invested assets. Net cash used in investing activities also increased as a result of a decrease in cash received from the sale of businesses, principally SSRM. The increase in net cash used in investing activities was offset by a decrease in net purchases of equity securities and other limited partnerships. Net cash provided by financing activities increased by $2,262 million to $15,268 million for the six months ended June 30, 2006 from $13,006 million for the comparable 2005 period. Net cash provided by financing activities increased primarily a result of an increase in the amount of securities lending cash collateral invested in connection with the securities lending program and a reduction in the repayment of long-term debt during the current period. These increases in net cash provided by financing activities were offset by a decrease in net deposits related to policyholder account balances and the issuance of long-term debt, preferred stock and junior subordinated debentures in the current period as compared to the prior period. Such issuances in the prior period were executed to finance the acquisition of Travelers. 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, 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 federal banking regulatory agencies' "adequately capitalized" standards. 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. 108 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 six months ended June 30, 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 June 30, 2006 and December 31, 2005, the Holding Company had $671 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 June 30, 2006 and December 31, 2005, the Holding Company had $1.3 billion and $961 million in short-term debt outstanding, respectively. At June 30, 2006 and December 31, 2005, the Holding Company had $7.4 billion and $7.3 billion of unaffiliated long-term debt outstanding, respectively. At June 30, 2006 and December 31, 2005, the Holding Company had $296 million and $286 million of affiliated long-term debt outstanding, respectively. 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 109 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 six months ended June 30, 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 six months ended June 30, 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 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. Each common equity unit has an initial stated amount of $25 per unit and consists of (i) a 1/80, or 1.25% ($12.50), undivided beneficial ownership interest in a series A trust preferred security of MetLife Capital Trust II ("Series A Trust"), with an initial liquidation amount of $1,000; (ii) a 1/80, or 1.25% ($12.50), undivided beneficial ownership interest in a series B trust preferred security of MetLife Capital Trust III ("Series B Trust" and, together with the Series A Trust, the "Trusts"), with an initial liquidation amount of $1,000; and (iii) a stock purchase contract under which the holder of the common equity unit will purchase and the Holding Company will sell, on each of the initial stock purchase date and the subsequent stock purchase date, a variable number of shares of the Holding Company's common stock, par value $0.01 per share, for a purchase price of $12.50. 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, and $1.5 billion expiring in 2010, which it shares with MetLife Funding) as of June 30, 2006. 110 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 June 30, 2006, there were no borrowings against these credit facilities. At June 30, 2006, $594 million of the unsecured credit facilities support the letters of credit issued on behalf of the Company, of which $334 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 MetLife Re and various institutional lenders became effective. Under the L/C Agreement, the Holding Company agreed to unconditionally guarantee reimbursement obligations of MetLife Re 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 June 30, 2006:
LETTER OF CREDIT UNUSED ACCOUNT PARTY EXPIRATION CAPACITY ISSUANCES COMMITMENTS - ------------------------------------- ----------------- -------- --------- ----------- (IN MILLIONS) MetLife Reinsurance Company of South Carolina........................... July 2010 (1) $2,000 $2,000 $ -- Exeter Reassurance Company Ltd. and MetLife, Inc. ..................... June 2016 (2) 500 290 210 Exeter Reassurance Company Ltd. ..... March 2025 (1)(3) 225 225 -- Exeter Reassurance Company Ltd. ..... June 2025 (1)(3) 250 250 -- Exeter Reassurance Company Ltd. ..... June 2025 (1)(3) 325 21 304 ------ ------ ---- Total......................... $3,300 $2,786 $514 ====== ====== ====
- --------------- (1) The Holding Company is a guarantor under this agreement. (2) Letters of credit issued under this facility of $280 million and $10 million expire in December 2015 and March 2016, respectively. (3) On June 1, 2006, the letter of credit issuer elected to extend the initial stated termination date of each respective letter of credit to the respective dates indicated. At June 30, 2006 and December 31, 2005, the Holding Company had $334 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 May 16, 2006, the Holding Company's board of directors declared dividends of $0.3775833 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 June 15, 2006 to shareholders of record as of May 31, 2006. 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. 111 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 six months ended June 30, 2006, the Holding Company invested an aggregate of $543 million in various affiliated transactions. 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 in the Company's ownership percentage of RGA to approximately 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 June 30, 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 as of June 30, 2006. 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 June 30, 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 MetLife Reinsurance Company of South Carolina, formerly The Travelers Life and Annuity Reinsurance Company, at the greater of $250,000 or 10% of net loss reserves (loss reserves less DAC). 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. 112 SUBSEQUENT EVENTS On July 18, 2006, the Company announced that it is evaluating options with respect to its Peter Cooper Village and Stuyvesant Town properties, including the possibility of marketing the assets for sale. The Peter Cooper Village and Stuyvesant Town properties together make up the largest apartment complex in Manhattan, New York totaling over 11,200 units, spread over 80 contiguous acres. The properties are owned by the Holding Company's subsidiary Metropolitan Tower Life Insurance Company. The sale of these properties is contingent on pricing that meets the Company's expectations. 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 $2,992 million and $2,684 million at June 30, 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. MORTGAGE LOAN COMMITMENTS The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $4,190 million and $2,974 million at June 30, 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. COMMITMENTS TO FUND REVOLVING CREDIT FACILITIES AND BRIDGE LOANS The Company commits to lend funds under revolving credit facilities and bridge loans. The amounts of these unfunded commitments were $604 million and $346 million at June 30, 2006 and December 31, 2005, respectively. The purpose of these commitments and any related fundings 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 LETTERS 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. 113 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. During the six months ended June 30, 2006, the Company did not record any additional liabilities for indemnities, guarantees and commitments. During 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 June 30, 2006 and December 31, 2005 for indemnities, guarantees and commitments were $9 million. In connection with replication synthetic asset transactions, 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 $599 million at June 30, 2006. 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 114 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 is $926 million and $1.1 billion at June 30, 2006 and December 31, 2005, respectively, which is included in policyholder account balances. MetLife Bank is a member of the FHLB of NY and holds $52 million and $43 million of common stock of the FHLB of NY, at June 30, 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 is $951 million and $855 million at June 30, 2006 and December 31, 2005, respectively, which is included in long-term debt. COLLATERAL FOR SECURITIES LENDING The Company has noncash collateral for securities lending on deposit 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 $126 million and $207 million at June 30, 2006 and December 31, 2005, respectively. 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 SEC 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 six months ended June 30, 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). 115 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 flows. 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 116 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 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 117 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 No. 115, Accounting for Certain Investments in Debt and Equity Securities, that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment but has issued FSP FAS 115-1 and FAS 124-1, 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 June 30, 2005, the Company was evaluating the impacts of the repatriation provision of the AJCA and during the six months ended June 30, 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. As of January 1, 2006, the repatriation provision of the AJCA no longer applies to the Company. 118 FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the FASB issued FSP FAS 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction ("FSP 13-2"). FSP 13-2 amends SFAS No. 13, Accounting for Leases, to require that a lessor review the projected timing of income tax cash flows generated by a leveraged lease annually or more frequently if events or circumstances indicate that a change in timing has occurred or is projected to occur. In addition, FSP 13-2 requires that the change in the net investment balance resulting from the recalculation be recognized as a gain or loss from continuing operations in the same line item in which leveraged lease income is recognized in the year in which the assumption is changed. The guidance in FSP 13-2 is effective for fiscal years beginning after December 15, 2006. FSP 13-2 is not expected to have a material impact on the Company's consolidated financial statements. In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, treatment of interest and penalties, and disclosure of such positions. FIN 48 will be applied prospectively and will be effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating FIN 48 and does not expect adoption to have a material impact on the Company's consolidated financial statements. In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets -- an amendment of FASB Statement No. 140 ("SFAS 156"). 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 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 DAC 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 DAC, unearned revenue and deferred sales inducements associated with the replaced contract. The guidance 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. 119 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 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. 120 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 and six months ended June 30, 2006 and 2005:
AT OR FOR THE AT OR FOR THE THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 2006 2005 2006 2005 -------- -------- -------- -------- (IN MILLIONS) FIXED MATURITIES Yield(1)........................................ 6.10% 6.34% 6.12% 6.34% Investment income(2)............................ $ 2,986 $ 2,310 $ 5,982 $ 4,588 Net investment gains (losses)................... $ (381) $ (89) $ (793) $ (203) Ending assets(2)................................ $237,612 $184,830 $237,612 $184,830 MORTGAGE AND CONSUMER LOANS Yield(1)........................................ 6.41% 6.89% 6.55% 6.79% Investment income(3)............................ $ 574 $ 535 $ 1,159 $ 1,052 Net investment gains (losses)................... $ 3 $ (8) $ 7 $ (19) Ending assets................................... $ 38,665 $ 33,586 $ 38,665 $ 33,586 REAL ESTATE AND REAL ESTATE JOINT VENTURES(4) Yield(1)........................................ 11.37% 12.41% 11.93% 11.82% Investment income............................... $ 135 $ 130 $ 281 $ 249 Net investment gains (losses)................... $ 54 $ 1,904 $ 71 $ 1,922 Ending assets................................... $ 4,786 $ 3,998 $ 4,786 $ 3,998 POLICY LOANS Yield(1)........................................ 5.89% 6.19% 5.86% 6.18% Investment income............................... $ 147 $ 139 $ 293 $ 277 Ending assets................................... $ 10,065 $ 8,975 $ 10,065 $ 8,975 EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS Yield(1)........................................ 14.83% 21.40% 13.86% 15.92% Investment income............................... $ 278 $ 277 $ 513 $ 396 Net investment gains (losses)................... $ 25 $ 12 $ 52 $ 107 Ending assets................................... $ 8,007 $ 5,914 $ 8,007 $ 5,914 CASH AND SHORT-TERM INVESTMENTS Yield(1)........................................ 4.70% 3.57% 4.67% 3.59% Investment income............................... $ 85 $ 91 $ 165 $ 155 Net investment gains (losses)................... $ (1) $ -- $ (2) $ (1) Ending assets................................... $ 8,193 $ 15,770 $ 8,193 $ 15,770 OTHER INVESTED ASSETS(5) Yield(1)........................................ 7.94% 7.83% 8.41% 8.22% Investment income............................... $ 168 $ 102 $ 339 $ 206 Net investment gains (losses)................... $ (517) $ 406 $ (776) $ 398 Ending assets................................... $ 9,652 $ 6,452 $ 9,652 $ 6,452 TOTAL INVESTMENTS Gross investment income yield(1)................ 6.49% 6.81% 6.51% 6.69% Investment fees and expenses yield.............. (0.14%) (0.15%) (0.13%) (0.13%) -------- -------- -------- -------- NET INVESTMENT INCOME YIELD..................... 6.35% 6.66% 6.38% 6.56% ======== ======== ======== ======== Gross investment income......................... $ 4,373 $ 3,584 $ 8,732 $ 6,923 Investment fees and expenses.................... $ (96) $ (76) $ (177) $ (136) -------- -------- -------- -------- NET INVESTMENT INCOME(4)(5)..................... $ 4,277 $ 3,508 $ 8,555 $ 6,787 ======== ======== ======== ======== Ending assets................................... $316,980 $259,525 $316,980 $259,525 ======== ======== ======== ======== Net investment gains (losses)(4)(5)............. $ (817) $ 2,225 $ (1,441) $ 2,204 ======== ======== ======== ========
121 - --------------- (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 $519 million and $197 million in ending assets relating to trading securities at June 30, 2006 and 2005, respectively. Fixed maturities include ($3) million and $16 million in investment income relating to trading securities for the three months and six months ended June 30, 2006, respectively, and $2 million and $3 million for the three months and six months ended June 30, 2005, respectively. The annualized yield on trading securities was (1.99%) and 4.09% for the three months and six months ended June 30, 2006, respectively, and 5.27% and 5.09% for the three months and six months ended June 30, 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 $5 million and $9 million for the three months and six months ended June 30, 2006, respectively, and $21 million and $66 million for the three months and six months ended June 30, 2005, respectively. Net investment gains (losses) includes ($3) million and ($8) million of amounts classified as discontinued operations for the three months and six months ended June 30, 2006, respectively, and $1,905 million and $1,923 million of gains for the three months and six months ended June 30, 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 $68 million and $107 million for the three months and six months ended June 30, 2006, respectively, and $13 million and $37 million for the three months and six months ended June 30, 2005, respectively. These amounts are excluded from net investment gains (losses). Additionally, excluded from net investment gains (losses) is $3 million and ($1) million for three months and six months ended June 30, 2006, respectively, 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. There were no settlement payments on derivatives used to hedge interest rate and currency risk on policyholder account balances that do not qualify for hedge accounting for the three months and six months ended June 30, 2005. FIXED MATURITIES AND EQUITY SECURITIES AVAILABLE-FOR-SALE Fixed maturities consist principally of publicly traded and privately placed debt securities, and represented 74.8% and 75.2% of total cash and invested assets at June 30, 2006 and December 31, 2005, respectively. Based on estimated fair value, public fixed maturities represented $206,240 million, or 87.0%, and $200,177 million, or 87.0%, of total fixed maturities at June 30, 2006 and December 31, 2005, respectively. Based on estimated fair value, private fixed maturities represented $30,853 million, or 13.0%, and $29,873 million, or 13.0%, of total fixed maturities at June 30, 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). 122 The following table presents the Company's total fixed maturities by Nationally Recognized Statistical Rating Organizations designation and the equivalent ratings of the NAIC, as well as the percentage, based on estimated fair value, that each designation is comprised of at:
JUNE 30, 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) Aaa/Aa/A.................... 1 $173,219 $171,836 72.5% $161,256 $165,577 72.0% Baa......................... 2 48,393 48,032 20.2 47,712 49,124 21.3 Ba.......................... 3 9,743 9,836 4.1 8,794 9,142 4.0 B........................... 4 6,751 6,762 2.9 5,666 5,710 2.5 Caa and lower............... 5 429 429 0.2 287 290 0.1 In or near default.......... 6 20 18 -- 18 15 -- -------- -------- ----- -------- -------- ----- Subtotal.................... 238,555 236,913 99.9 223,733 229,858 99.9 Redeemable preferred stock....................... 186 180 0.1 193 192 0.1 -------- -------- ----- -------- -------- ----- Total fixed maturities...... $238,741 $237,093 100.0% $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. 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. 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:
JUNE 30, 2006 -------------------------------------------------- COST OR GROSS UNREALIZED AMORTIZED ----------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL --------- ------- ------- ---------- ----- (IN MILLIONS) U.S. corporate securities.............. $ 76,260 $1,353 $2,457 $ 75,156 31.7% Residential mortgage-backed securities........................... 52,128 193 1,185 51,136 21.6 Foreign corporate securities........... 35,302 1,393 1,084 35,611 15.0 U.S. Treasury/agency securities........ 26,359 678 853 26,184 11.0 Commercial mortgage-backed securities........................... 19,063 116 566 18,613 7.8 Asset-backed securities................ 13,112 79 124 13,067 5.5 Foreign government securities.......... 10,433 999 142 11,290 4.8 State and political subdivision securities........................... 4,897 106 121 4,882 2.1 Other fixed maturity securities........ 1,001 15 42 974 0.4 -------- ------ ------ -------- ----- Total bonds.......................... 238,555 4,932 6,574 236,913 99.9 Redeemable preferred stock............. 186 2 8 180 0.1 -------- ------ ------ -------- ----- Total fixed maturities............... $238,741 $4,934 $6,582 $237,093 100.0% ======== ====== ====== ======== ===== Common stock........................... $ 1,843 $ 305 $ 43 $ 2,105 65.7% Non-redeemable preferred stock......... 1,094 33 30 1,097 34.3 -------- ------ ------ -------- ----- Total equity securities(1)........... $ 2,937 $ 338 $ 73 $ 3,202 100.0% ======== ====== ====== ======== =====
123
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% ======== ====== ====== ======== =====
- --------------- (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 $230 million and $472 million at June 30, 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 $27 million and $36 million for the three months and six months ended June 30, 2006, respectively, and $29 million and $48 million for the 124 three months and six months ended June 30, 2005, respectively. The Company's three largest impairments totaled $16 million for both the three months and six months ended June 30, 2006 and $26 million and $40 million for the three months and six months ended June 30, 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 and six months ended June 30, 2006, the Company sold or disposed of fixed maturities and equity securities at a loss that had a fair value of $16,789 million and $44,292 million, respectively, and $16,410 million and $37,838 million for the three months and six months ended June 30, 2005, respectively. Gross losses excluding impairments for fixed maturities and equity securities were $437 million and $962 million for the three months and six months ended June 30, 2006, respectively, and $224 million and $453 million for the three months and six months ended June 30, 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 June 30, 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:
JUNE 30, 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............ $ 94,474 $359 $2,774 $105 9,608 254 Six months or greater but less than nine months.............. 16,486 17 711 4 1,606 6 Nine months or greater but less than twelve months............ 42,648 5 2,482 3 4,657 15 Twelve months or greater........ 11,557 9 573 3 1,460 10 -------- ---- ------ ---- ------ --- Total......................... $165,165 $390 $6,540 $115 17,331 285 ======== ==== ====== ==== ====== ===
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 June 30, 2006, $6,540 million of unrealized losses related to securities with an unrealized loss position of less than 20% of cost or amortized cost, which represented 4% 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 of less than 20% of cost or amortized cost, which represented 2% of the cost or amortized cost of such securities. As of June 30, 2006, $115 million of unrealized losses related to securities with an unrealized loss position of 20% or more of cost or amortized cost, which represented 29% of the cost or amortized cost of such securities. Of such unrealized losses of $115 million, $105 million relates to securities that were in an unrealized loss position for a period of less than six months. As of December 31, 2005, $58 million of 125 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 relates to securities that were in an unrealized loss position for a period of less than six months. The Company held 27 fixed maturities and equity securities with a gross unrealized loss at June 30, 2006 of greater than $10 million each. These securities represented approximately 11% or $721 million in the aggregate of the gross unrealized loss on fixed maturities and equity securities. As of June 30, 2006 and December 31, 2005, the Company had $6,655 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:
JUNE 30, DECEMBER 31, 2006 2005 ----------- --------------- SECTOR: U.S. corporates........................................... 37% 37% Residential mortgage-backed............................... 18 21 Foreign corporates........................................ 16 20 U.S. Treasury/agency securities........................... 13 4 Commercial mortgage-backed................................ 9 9 Other..................................................... 7 9 --- --- Total.................................................. 100% 100% === === INDUSTRY: Mortgage-backed........................................... 26% 30% Industrial................................................ 20 22 Government................................................ 15 5 Finance................................................... 12 11 Utility................................................... 9 6 Other..................................................... 18 26 --- --- Total.................................................. 100% 100% === ===
The increase in the unrealized losses during the period ended June 30, 2006 is principally driven by an increase in interest rates. As described previously, 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. One of the criteria which the Company considers in its other-than-temporary impairment analysis is its intent and ability to hold securities for a period of time sufficient to allow for the recovery of their value to an amount equal to or greater than cost or amortized cost. The Company's intent and ability to hold securities considers broad portfolio management objectives such as asset/liability duration management, issuer and industry segment exposures, interest rate views and the overall total return focus. In following these portfolio management objectives, changes in facts and circumstances that were present in past reporting periods may trigger a decision to sell securities that were held in prior reporting periods. Decisions to sell are based on current conditions or the Company's need to shift the portfolio to maintain its portfolio management objectives including liquidity needs or duration targets on asset/liability managed portfolios. The Company attempts to anticipate these types of changes and if a sale decision has been made on an impaired security and that security is not expected to recover prior to the expected time of sale, the security will be deemed other-than-temporarily impaired in the period that the sale decision was made and an other-than-temporary impairment loss will be recognized. 126 Based upon the Company's current 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 current 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:
JUNE 30, 2006 DECEMBER 31, 2005 ------------------ ------------------ ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (IN MILLIONS) Industrial....................................... $ 40,637 36.7% $ 41,322 37.8% Foreign(1)....................................... 35,611 32.1 34,981 32.0 Finance.......................................... 20,450 18.5 19,189 17.5 Utility.......................................... 13,059 11.8 12,633 11.6 Other............................................ 1,010 0.9 1,174 1.1 -------- ----- -------- ----- Total.......................................... $110,767 100.0% $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 June 30, 2006 and December 31, 2005, the Company's combined holdings in the ten issuers to which it had the greatest exposure totaled $6,281 million and $6,215 million, respectively, each less than 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 June 30, 2006 and December 31, 2005 was $877 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:
JUNE 30, 2006 DECEMBER 31, 2005 ------------------ ------------------ ESTIMATED % OF ESTIMATED % OF FAIR VALUE TOTAL FAIR VALUE TOTAL ---------- ----- ---------- ----- (IN MILLIONS) Residential mortgage-backed securities: Collateralized mortgage obligations............ $31,230 37.7% $29,679 38.8% Pass-through securities........................ 19,906 24.0 17,567 23.0 ------- ----- ------- ----- Total residential mortgage-backed securities..... 51,136 61.7 47,246 61.8 Commercial mortgage-backed securities............ 18,613 22.5 17,698 23.1 Asset-backed securites........................... 13,067 15.8 11,573 15.1 ------- ----- ------- ----- Total....................................... $82,816 100.0% $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 June 30, 2006 and December 31, 2005, $50,690 million and $46,304 million, respectively, or 99% and 98%, respectively, of the residential mortgage-backed securities were rated Aaa/AAA by Moody's, S&P or Fitch. 127 At June 30, 2006 and December 31, 2005, $15,389 million and $13,272 million, respectively, or 83% and 75%, respectively, 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. Credit card receivables and home equity loans, accounting for about 32% and 25% of the total holdings, respectively, constitute the largest exposures in the Company's asset-backed securities portfolio. At June 30, 2006 and December 31, 2005, $7,325 million and $6,084 million, respectively, or 56% and 53%, respectively, 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 are debt securities that generally provide equity-based returns. The carrying value, included in fixed maturities, of such investments was approximately $366 million and $362 million at June 30, 2006 and December 31, 2005, respectively. The related net investment income recognized was less than $1 million and $19 million for the three months and six months ended June 30, 2006, respectively, and less than $1 million and $4 million for the three months and six months ended June 30, 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 June 30, 2006 and December 31, 2005, trading securities are $519 million and $825 million, respectively, and liabilities associated with the repurchase agreements in the trading securities portfolio, which are included in other liabilities, are approximately $208 million and $460 million, respectively. 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 128 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. At December 31, 2005, MetLife was the majority owner of the feeder fund and consolidated the fund within its consolidated financial statements. At December 31, 2005, approximately $452 million of trading securities were related to Tribeca and approximately $190 million of the repurchase agreements were related to Tribeca. Net investment income related to the trading activities of Tribeca for the three months and six months ended June 30, 2006 includes $1 million and $12 million, respectively, of interest and dividends earned and net realized and unrealized gains (losses). During the second quarter of 2006, MetLife's ownership interests in Tribeca declined to a position whereby Tribeca is no longer consolidated and as of June 30, 2006 is accounted for under the equity method of accounting. The equity method investment at June 30, 2006 of $103 million is included in other limited partnership interests. Net investment income related to the Company's equity method investment in Tribeca was $3 million for the three months and six months ended June 30, 2006. During the three months and six months ended June 30, 2006, 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 $7 million and $8 million, respectively, and $1 million and $3 million for the three months and six months ended June 30, 2005, respectively. Changes in the fair value of such trading securities and repurchase agreement liabilities, excluding Tribeca, total ($11) million and ($4) million for the three months and six months ended June 30, 2006, respectively, and $1 million and $0 million for the three months and six months ended June 30, 2005, 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 12.2% of the Company's total cash and invested assets at both June 30, 2006 and December 31, 2005. 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:
JUNE 30, 2006 DECEMBER 31, 2005 ---------------- ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- --------- ------ (IN MILLIONS) Commercial mortgage loans.......................... $29,533 76.4% $28,022 75.4% Agricultural mortgage loans........................ 7,817 20.2 7,700 20.7 Consumer loans..................................... 1,315 3.4 1,468 3.9 ------- ----- ------- ----- Total............................................ $38,665 100.0% $37,190 100.0% ======= ===== ======= =====
129 Commercial Mortgage Loans. The Company diversifies its commercial mortgage loans by both geographic region and property type. The following table presents the distribution across geographic regions and property types for commercial mortgage loans at:
JUNE 30, 2006 DECEMBER 31, 2005 ---------------- ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- --------- ------ (IN MILLIONS) REGION Pacific............................................ $ 7,602 25.8% $ 6,818 24.3% South Atlantic..................................... 6,714 22.7 6,093 21.8 Middle Atlantic.................................... 4,346 14.7 4,689 16.7 East North Central................................. 2,884 9.8 3,078 11.0 West South Central................................. 2,482 8.4 2,069 7.4 New England........................................ 1,165 3.9 1,295 4.6 International...................................... 2,242 7.6 1,817 6.5 Mountain........................................... 814 2.8 861 3.1 West North Central................................. 811 2.7 825 2.9 East South Central................................. 378 1.3 381 1.4 Other.............................................. 95 0.3 96 0.3 ------- ----- ------- ----- Total............................................ $29,533 100.0% $28,022 100.0% ======= ===== ======= ===== PROPERTY TYPE Office............................................. $14,060 47.6% $13,453 48.0% Retail............................................. 6,585 22.3 6,398 22.8 Apartments......................................... 3,422 11.6 3,102 11.1 Industrial......................................... 2,939 10.0 2,656 9.5 Hotel.............................................. 1,429 4.8 1,355 4.8 Other.............................................. 1,098 3.7 1,058 3.8 ------- ----- ------- ----- Total............................................ $29,533 100.0% $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. 130 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:
JUNE 30, 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................... $29,670 100.0% $140 0.5% $28,158 100.0% $147 0.5% Restructured................. -- -- -- --% -- -- -- --% Potentially delinquent....... 2 -- -- --% 3 -- -- --% Delinquent or under foreclosure................ 1 -- -- --% 8 -- -- --% ------- ----- ---- ------- ----- ---- Total...................... $29,673 100.0% $140 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:
SIX MONTHS ENDED JUNE 30, 2006 ---------------- (IN MILLIONS) Balance, beginning of period................................ $147 Additions................................................... 5 Deductions.................................................. (12) ---- Balance, end of period...................................... $140 ====
Agricultural Mortgage Loans. The Company diversifies its agricultural mortgage loans by both geographic region and product type. Approximately 66% of the $7,817 million of agricultural mortgage loans outstanding at June 30, 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. The following table presents the amortized cost and valuation allowances for agricultural mortgage loans distributed by loan classification at:
JUNE 30, 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................... $7,723 98.6% $ 9 0.1% $7,635 99.0% $ 8 0.1% Restructured................. 14 0.2 -- --% 36 0.5 -- --% Potentially delinquent....... 15 0.2 -- --% 3 -- 1 33.3% Delinquent or under foreclosure................ 82 1.0 8 9.8% 37 0.5 2 5.4% ------ ----- --- ------ ----- --- Total...................... $7,834 100.0% $17 0.2% $7,711 100.0% $11 0.1% ====== ===== === ====== ===== ===
- --------------- (1) Amortized cost is equal to carrying value before valuation allowances. 131 The following table presents the changes in valuation allowances for agricultural mortgage loans for the:
SIX MONTHS ENDED JUNE 30, 2006 ---------------- (IN MILLIONS) Balance, beginning of period................................ $11 Additions................................................... 8 Deductions.................................................. (2) --- Balance, end of period...................................... $17 ===
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 June 30, 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 $4,786 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 June 30, 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:
JUNE 30, 2006 DECEMBER 31, 2005 --------------------- --------------------- CARRYING CARRYING TYPE VALUE % OF TOTAL VALUE % OF TOTAL - ------------------------------------------------------ -------- ---------- -------- ---------- (IN MILLIONS) Real estate held-for-investment....................... $3,575 74.7% $3,426 73.4% Real estate joint ventures held-for-investment........ 923 19.3 926 19.9 Foreclosed real estate held-for-investment............ 9 0.2 4 0.1 ------ ----- ------ ----- 4,507 94.2 4,356 93.4 ------ ----- ------ ----- Real estate held-for-sale............................. 279 5.8 309 6.6 Foreclosed real estate held-for-sale.................. -- -- -- -- ------ ----- ------ ----- 279 5.8 309 6.6 ------ ----- ------ ----- Total real estate, real estate joint ventures and real estate held-for-sale................................ $4,786 100.0% $4,665 100.0% ====== ===== ====== =====
The Company's carrying value of real estate held-for-sale, including real estate acquired upon foreclosure of commercial and agricultural mortgage loans, in the amounts of $279 million and $309 million at June 30, 2006 and December 31, 2005, respectively, have been reduced by impairments of $9 million and $0 million, respectively, at June 30, 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 variable interest entity ("VIE") under FIN No. 46, Consolidation of Variable Interest Entities -- An Interpretation of Accounting Research Bulletin No. 51, and its December 2003 revision ("FIN 46(r)"). See "-- Investments -- Variable Interest Entities." In the second quarter of 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 gains, net of income taxes, of $431 million and $762 million, respectively. Net investment income on One Madison Avenue 132 and 200 Park Avenue was $4 million and $1 million, respectively, for the three months ended June 30, 2005 and $15 million and $17 million, respectively, for the six months ended June 30, 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 $4,805 million and $4,276 million at June 30, 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 1.5% and 1.4% of cash and invested assets at June 30, 2006 and December 31, 2005, respectively. 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 of $1,076 million and $1,081 million, funds withheld at interest of $3,629 million and $3,492 million, and derivative revaluation gains of $2,471 million and $2,023 million at June 30, 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 3.0% and 2.6% of cash and invested assets at June 30, 2006 and December 31, 2005, respectively. 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 synthetic asset transactions as permitted by its insurance subsidiaries' Derivatives Use Plans approved by the applicable state insurance departments. 133 The following table provides a summary of the notional amounts and current market or fair value of derivative financial instruments held at:
JUNE 30, 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....... $ 18,585 $ 710 $ 432 $20,444 $ 653 $ 69 Interest rate floors...... 41,237 243 -- 10,975 134 -- Interest rate caps........ 34,588 309 -- 27,990 242 -- Financial futures......... 1,355 5 13 1,159 12 8 Foreign currency swaps.... 17,163 681 1,169 14,274 527 991 Foreign currency forwards................ 3,556 60 45 4,622 64 92 Options................... 968 403 4 815 356 6 Financial forwards........ 3,811 34 26 2,452 13 4 Credit default swaps...... 6,569 4 10 5,882 13 11 Synthetic GICs............ 3,718 -- -- 5,477 -- -- Other..................... 250 22 -- 250 9 -- -------- ------ ------ ------- ------ ------ Total................... $131,800 $2,471 $1,699 $94,340 $2,023 $1,181 ======== ====== ====== ======= ====== ======
The above table does not include notional values for equity futures, equity financial forwards, and equity options. At June 30, 2006 and December 31, 2005, the Company owned 1,639 and 3,305 equity futures contracts, respectively. Equity futures market values are included in financial futures in the preceding table. At both June 30, 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 June 30, 2006 and December 31, 2005, the Company owned 74,506,808 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 June 30, 2006 and December 31, 2005, the Company was obligated to return cash collateral under its control of $329 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 June 30, 2006 and December 31, 2005, the Company had also accepted collateral consisting of various securities with a fair market value of $430 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 June 30, 2006 and December 31, 2005, none of the collateral had been sold or repledged. As of June 30, 2006 and December 31, 2005, the Company provided collateral of $216 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. 134 VARIABLE INTEREST ENTITIES The following table presents the total assets of and maximum exposure to loss relating to VIEs for which the Company has concluded that (i) it is the primary beneficiary and which are consolidated in the Company's consolidated financial statements at June 30, 2006; and (ii) it holds significant variable interests but it is not the primary beneficiary and which have not been consolidated:
JUNE 30, 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.......... $ -- $-- $ 2,998 $ 355 Real estate joint ventures(3).............. 13 11 192 17 Other limited partnerships(4).............. 132 50 13,335 1,616 Other investments(5)....................... -- -- 4,538 303 ---- --- ------- ------ Total.................................... $145 $61 $21,063 $2,291 ==== === ======= ======
- --------------- (1) The assets of the asset-backed securitizations and collateralized debt obligations are reflected at fair value at June 30, 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 $45,897 million and $32,068 million and an estimated fair value of $45,129 million and $32,954 million were on loan under the program at June 30, 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 $46,283 million and $33,893 million at June 30, 2006 and December 31, 2005, respectively. Securities loaned transactions are 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 $126 million and $207 million, respectively, at June 30, 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. 135 SEPARATE ACCOUNTS The Company had $132.8 billion and $127.9 billion held in its separate accounts, for which the Company does not bear investment risk, as of June 30, 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 the 2005 Annual Report, 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 the 2005 Annual Report. 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 performing this analysis, the Company used market rates at June 30, 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; 136 - 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 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. The table below illustrates the potential loss in fair value of the Company's interest rate sensitive financial instruments at June 30, 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 June 30, 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 June 30, 2006 was:
JUNE 30, 2006 ---------------- (IN MILLIONS) Non-trading: Interest rate risk........................................ $7,113 Equity price risk......................................... $ 772 Foreign currency exchange rate risk....................... $ 588 Trading: Interest rate risk........................................ $ 11
137 The table below provides additional detail regarding the potential loss in fair value of the Company's non-trading interest sensitive financial instruments at June 30, 2006 by type of asset or liability.
AS OF JUNE 30, 2006 ------------------------------------ ASSUMING A 10% INCREASE NOTIONAL IN THE YIELD AMOUNT FAIR VALUE CURVE. -------- ---------- ------------ (IN MILLIONS) ASSETS Fixed maturities.......................................... $237,093 $(6,760) Equity securities......................................... 3,202 -- Mortgage and consumer loans............................... 38,521 (838) Policy loans.............................................. 10,065 (329) Short-term investments.................................... 4,067 (9) Cash and cash equivalents................................. 4,126 -- Mortgage loan commitments................................. $ 4,190 (13) (6) ------- Total assets........................................... $(7,942) ------- LIABILITIES Policyholder account balances............................. $105,939 $ 857 Short-term debt........................................... 2,253 -- Long-term debt............................................ 10,563 387 Junior subordinated debt securities underlying common equity units........................................... 2,004 28 Shares subject to mandatory redemption.................... 221 -- Payables for collateral under securities loaned and other transactions........................................... 46,612 -- ------- Total liabilities...................................... $ 1,272 ------- OTHER Derivative instruments (designated hedges or otherwise) Interest rate swaps.................................... $18,585 $ 278 $ (159) Interest rate floors................................... 41,237 243 (85) Interest rate caps..................................... 34,588 309 101 Financial futures...................................... 1,355 (8) (51) Foreign currency swaps................................. 17,163 (488) (249) Foreign currency forwards.............................. 3,556 15 -- Options................................................ 968 399 -- Financial forwards..................................... 3,811 8 -- Credit default swaps................................... 6,569 (6) -- Synthetic GICs......................................... 3,718 -- -- Other.................................................. 250 22 -- ------- Total other....................................... $ (443) ------- NET CHANGE.................................................. $(7,113) =======
138 This quantitative measure of risk has increased by $1,590 million, or 29%, at June 30, 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 $1,260 million, an increase in asset growth of approximately $230 million, an increase in derivative use of approximately $190 million, and offset by a decrease in the asset duration and other of approximately $90 million. ITEM 4. CONTROLS AND PROCEDURES Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the 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 Company's internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 139 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The following should be read in conjunction with Note 7 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 June 30, 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 June 30, 2006, there are approximately 324 sales practices litigation matters pending against Metropolitan Life; approximately 45 sales practices litigation matters pending against New England Mutual, New England Life Insurance Company, and New England Securities Corporation (collectively, "New England"); approximately 45 sales practices litigation matters pending against General American; and approximately 29 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 140 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 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 six months ended June 30, 2006 and 2005, Metropolitan Life received approximately 3,886 and 9,110 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 the 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, 2005 and 2006 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 141 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 June 30, 2006, to be approximately $91.8 million in the aggregate, including future years. Property and Casualty Actions A number of lawsuits are pending against MPC (in Louisiana and in Missouri) relating to Hurricane Katrina including purported class actions. 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 action 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, the Holding Company and the individual defendants believe they have meritorious defenses to the plaintiffs' claims and are contesting vigorously all of the plaintiffs' claims in these actions. On April 30, 2004, a lawsuit was filed in New York state court in New York County against the Holding Company and Metropolitan Life on behalf of a proposed class comprised of the settlement class in the Metropolitan Life sales practices class action settlement approved in December 1999 by the United States District Court for the Western District of Pennsylvania. In their amended complaint, plaintiffs challenged the 142 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. On June 26, 2006, the appellate court affirmed the trial court's order dismissing the action. 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 moved for reconsideration. Plaintiffs' motion for reconsideration was denied. Plaintiffs have filed an appeal to the United States Court of Appeals for the District of Columbia Circuit. 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. 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. On or about May 16, 2006, the Oklahoma Insurance Department apprised Metropolitan Life Insurance Company that it had concluded its Limited Market Conduct Examination without issuing a report. The Ohio Department of Insurance has requested documents regarding 143 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 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 is defending these cases vigorously. 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 New England Securities Corporation ("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 144 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, a number of NASD arbitration matters and litigation matters were commenced in 2005 and 2006 against Tower Square. 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 an unrelated 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, as appropriate, with respect to the matters described above. Metropolitan Life also has been named as a defendant in numerous silicosis, welding and mixed dust cases pending in various state or federal courts. 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. 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 June 30, 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 - ------ ---------------- ----------- -------------------- ------------------------- April 1 -- April 30, 2006......... -- $ -- -- $716,206,611 May 1 -- May 31, 2006........... -- $ -- -- $716,206,611 June 1 -- June 30, 2006.......... 2,659 $50.56 -- $716,206,611 ----- Total.................... 2,659 $50.56 -- $716,206,611 ===== ===
145 - --------------- (1) During the periods April 1- April 30, 2006, May 1- May 31, 2006 and June 1- June 30, 2006, separate account affiliates of the Holding Company purchased 0 shares, 0 shares and 2,659 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 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 information called for by this is incorporated herein by reference to Part II, Item 4, "Submission of Matters to a Vote of Security Holders" in MetLife, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. ITEM 5. OTHER INFORMATION Employees The Company disclosed in Part I, Item 1 of its 2005 Annual Report that it employed approximately 65,500 employees. Included in this figure were certain agents who would not be considered employees under local statutes and regulations in foreign jurisdictions and certain other employees. Accordingly, the Company has revised the reported count of employees as of December 31, 2005 to approximately 46,000. The manner in which MetLife counts employees has been modified, but the composition of the MetLife workforce has not changed. Amendments to Benefit Plans On August 7, 2006, Metropolitan Life amended the MetLife Plan for Transition Assistance for Officers (the "MPTA") to eliminate the requirement that employees be notified by June 30, 2006 of their impending discontinuance in order to receive limited additional age and service credit for certain benefit purposes should their discontinuance with MPTA eligibility occur by December 31, 2006. Also on August 7, 2006, Metropolitan Life amended the MPTA to provide certain benefits to employees who are discontinued as a result of a transaction affecting Metropolitan Life's MetLife Retirement Plans division. Officers of certain affiliates of the Company, some of whom are officers of the Company, are eligible to participate in the MPTA if their employment is discontinued due to job elimination and certain other circumstances. The foregoing description of the amendments to the MPTA is not complete and is qualified in its entirety by reference to the complete text of the MPTA, which, as in effect prior to the amendments discussed above, is filed as Exhibit 10.4 to the Form 10-Q of MetLife, Inc. for the quarter ended September 30, 2004, as amended by Amendment Number Ten and Amendment Number Eleven to the MPTA, filed as Exhibits 10.55 and 10.56, respectively, to the 2005 Annual Report, and the August 7, 2006 amendments discussed above, which are filed as Exhibits 10.1 and 10.2, respectively, hereto, each of which are incorporated herein by reference. 146 On August 7, 2006, Metropolitan Life amended and restated the MetLife Auxiliary Pension Plan (the "Auxiliary Plan") to comply with Internal Revenue Code Section 409A, which requires the Auxiliary Plan to state a default time and form of payment of benefits and to conform to certain other terms, and to memorialize the crediting of interest on deferred installment payments. Employees of certain affiliates of the Company, some of whom are officers of the Company, are eligible to participate in the Auxiliary Plan if their annual compensation exceeds the limitations in Internal Revenue Code Section 401(a)(17) or if they voluntarily deferred salary or incentive compensation. The foregoing description is not complete and is qualified in its entirety by reference to the complete text of the Auxiliary Plan, which is filed as Exhibit 10.3 hereto, and which is incorporated herein by reference. 147 ITEM 6. EXHIBITS 10.1 Amendment Number Twelve, dated August 7, 2006, to the MetLife Plan for Transition Assistance for Officers, dated January 7, 2000, as amended (the "MPTA") 10.2 Amendment Number Thirteen to the MPTA, dated August 7, 2006 10.3 MetLife Auxiliary Pension Plan dated August 7, 2006 (as amended and restated, effective June 30, 2006) 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
148 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: August 8, 2006 149 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT NAME - ------- ------------ 10.1 Amendment Number Twelve, dated August 7, 2006, to the MetLife Plan for Transition Assistance for Officers, dated January 7, 2000, as amended (the "MPTA") 10.2 Amendment Number Thirteen to the MPTA, dated August 7, 2006 10.3 MetLife Auxiliary Pension Plan dated August 7, 2006 (as amended and restated, effective June 30, 2006) 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-10.1 2 y23754exv10w1.txt AMENDMENT NUMBER TWELVE TO THE PLAN FOR TRANSITION ASSISTANCE FOR OFFICERS EXHIBIT 10.1 AMENDMENT NUMBER TWELVE TO THE METLIFE PLAN FOR TRANSITION ASSISTANCE FOR OFFICERS The METLIFE PLAN FOR TRANSITION ASSISTANCE FOR OFFICERS (the "Plan") is hereby amended as follows: 1. Section 4.2 of the Plan is hereby amended by deleting the words "and who was notified by the Participant's management in writing no later than June 30, 2006 that the Participant's Date of Discontinuance of Employment was anticipated to be no later than December 31, 2006." 2. This amendment shall be effective with regard to Participants with a Date of Discontinuance of Employment on or after March 2, 2006, but will not apply to any Participant whose Separation Agreement became final prior to January 1, 2006. IN WITNESS WHEREOF, the Company has caused this amendment to be executed by an officer thereunto duly authorized on the date noted below the officer's signature. METROPOLITAN LIFE INSURANCE COMPANY By /s/ Debra Capolarello ---------------------------------- Date: 8/7/06 ------------------------------- /s/ Judith N. Eidenberg - ------------------------------------- Witness EX-10.2 3 y23754exv10w2.txt AMENDMENT NUMBER THIRTEEN TO THE MPTA EXHIBIT 10.2 AMENDMENT NUMBER THIRTEEN TO THE METLIFE PLAN FOR TRANSITION ASSISTANCE FOR OFFICERS The METLIFE PLAN FOR TRANSITION ASSISTANCE FOR OFFICERS (the "Plan") is hereby amended as follows: 1. The Plan is hereby amended by adding the following Section: "Section 10.3 2006-2007 MetLife Retirement Plans Transaction. Notwithstanding any other terms the Plan to the contrary: (a) An Employee who, as of June 26, 2006, spent substantially all of his or her time conducting or supporting the MetLife Retirement Plan business, and who as of that date spent a substantial portion of his or her time in internal or external wholesaling, external customer relationship management, management of wholesaling or external customer relationship management, defined benefits operations, or sales administrative assistance (as defined more specifically as a "Secured Employee" under the terms of and as defined in the Asset Purchase Agreement between the Company and certain of its Affiliates and Great-West Life & Annuity Insurance Company regarding the MetLife Retirement Plans business (the "MRP Asset Purchase Agreement")), and whose employment is discontinued in 2006 or 2007 due to job elimination as a result of the transactions contemplated by the MRP Asset Purchase Agreement, shall not eligible for Severance Pay or Outplacement Assistance but shall otherwise be considered a Job Elimination Participant under the Plan for purposes of benefits provided under certain other benefit plans and may be offered a Separation Agreement without Severance Pay or Outplacement Assistance for purposes of such benefit that are contingent on a final Separation Agreement. (b) Section 1.4.05(b) of this Plan shall not apply to An Employee who, as of June 26, 2006, spent substantially all of his or her time conducting or supporting the MetLife Retirement Plan business (as defined more specifically as a "Dedicated Employee," under the terms of and as defined in the MRP Asset Purchase Agreement) but is not subject to Section 10.3(a) of this Plan, whose employment is discontinued in 2006 or 2007 due to job elimination as a result of the transactions contemplated by MRP Asset Purchase Agreement: 2. This amendment shall be effective as of June 26, 2006. IN WITNESS WHEREOF, Metropolitan Life Insurance Company has caused this amendment to be executed by an officer thereunto duly authorized on the date(s) noted below the officer's signature. METROPOLITAN LIFE INSURANCE COMPANY By: /s/ Debra Capolarello --------------------------------- Date: 8/7/06 ------------------------------- /s/ Judith N. Eidenberg - ------------------------------------- Witness 2 EX-10.3 4 y23754exv10w3.txt AUXILIARY PENSION PLAN EXHIBIT 10.3 METLIFE AUXILIARY PENSION PLAN Metropolitan Life Insurance Company ("Company") hereby amends and restates the MetLife Auxiliary Pension Plan ("Plan") effective June 30, 2006. Part I Part I of this Plan document contains the provisions of the Plan that govern 409A Benefits as defined in Article 4.1(a) of Part I. All references to "409A" or "Section 409A" in this Plan are references to Section 409A of the Internal Revenue Code and the regulations there under. Article 1. Purpose of Plan. The purpose of the Plan is to provide to certain participants employed by the Company, other employers (each an "Employer") participating under the Metropolitan Life Retirement Plan for United States Employees ("Retirement Plan") and his/her beneficiaries, the excess amount that would have been payable under the Retirement Plan in the absence of the limitations under (i) section 415 of the Internal Revenue Code of 1986 (as amended) ("Internal Revenue Code"), (ii) section 401(a)(17) of the Internal Revenue Code, or such lesser limit as in effect under the Retirement Plan and (iii) section 1.415-2(d)(2) of the Income tax Regulations, that excludes compensation deferred under the Company's or an Employer's deferred compensation arrangements. Except for terms defined in this Plan, all capitalized terms used in this Plan shall have the same definition and meaning assigned to those terms under the Retirement Plan. Article 2. Participation A Participant in the Plan is any Employee that is eligible under Section 2.1, 2.2 or 2.3 below: 2.1. An Employee participating in the Retirement Plan: (a) whose Retirement Plan benefits are reduced because of the application of Section 401(a)(17) of the Internal Revenue Code (or such lesser limit as in effect under the Retirement Plan), or, (b) whose Retirement Plan benefits are reduced because of the application of section 415 of the Internal Revenue Code, including Treasury Regulation 1.415-2. shall be eligible to participate in the Plan as stated in all Articles except Section 4.2 of Article 4 and Article 4A. 1 2.2. PRA/PLS Benefit. "PRA/PLS Benefit" means a benefit that is either a Personal Retirement Account benefit or a Performance Pension Account benefit under the Retirement Plan. Likewise, any benefit referred to as a "non PRA/PLS Benefit" or "not a PRA/PLS Benefit" refers to benefits under the Retirement Plan that are not PRA/PLS Benefits. An Employee with a benefit that is not a PRA/PLS Benefit participating in the Retirement Plan who: (a) is in a compensation grade of 36 or higher (or an equivalent compensation grade), or, (b) is a member of the Chairman's Council for 3 consecutive years, or, (c) is listed in Appendix A, or, (d) has been inducted into the Sales Representative Hall of Fame and has attained the age of 65 shall be eligible to participate in the Plan as stated in all Articles. If an Employee is an eligible Participant in the Plan under Section 2.1 of this Article, and on or after January 1, 1995, he/she qualifies as a Participant under Section 2.2 of this Article, then the portion of his/her benefit that is not a PRA/PLS Benefit that has accrued to that Employee shall be determined and payable as if the Employee was always eligible under Section 2.2 of this Article. If, after qualifying as a Participant under Section 2.2 of this Article, an individual's compensation grade drops below level 36 (or its equivalent), or the individual ceases to qualify for the Chairman's Council, then that individual shall continue to be treated as if he or she meets the requirements of Section 2.2 of this Article. 2.3. An Employee participating in the Retirement Plan: (a) (i) who participated and accrued benefits in either of the following plans.: - The New England Life Insurance Company Select Employee's Supplemental Retirement Plan, or - New England Life Insurance Company Supplemental Retirement Plan, and, (ii) who, on December 31, 2000, was actively employed by New England Life Insurance Company, the Company or an Employer, shall be eligible, on January 1, 2001, to participate in this Plan, except Section 4.2 of Article 4 and Article 4A. These individuals shall have his/her entire auxiliary defined benefit as defined in Article 4.2 (and including amounts previously accrued under the New England plans named above) paid under this Plan, in accordance with the terms of this Plan. These individuals shall be eligible to participate in this Plan as stated in 2 Section 4.2 of Article 4 and Article 4A if they qualify as a Participant under Section 2.2 of this Article after December 31, 2000. (b) (i) who participated and accrued benefits in the GenAmerica Corporation Augmented Benefit Plan, (only insofar as it relates to benefits on compensation that exceeded the limits imposed by or upon the GenAmerica Corporation Performance Pension Plan and Trust.) and, (ii) who, on December 31, 2002, was actively employed by General American Life Insurance Company, the Company or an Employer, shall be eligible, on January 1, 2003, to participate in this Plan, except Section 4.2 of Article 4 and Article 4A. These individuals shall have his/her entire auxiliary defined benefit as defined in Section 4.2 (and including amounts previously accrued under the Augmented Benefit Plan) paid under this Plan, in accordance with the terms of this Plan. These individuals shall be eligible to participate in Section 4.2 of Article 4 and Article 4A of this Plan if they qualify as a Participant under Section 2.2 of this Article after December 31, 2002. Article 3. Vesting Participants will vest in their accrued benefit, described in Article 4.2, under this Plan in accordance with the vesting schedule under the Retirement Plan. All benefits accrued by Participants under this Plan, prior to a Change of Control as defined in Article 8, shall vest if the Participant satisfies the vesting schedule that existed under the Retirement Plan immediately prior to the Change of Control. Article 4. Payment of Benefits 4.1. Definitions. (a) 409A Benefits. "409A Benefits" For individuals who are eligible under Section 2.2 on or before December 31, 2006, "409A Benefits" means the portion of a Participant's vested benefit that accrues after December 31, 2004. For all other Participants in the Plan "409A Benefits" means his/her entire accrued benefit payable under this Plan. (b) Grandfathered Benefits. "Grandfathered Benefits" means the portion of a Participant's benefit vested and accrued prior to January 1, 2005 plus any other increases or amounts that can be included in the grandfathered benefit under Internal Revenue Code Section 409A and the regulations there under. Only individuals who: (i) are eligible under Section 2.2 on or before December 31, 2006, (ii) are described in Section 4.6(c) and (d) of the Plan, or 3 (iii) terminated on or before December 31, 2004 with a vested benefit that is not a PRA/PLS Benefit will have "Grandfathered Benefits" under this Plan. 4.2. Benefits under this Plan shall be payable to a Participant in an amount equal to the difference, as determined by the Plan Administrator in its sole discretion, between (a) and (b) below: (a) the largest amount (without duplication of amount) that would have been payable to the Participant under the Retirement Plan, had the Retirement Plan not been subject to the limitations of Internal Revenue Code Sections: (i) 415, (ii) 401(a)(17) or such lesser limit as stated in the Retirement Plan, and (iii) Regulation Section 1. 415-2(d)(2) (with respect to deferred compensation arrangements); and, (b) the amount of benefits payable under the Retirement Plan and any predecessor auxiliary plan. 4.3. Distribution of 409A Benefits Participants who have an election on file that complies with 409A, as determined by the Plan Administrator, and specifies the time and form for distribution of benefits, will have that election govern payment. If a Participant does not have an election on file that complies with 409A, then benefits commencing during 2006 will continue to follow, in time and form, the Participant's distributions under the Retirement Plan. With regard to benefits commencing after December 31, 2006, the time/form of payment for the Participant's 409A Benefits will be as specified below: (a) PRA/PLS Benefits will be paid in a lump sum as soon as administratively possible after separation from service. (b) Benefits that are not PRA/PLS Benefits will be paid in the following annuity forms commencing after separation from service and attainment of Retirement eligibility: (i) Participants who are not married at the time distributions commence will receive a life annuity with a 5 year term certain. (ii) Participants who are married at the time distributions commence will receive a 50% contingent survivor annuity, with the spouse of the Participant as the survivor annuitant. (c) PRA/PLS Benefits for Participants who terminated on or before December 31, 2006, will be paid in a lump sum as soon as administratively possible after December 31, 2006. 4 (d) Participants with benefits that are not PRA/PLS Benefits, who separated from service and are Retirement eligible as of December 31, 2006, will have benefits paid to him/her in the appropriate annuity form specified in (b)(i) or (ii) above, commencing as soon as administratively possible after December 31, 2006. (e) Alternate payees receiving benefits under the Plan through a Qualified Domestic Relations Order ("QDRO") as defined under section 414 (p) of the Internal Revenue Code, will receive benefits in the time and form specified in the QDRO. In the absence of a specified time for payment in the QDRO the alternate payee will have benefits paid to them at the same time as benefits are paid under this Plan to the Participant from whom his/her interest in the Plan arose. In the absence of a specified form of payment in the QDRO, the alternate payee will have benefits paid to them under either (i) or (ii) below : (i) For alternate payees whose interest arose from a Participant who was a Participant under Article 2.2 of the Plan the alternate payee's form of benefit will be the same form payable to the Participant under the Plan., (ii) For alternate payees whose interest arose from a Participant with a PRA/PLS Benefit under the Plan, the alternate payee's form of benefit will be a lump sum payment as soon as administratively possible after separation from service, (iii) For alternate payees whose interest arose from a Participant who was not a Participant under Article 2.2 of the Plan and who had a benefit that was not a PRA/PLS Benefit, the alternate payee will receive his/her benefit in the form of a life annuity with a 5 year term certain. In no event will benefits be distributed under a QDRO at any time or in any form not allowed, in the sole discretion of the Plan Administrator, under the Plan or under the laws governing this Plan. Alternate payees have the status of beneficiaries under this Plan. 4.4 Notwithstanding the default forms of payment listed in Article 4.3 above: (a) the Company intends all forms of payment to be treated as a single payment and Participants with annuity forms of benefit under Article 4.3 above, will be able to elect, in accordance with Internal Revenue Code Section 409A, as determined by the Plan Administrator, among actuarially equivalent annuity forms of benefit any time prior to the payment commencement date for such benefit. (b) any Participant identified as a Key Employee as that term is defined under 409A, and, whose benefit is payable due to separation from service or Retirement shall not have his/her 409A Benefits commence under this Plan in any form until six months have elapsed since his/her separation or Retirement. The determination of who is a Key Employee will be based on taxable compensation paid during the 12-month period ending August 31st of the calendar year immediately preceding the year of the distribution. 5 4.5 Only for those individuals who are eligible under Article 2.2, Final Average Compensation used to determine the largest amount that would have been payable under Article 4.2(a) above, will be based on the following rules, notwithstanding the actual provisions of the Retirement Plan. For an eligible Participant that is not a Commissioned Employee under the Retirement Plan, Final Average Compensation will be the sum of (a) and (b) below: (a) The base salary component of the Participant's Final Average Compensation is determined using the average of the Participant's base salary for the 60 highest consecutive months during the 120 months preceding the Participant's date of Retirement or termination, and, (b) The component of the Participant's Final Average Compensation representing the MetLife Annual Variable Incentive Compensation Plan or successor annual cash bonus plan or program ("AVIP") award will be determined using the average of the Participant's highest 5 AVIP payments (not necessarily consecutive) with respect to the 10 calendar years preceding such Participant's date of Retirement or termination (including any projected payment(s) to be made beyond the Participant's date of Retirement or termination). The AVIP award, as set forth in subsection (b) immediately above, projected to be made beyond the Participant's date of Retirement or termination will be deemed equal to the result of the following calculation, as determined by the Plan Administrator in its sole discretion: (i) the highest of the last 3 bonuses/awards paid while the Participant was in active Company service multiplied by (ii) a fraction, the numerator of which is the number of months (or part thereof) that the Participant was actively employed in the calendar year(s) for which the bonus/award would be payable and the denominator of which is 12. (iii) If the fraction determined under (ii) immediately above, is less than 1, then, the fractional amount determined under (ii) shall replace an equivalent fractional amount in the lowest of the 5 highest AVIP payments used in (b) above. This replacement shall occur only if the fractional amount determined under (ii) is greater than the fractional amount it is replacing in the lowest of the 5 highest AVIP payments. Notwithstanding (b)(i), (ii) and (iii), if a specific amount of bonus/award was already approved under the AVIP, prior to the Participant's date of Retirement or termination, such amount shall be used instead of the deemed estimate, and such amount shall also be taken into account in determining the highest of the Participant's last 3 bonuses/awards with regard to any bonus/award payable for the Participant's year of Retirement or termination. 6 If, at the time of Retirement or termination, fewer than 5 AVIP payments have been made to a Participant, then the AVIP component of Final Average Compensation shall be the average of: all AVIP payments actually made to the Participant and the projected payment (described above) for the year of Retirement or termination. For eligible Participants that are compensated on a commission basis, Final Average Compensation will be the amount described in appropriate provisions of the Retirement Plan. 4.6. Except as described in (a) through (e) immediately below, Grandfathered Benefits shall be payable in the same form(s) and at the same times as benefits are payable under the Retirement Plan. (a) Alternative Distributions of the benefit under Article 4A shall be paid in the form, and at the time stated in the election form completed by the Participant and approved by the Committee. (b) Pre-Distribution Death Benefits as described in Article 4A.5 shall be paid in accordance with the terms of that Article. (c) Individuals who: (i) had accrued benefits under the New England Life Insurance Company's non-qualified Plans listed in Section 2.3, (ii) terminated employment on or before December 31, 2000, and, (iii) did not become Employees of the Company or an Employer upon that termination of employment, will have his/her benefits paid from this Plan in the amounts, at the times and in the form provided for under the provisions of those prior plans. (d) Individuals who: (i) had accrued benefits under the GenAmerica Corporation Augmented Benefit Plan, (ii) terminated employment on or before December 31, 2002, and, (iii) did not become Employees of the Company or an Employer upon that termination of employment, will have his/her entire auxiliary defined benefit paid from this Plan in the amounts, at the times, and in the form provided for under the provisions of that prior plan. (e) Individuals described in Section 2.3 shall have his/her entire auxiliary defined benefit (including amounts previously accrued under the plans named in Section 2.3) paid under this Plan, in accordance with the terms of this Plan. 7 4.7 Notwithstanding any provision to the contrary, the payment of benefits under this Plan shall not be effected by, or be subject to, the qualified pre-retirement survivor annuity and qualified joint and survivor annuity rules under the Retirement Equity Act of 1984. Payment of benefits under this Plan will not be effected by, or be subject to, minimum distributions as described under Section 401(a)(9) of the Internal Revenue Code and the accompanying Regulations under that Section. Article 4A. Alternative Distribution Alternative forms of distribution are available only to those individuals who are eligible Participants under Section 2.2 herein on or before December 31, 2006. Alternative forms of distribution may be elected by eligible Participants under Section 2.2 on or before December 31, 2006 and may apply to his/her 409A benefit as allowed under the transition relief provided under 409A. After December 31, 2006, alternative forms of distribution can only be elected by eligible individuals under Section 2.2 for his/her Grandfathered Benefits. 4A.1 Definitions (a) Alternative Distribution. "Alternative Distribution" means one of the following modes of payment: (i) Single Sum: Payment in a single sum. (ii) Installment Payments for a Specific Period: Monthly or annual payments are made to the Participant for a specified number of years selected (not exceeding 20 years). If the Participant dies before the expiration of the specified period, installment payments will continue to be made for the remainder of the period chosen by the Participant to a beneficiary designated by the Participant. (iii) Other Distribution: Any other form of payment that is mutually agreed upon by the Participant and the Committee. (b) Committee. "Committee" means the Compensation Committee of the Board of Directors of the Company. The Committee, or either component thereof, may delegate any of its powers or authority under this Plan in any manner consistent with law. (c) Election Date. "Election Date" means the date on which the Participant files his/her request for an Alternative Distribution. For Participants who are Retirement eligible when they separate from service with the Company or an Employer, this date can be no later than the day before the Participant's Retirement or termination date. For Participants who are not Retirement eligible when they separate from service with 8 the Company or an Employer, this date can be no later than 12 months before the Distribution Date. (d) Distribution Date. "Distribution Date" means the date distributions commence under the mode of payment elected by the Participant. For Participants who are Retirement eligible when they separate from service with the Company or an Employer, this date cannot be earlier than the Participant's Retirement or termination date. For Participants who are not Retirement eligible when they separate from service with the Company or an Employer, this date cannot be earlier than the later of: (i) 12 months following the Participant's Election Date, and (ii) the earliest date the Participant becomes eligible for a distribution from the Retirement Plan. 4A.2. Payment in the Form of an Alternative Distribution. In order to receive an Alternative Distribution: (i) a request form must be duly filed by the Participant in compliance with both the provisions of this Article 4A and the procedures as set forth from time to time by the Committee, (ii) consent thereto must be given by the Committee, and (iii) payment in the form of an Alternative Distribution must be made pursuant to a request form that satisfies 409A and the regulations there under. 4A.3. Election of Alternative Distribution. A form requesting that 409A Benefits under this Plan be paid in the form of an Alternative Distribution must be submitted by the Participant to the Committee no later than the last date specified under 409A transition relief for submitting elections with regard to 409A Benefits. Request forms for an Alternative Distribution of 409A Benefits will be accepted at the discretion of the Plan Administrator. For Participants who are separated from service with the Company or an Employer before they are Retirement eligible, the form requesting an Alternative Distribution must have an Election Date no later than 12 months before the Distribution Date indicated on the election form. All requests must be in writing, signed by the Participant, and follow the format prescribed by the Committee. On the request form the Participant must also designate (i) the mode of payment requested and (ii) the Participant's Retirement or Distribution Date. A request form shall be deemed submitted by the Participant to the Committee on the day that such form postmarked, if sent by U.S. mail, or on the day received by the Committee, if sent by means other than the U.S. mail. A form requesting an Alternative Distribution of 409A Benefits cannot be revoked or modified after the last date allowed for transition period elections under 409A. Except that, individuals who elected an annuity form of payment for their 409A Benefits may be allowed to choose among actuarially equivalent annuity forms any time prior to commencement of payments as allowed under 409A and in the discretion of the Plan Administrator. Any modification of the request form must be in writing, comply with the procedures of the Committee and is subject to the approval of the Committee. 9 4A.4. Consent of the Committee. Payment in the form of an Alternative Distribution shall require the consent of the Committee. The Committee shall have full and complete discretion to approve or reject any request for an Alternative Distribution. The decision of the Committee on the Participant's request form shall be made known to the Participant in writing. 4A.5. Death of Participant Before Distribution Date. (a) A Participant under Section 2.2, who accrued Plan benefits other than PRA/PLS Benefits before death, shall have 50% of the present value of his/her undistributed non PRA/PLS Benefit, (valued as a single sum under Section 4A.6(a) below and actuarially adjusted for payment at the Participant's earliest Retirement date or the day prior to death, if the Participant was Retirement eligible at death), paid to his/her designated beneficiary. This pre-distribution death benefit will be payable in the form designated by the Participant and approved by the Committee. A Participant may file with the Committee a form (which will become irrevocable only upon death) designating a beneficiary or changing his/her existing designation. This form will also allow the Participant to choose the form in which the pre-distribution death benefit will be paid. All optional forms of benefit available to the Participant under this Plan and the Retirement Plan will be available for payment of this death benefit. (b) For salaried Participants covered under Section 2.2, a single sum, equivalent to the full value of a Participant's undistributed non PRA/PLS Benefit on the date of the Participant's death, (valued under Section 4A.6(a)), shall be paid to the Participant's designated beneficiary if: (i) the Participant notifies the Committee in a request form in effect on the Election Date of his or her anticipated Retirement date, (ii) the Committee gives its consent to the payment of a Single Sum or Installment Payments for a Specific Period before the Distribution Date is reached, (iii) the Participant agrees to defer Retirement at the Company's written request, (iv) the Distribution Date for payment of the Single Sum or Installment Payments for a Specific Period is deferred to the Participant's Retirement date, and (v) the Participant dies after such anticipated Retirement date but before Retirement. In the absence of a designation by the Participant, the death benefit, under (a) or (b) immediately above, shall be paid to the Participant's surviving spouse in a single sum. If 10 the Participant has no surviving spouse at the time of death, then the death benefit shall be paid to the Participant's estate. 4A.6. Valuation of Alternative Benefit (a) The actuarial equivalent value of the Single Sum shall be determined using the UP 84 Mortality Table, set forward one year for the Participant and set back four years for the Participant's spouse, (if applicable). If the Participant was Retirement eligible on December 31, 2004, then the Pension Benefit Guaranty Corporation immediate interest rate ("PBGC Rate") used to calculate the Single Sum shall be the lowest rate in effect in the 12 months prior to the Participant's actual Retirement date If the Participant was not Retirement eligible on December 31, 2004, then the PBGC Rate used to calculate the Single Sum shall be the rate in effect in the month prior to the later of: (i) the Participant's earliest Retirement date or (ii) the Participant's actual Retirement date. (b) The actuarial equivalent benefit amount for the Installment Payments for a Specific Period will be determined by converting the Single Sum benefit amount, determined under Article 4A.6(a). The interest rate basis for the immediate annuity purchase rates offered under the Metropolitan Savings and Investment Plan ("SIP Rate") and its successors utilized in the calculation of installment payments will be as follows: (i) If the Participant was Retirement eligible on December 31, 2004, the SIP Rate is the highest rate in the month that had the lowest PBGC Rate out of the12 months prior to the Participant's actual Retirement date. (ii) If the Participant was not on December 31, 2004, the SIP Rate is the rate in effect on the last day of the month prior to the later of: a. the Participant's earliest Retirement date, or b. the Participant's actual Retirement date. 4A.7. Interest on Deferred Installments Individuals who elect deferred installment payments under the terms of this Article 4A, shall receive interest from the date they separate from service to the date that the installment payments commence. Interest will be calculated based on the entire amount that the Participant has elected to receive as deferred installments under Article 4A. Interest will be credited using the SIP Rate in effect on the Election Date and will be compounded annually from the date of separation from service to the date payments commence. The interest accrued prior to payment commencement will be added to the accrued Plan benefit to produce a total benefit amount. This total benefit amount will be credited with the SIP Rate for the duration of the payment(s) and divided by the number of installment payments due under the Participant's election to produce uniform payments under the Plan. This interest will be part of the Participant's 409A Benefit and will be paid in accordance with 409A. 11 4A.8. Power of Committee. The Committee shall have the discretionary power to make any and all administrative decisions regarding the election and payment of an Alternative Distribution, including but not limited to, (i) the design and format of request forms, (ii) the approval or rejection of requests for an Alternative Distribution, (iii) the design and format of revocation forms and (iv) the sending of notices. Article 5. Unfunded Plan. The Plan is completely unfunded. Except as obligations under this Plan have been undertaken pursuant to plans or other arrangements offered by another company, obligations under this Plan are obligations of the Company. All obligations under this Plan are entirely separate from the Retirement Plan and any other plan. Participation in this Plan gives a Participant no right to any funds or assets of the Retirement Plan, or any other plan. The fact that contracts or certificates may be distributed to recipients of benefits under the Retirement Plan in discharge of obligations thereunder shall in no way entitle a Participant in this Plan to receive any such contract or certificate in discharge of obligations under this Plan. Article 6. Non-transferability of Participant's Interest No Participant shall have any power or right to transfer, assign, mortgage, commute or otherwise encumber any of the Plan benefits payable hereunder, nor shall such benefits be subject to seizure for the payment of any debts or judgments, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Article 7. Effect of Taxes Payments under this Plan shall be made after withholding of any Federal, state or local income, employment or other taxes, legally obligated to be withheld. All tax liabilities arising out of benefits under this Plan are the sole obligation of the Plan Participant(s) or his/her beneficiary, including but not limited to, any tax liabilities that may arise under Section 409A. In the event that a Participant or beneficiary incurs greater tax burdens from payments under this Plan (whether income, employment, estate or other tax burdens) than they would if such payments had been made from the Retirement Plan, neither the Company nor any other person shall have an obligation to reimburse the Participant or beneficiary for such greater tax burdens. 12 Article 8. Change of Control 8.1. Definitions. (a) Change of Control. For the purposes of this Plan, a "Change of Control" shall be deemed to have occurred if: (i) any Person acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities of the Corporation representing 25% or more of the combined Voting Power of the Corporation's securities; (ii) within any 24-month period, the persons who were directors of the Corporation at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board of Directors of the Corporation (the "Board") or the board of directors of any successor to the Corporation; provided, however, that any director elected or nominated for election to the Board by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this Section 8.1(a)(ii); (iii) the stockholders of the Corporation approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Corporation which is consummated (a "Corporate Event"), and immediately following the consummation of which the stockholders of the Corporation immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the Voting Power of (A) in the case of a merger or consolidation, the surviving or resulting corporation, (B) in the case of a share exchange, the acquiring corporation, or (C) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the Corporation immediately prior to such Corporate Event; or (iv) any other event occurs which the Board declares to be a Change of Control. (b) Corporation. For the Purposes of this Article, "Corporation" means MetLife, Inc. (c) Person. For purposes of the definition of Change of Control, "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as supplemented by Section 13(d)(3) of the Exchange Act, and shall include any group (within the meaning of Rule 13d-5(b) under the Exchange Act); provided, however, that "Person" shall not include (A) the Corporation or any Affiliate, (B) the MetLife Policyholder Trust (or any person(s) who would otherwise be described herein solely by reason of having the power to control the voting of the shares held by that trust), or (C) any employee benefit plan (including an employee stock ownership plan) sponsored by the Corporation, Company or any Affiliate. 13 (d) Voting Power. For purposes of the definition of Change of Control, "Voting Power" shall mean such number of Voting Securities as shall enable the holders thereof to cast all the votes which could be cast in an annual election of directors of a company, and "Voting Securities" shall mean all securities entitling the holders thereof to vote in an annual election of directors of a company. (e) Affiliate. For the purposes of this article, an "Affiliate" shall mean any corporation, partnership, limited liability company, trust or other entity which directly, or indirectly through one or more intermediaries, controls, or is controlled by, the Corporation. (f) Cause. For the purposes of this article, "Cause" means either: (i) the Participant's conviction or plea of nolo contendere to a felony, or, (ii) any act or acts of dishonesty or gross misconduct on the Participant's part which results or is intended to result in material damage to the business or reputation of MetLife. (g) Good Reason. For the purposes of this article, "Good Reason" means any of: (i) any reduction by the Corporation or an Affiliate in the Participant's base salary rate below the rate in effect immediately before the Change of Control; (ii) any relocation by the Corporation or an Affiliate of the Participant's usual base work location to any other office or location more than 50 miles from the Participant's usual base work location immediately prior to a Change of Control, or in a state other than the one in which the Participant performed his duties immediately prior to the Change of Control, in each case except for travel reasonably required in the performance of the Participant's responsibilities; (iii) if the Participant is a party to an Employment Continuation Agreement with the Corporation or an Affiliate, any circumstance or occurrence constituting "Good Reason" under that Employment Continuation Agreement; (iv) the failure of the Corporation or an Affiliate to pay the Employee's base salary or employee benefits as required by law. 8.2. Vesting and Other Rights on and After a Change of Control Subject to Conditions In the event that: (a) there is a Change of Control as defined in Section 8.1(a) of this Article, and, (b) on the date of the Change of Control or on a date before the second anniversary of the Change of Control, a Participant in this Plan: 14 (i) is involuntarily terminated from employment by the Corporation or any Affiliate (other than directly in connection with a transfer of employment to or from the Corporation or any Affiliate) without Cause, (ii) voluntarily terminates employment with the Corporation or any Affiliate for Good Reason, then the Participant's unvested benefits and rights accrued as of the Change of Control in each, the Retirement Plan and this Plan, will vest immediately under this Plan, notwithstanding any other provision of the Retirement Plan or this Plan, or any amendment or termination of this Plan taking place on or after a Change of Control. These accrued benefits will be paid under this Plan according to the ordinary distribution rules of this Plan. The ordinary distribution rules of this Plan are described in Article 4 and where applicable, Article 4A as they existed immediately prior to the Change of Control. If this Section 8.2 is triggered, a Participant under Section 2.2 does not have to obtain Committee approval for an Alternate Distribution in the form of a Single Sum or Installment Payments for a Specific Period, to the extent that an Alternative Distribution is available to that Participant under 409A. Article 9. Interpretation of the Plan (a) The Committee is empowered to take all actions it deems appropriate in administering this Plan. Any Committee determination with respect to the meaning or application of the provisions of the Plan shall be binding and conclusive. Benefits will be paid under this Plan only if the Committee determines in its discretion that the applicant is entitled to them. Once a Change of Control (as defined in Article 8) has occurred, this subpart (a) of Article 9 shall no longer apply. (b) Claims for benefits and appeals of denied claims under the Plan shall be administered in accordance with Section 503 of ERISA, the regulations thereunder (and any other law that amends, supplements or supersedes said Section of ERISA), and the procedures adopted by the Committee, as appropriate. The claims procedures referenced above are incorporated herein by reference. Article 10. Governing Law To the extent not inconsistent with Federal law, the validity of the Plan and its provisions shall be construed according to the laws of the State of New York. Article 11. Amendment and Termination of Plan 11.1. Except to the extent prohibited by law, the Committee may amend or terminate this Plan at any time without the consent of any Participant or of any other person. However, any such amendment or termination will not adversely affect the benefit entitlements of: 15 (a) any Participant receiving benefits under this Plan at or prior to the time of such amendment or termination, or, (b) any Employee who is a Participant in the Retirement Plan to the extent of the present value of his/her accrued benefit under this Plan prior to the time of such amendment or termination. However, amendments may be made to all other aspects of this Plan consistent with Section 409A, including, but not limited to: (i) amendments impacting the timing under which the Participant's entire accrued benefit is paid, or, (ii) amendments impacting the optional forms of benefit available for payment of the Participant's entire accrued benefit. Notwithstanding the above, any amendment or group of amendments made effective on the same date, which would increase or decrease the annual cost of Plan benefits for active Plan Participants and former Plan Participants by ten million dollars or more in the aggregate, as determined in good faith by the Committee, shall be effective only if authorized or ratified by the Board of Directors of the Company. 11.2. (a) Notwithstanding the provisions of Section 11.1 above, or any other provision of this Plan, on or after a Change of Control (as defined in Article 8), no amendments can be made to Article 8, Article 9 or Section 11.2 of Article 11 of this Plan; and (b) Participants who: (i) accrued rights or benefits under this Plan prior to a Change of Control (as defined in Article 8), and, (ii) whose rights or benefits are not vested at the time of the Change of Control cannot have the vesting schedule under Article 3, applicable on the day prior to the Change of Control, amended with regard to such rights or benefits. The Company may not wrongfully deny Participants the opportunity to vest in rights or benefits accrued prior to a Change of Control under this Plan. Part II Part II of the this plan document contains the provisions of the Plan that will govern Grandfathered Benefits as defined in Article 4.1(b) of Part I of this Plan. Article 1. Purpose of Plan. The purpose of the Plan is to provide to certain participants employed by the Company, other employers (each a "Subsidiary") participating under the Metropolitan Life Retirement Plan for United States Employees ("Retirement Plan") and their beneficiaries, the 16 excess amount that would have been payable under the Retirement Plan in the absence of the limitations under (i) section 415 of the Internal Revenue Code of 1986 (as amended) ("Internal Revenue Code"), (ii) section 401(a)(17) of the Internal Revenue Code, or such lesser limit as in effect under the Retirement Plan and (iii) section 1.415-2(d)(2) of the Income tax Regulations, that excludes compensation deferred under the Company's or a Subsidiary's deferred compensation arrangements. Article 2. Participation A Participant in the Plan is any employee that qualifies under Section 2.1, 2.2 or 2.3 below: 2.1. A Company or Subsidiary (including, but not limited to, a MetLife Group, Inc.) employee participating in the Retirement Plan: (a) whose benefits are reduced because of the application of Section 401(a)(17) of the Internal Revenue Code (or such lesser limit as in effect under the Retirement Plan), or, (b) whose benefits are reduced because of the application of section 415 of the Internal Revenue Code, including Treasury Regulation 1.415-2. shall be eligible to participate in the Plan as stated in all Articles except Section 4.2 of Article 4 and Article 4A. 2.2. A Company or Subsidiary (including, but not limited to, a MetLife Group Inc.) employee participating in the Retirement Plan who: (a) is in a compensation grade of 36 or higher (or an equivalent compensation grade), or, (b) is a member of the Chairman's Council for 3 consecutive years, or, (c) is listed in Appendix A, or, (d) has been inducted into the Sales Representative Hall of Fame and has attained the age of 65 shall be eligible to participate in the Plan as stated in all Articles. If an employee is an eligible Participant in the Plan under Section 2.1 of this Article, and on or after January 1, 1995, he/she qualifies as a Participant under Section 2.2 of this Article, then the entire benefit that has accrued to that employee shall be payable as if the employee always qualified as a Participant under Section 2.2 of this Article. If, after qualifying as a Participant under Section 2.2 of this Article, an individual's compensation grade drops below level 36 (or its equivalent), or the individual ceases to qualify for the 17 Chairman's Council, then that individual shall continue to be treated as if he or she meets the requirements of Section 2.2 of this Article. 2.3. A Company or Subsidiary employee participating in the Retirement Plan: (a) (i) who participated and accrued benefits in the New England Life Insurance Company's non-qualified Plans, (named in the first paragraph of this Plan), and, (ii) who, on December 31, 2000, was actively employed by New England Life Insurance Company, the Company or a Subsidiary, shall be eligible, on January 1, 2001, to participate in this Plan, except Section 4.2 of Article 4 and Article 4A. These individuals shall have their entire auxiliary defined benefit (including amounts previously accrued under the New England plans named in the first paragraph of this Plan) paid under this Plan, in accordance with the terms of this Plan. These individuals shall be eligible to participate in this Plan as stated in Section 4.2 of Article 4 and Article 4A if they independently qualify as a Participant under Section 2.2 of this Article after December 31, 2000. (b) (i) who participated and accrued benefits in the GenAmerica Corporation Augmented Benefit Plan, and, (ii) who, on December 31, 2002, was actively employed by General American Life Insurance Company, the Company or a Subsidiary, shall be eligible, on January 1, 2003, to participate in this Plan, except Section 4.2 of Article 4 and Article 4A. These individuals shall have their entire auxiliary defined benefit (including amounts previously accrued under the Augmented Benefit Plan) paid under this Plan, in accordance with the terms of this Plan. These individuals shall be eligible to participate in Section 4.2 of Article 4 and Article 4A of this Plan if they independently qualify as a Participant under Section 2.2 of this Article after December 31, 2002. Article 3. Vesting Participants will vest in their accrued benefit under this Plan in accordance with the vesting schedule under the Retirement Plan. All benefits accrued by Participants under this Plan, prior to a Change of Control as defined in Article 8, shall vest if the Participant satisfies the vesting schedule that existed under the Retirement Plan immediately prior to the Change of Control. Article 4. Payment of Benefits 4.1. Benefits under this Plan shall be payable to a Participant in an amount equal to the difference between: 18 (a) the largest amount (without duplication of amount) that would have been payable to the Participant under the Retirement Plan, had the Retirement Plan not been subject to the limitations of Internal Revenue Code Sections: (i) 415, (ii) 401(a)(17) or such lesser limit as stated in the Retirement Plan, and (iii) Regulation Section 1. 415-2(d)(2) (with respect to deferred compensation arrangements); and, (b) the amount of benefits payable under the Retirement Plan and any predecessor Auxiliary Plan. 4.2. Only for those individuals who qualify as Participants in the Plan under Section 2.2, Final Average Compensation used to determine the largest amount that would have been payable under Section 4.1(a) above, will be based on the following rules, notwithstanding the actual provisions of the Retirement Plan. For qualifying Participants that are not compensated on a commission basis, Final Average Compensation will be the sum of (a) and (b) below: (a) The base salary component of the Participant's Final Average Compensation, determined using the average of the Participant's base salary for the 60 highest consecutive months during the 120 months preceding the Participant's date of retirement or termination, and, (b) The component of the Participant's Final Average Compensation representing the Annual Variable Incentive Compensation Plan or successor annual cash bonus plan or program ("AVIP") award will be determined using the average of the Participant's highest 5 AVIP payments, (not necessarily consecutive) with respect to, the 10 calendar years preceding such Participant's date of retirement or termination, (including any projected payment(s) to be made beyond the Participant's date of retirement or termination). The AVIP award, as set forth in subsection (b) immediately above, projected to be made beyond the Participant's date of retirement or termination will be deemed equal to: (i) the highest of the last 3 bonuses/awards paid while the Participant was in active Company service multiplied by (ii) a fraction, the numerator of which is the number of months (or part thereof) that the Participant was actively employed in the calendar year(s) for which the bonus/award would be payable and the denominator of which is 12. (iii) If the fraction determined under (ii) immediately above, is less than 1, then, the fractional amount determined under (ii) shall replace an equivalent fractional amount in the lowest of the 5 highest AVIP payments used in (b) above. This replacement shall occur only if the fractional amount determined under (ii) is greater than the fractional amount it is replacing in the lowest of the 5 highest AVIP payments. 19 Notwithstanding (b)(i), (ii) and (iii), if a specific amount of bonus/award was already approved under the AVIP, prior to the Participant's date of retirement or termination, such amount shall be used instead of the deemed estimate, and such amount shall also be taken into account in determining the highest of the Participant's last 3 bonuses/awards with regard to any bonus/award payable for the Participant's year of retirement or termination. For qualifying Participants that are compensated on a commission basis, Final Average Compensation will be the amount described in appropriate provisions of the Retirement Plan. 4.3. Except as described in (a) through (e) immediately below, benefits payable under this Plan shall be payable in the same form(s) and at the same times as benefits are payable under the Retirement Plan. (a) Alternative Distributions under Article 4A shall be paid in the form, and at the time, stated in the election form completed by the Participant and approved by the Committee. (b) Pre-Distribution Death Benefits as described in Article 4A.5 shall be paid in accordance with the terms of that Article. (c) If a Participant directs his or her accrued, Personal Retirement Account ("PRA") or Performance Pension Account ("PPA"), benefit under the Retirement Plan to be transferred to the Savings and Investment Plan, and, at the time the request is made, the Participant has an accrued benefit under the Auxiliary Savings and Investment Plan, then the Participant's accrued PRA or PPA benefit under this Plan will be transferred to the Auxiliary Savings and Investment Plan and will be payable in accordance with the terms of the Auxiliary Savings and Investment Plan. If a Participant directs his or her accrued PRA or PPA benefit under the Retirement Plan to be transferred to the Savings and Investment Plan, and at the time the request is made, the Participant has no accrued benefit under the Auxiliary Savings and Investment Plan, then the Participant's accrued PRA or PPA benefit, under this Plan, will be paid to the Participant in a lump sum. The transfer discussed in the preceding sentence does not apply to a Participant's traditional formula benefit under the Retirement Plan or this Plan. (d) Individuals who: (i) had accrued benefits under the New England Life Insurance Company's non qualified Plans listed in the first paragraph of this Plan, (ii) terminated employment on or before December 31, 2000, and, (iii) did not become employees of the Company or a Subsidiary upon that termination of employment, 20 will have their benefits paid from this Plan in the amounts, at the times and in the form provided for under the provisions of those prior plans. (e) Individuals who: (i) had accrued benefits under the GenAmerica Corporation Augmented Benefit Plan, (ii) terminated employment on or before December 31, 2002, and, (iii) did not become employees of the Company or a Subsidiary upon that termination of employment, will have their entire auxiliary defined benefit paid from this Plan in the amounts, at the times, and in the form provided for under the provisions of that prior plan. Individuals described in Section 2.3 shall have their entire auxiliary defined benefit (including amounts previously accrued under the plans named in the first paragraph of this Plan) paid under this Plan, in accordance with the terms of this Plan. Notwithstanding any provision to the contrary, the payment of benefits under this Plan shall not be affected by, or be subject to, the qualified pre-retirement survivor annuity and qualified joint and survivor annuity rules under the Retirement Equity Act of 1984. Article 4A. Alternative Distribution Alternative forms of distribution are available only to those Participants in the Plan as defined in Section 2 of Article 2. 4A.1 Definitions (a) Alternative Distribution. "Alternative Distribution" means one of the following modes of payment: (i) Single Sum: Payment in a single sum. (ii) Installment Payments for a Specific Period: Monthly or annual payments are made to the Participant for a specified number of years selected (not exceeding 20 years). If the Participant dies before the expiration of the specified period, installment payments will continue to be made for the remainder of the period chosen by the Participant to a beneficiary designated by the Participant. (iii) Other Distribution: Any other form of payment that is mutually agreed upon by the Participant and the Committee. (b) Committee. "Committee" means the Compensation Committee of the Board of Directors of Metropolitan Life Insurance Company or their designated agent(s). 21 (c) Election Date. "Election Date" means the date on which the Participant files his/her request for an Alternative Distribution. For Participants who are retirement eligible, as defined in the Retirement Plan, ("Retirement Eligible") when they separate from service with the Company or a Subsidiary, this date can be no later than the day before the Participant's retirement or termination date. For Participants who are not Retirement Eligible when they separate from service with the Company or a Subsidiary, this date can be no later than 12 months before the Distribution Date. (d) Distribution Date. "Distribution Date" means the date distributions commence under the mode of payment elected by the Participant. For Participants who are Retirement Eligible when they separate from service with the Company or a Subsidiary, this date cannot be earlier than the Participant's retirement or termination date. For Participants who are not Retirement Eligible when they separate from service with the Company or a Subsidiary, this date cannot be earlier than the later of: (i) 12 months following the Participant's Election Date, and (ii) the earliest date the Participant becomes eligible for a distribution from the Retirement Plan. 4A.2. Payment in the Form of an Alternative Distribution. Auxiliary retirement benefits under this Plan shall be payable in whole or in part to a Participant in the form of an Alternative Distribution provided (i) a request form is duly filed by the Participant in compliance with both the provisions of this Article 4A and the procedures as set forth from time to time by the Committee and (ii) consent thereto is given by the Committee. 4A.3. Election of Alternative Distribution. A form requesting that auxiliary retirement benefits under this Plan be paid in the form of an Alternative Distribution must be submitted by the Participant to the Committee no later than the day before the Participant's retirement date. For Participants who are separating from service with the Company or a Subsidiary before they are Retirement Eligible, the form requesting an Alternative Distribution must be submitted by the Participant to the Committee no later than 12 months before the Distribution Date indicated on the election form. All requests must be in writing, signed by the Participant, and follow the format prescribed by the Committee. On the request form the Participant must also designate (i) the mode of payment requested and (ii) the Participant's retirement or Distribution Date. A request form shall be deemed submitted by the Participant to the Committee on the day that such form is received by the Committee. Prior to the Participant's retirement date, the request form can be revoked by the Participant. Any revocation must be in writing and comply with the procedures of the Committee. A request form submitted by the Participant shall become irrevocable and binding as to all elections and designations made by the Participant as of the retirement date. In the event that a Participant's request form is not filed before his/her retirement date, the Participant's Plan benefits will be paid in the same form as the 22 benefits paid to the Participant under the Retirement Plan. For Participants who separate from service before they are Retirement Eligible, the request form shall become irrevocable and binding, as to all elections and designations, 12 months before the Distribution Date. 4A.4. Consent of the Committee. Payment in the form of an Alternative Distribution shall require the consent of the Committee. The Committee shall have full and complete discretion to approve or reject any request for an Alternative Distribution. The decision of the Committee on the Participant's request form shall be made known to the Participant in writing. 4A.5. Death of Participant Before Distribution Date. (a) A Participant under Section 2.2, who accrued benefits in this Plan under the traditional formula before death, shall have 50% of the present value of his/her undistributed traditional formula benefit, (valued as a single sum under Section 4A.6(a) below and actuarially adjusted for payment at the Participant's earliest retirement date), paid to his/her designated beneficiary. This pre-distribution death benefit will be payable in the form designated by the Participant and approved by the Committee. A Participant may file with the Committee a form (which will become irrevocable only upon death) designating a beneficiary or changing their existing designation. This form will also allow the Participant to choose the form in which the pre-distribution death benefit will be paid. All optional forms of benefit available to the Participant under this Plan and the Retirement Plan will be available for payment of this death benefit. (b) For salaried Participants under Section 2.2, a single sum, equivalent to the full value of a Participant's undistributed traditional formula benefit on the date of the Participant's death, (valued under Section 4A.6(a)), shall be paid to the Participant's designated beneficiary if: (i) the Participant notifies the Committee in a request form in effect on the Election Date of his or her anticipated retirement date, (ii) the Committee gives its consent to the payment of a Single Sum or Installment Payments for a Specific Period before the Distribution Date is reached, (iii) the Participant agrees to defer actual retirement at the Company's written request, (iv) the Distribution Date for payment of the Single Sum or Installment Payments for a Specific Period is deferred to the Participant's actual retirement date, and (v) the Participant dies after such anticipated retirement date but before actual retirement. 23 In the absence of a designation by the Participant, the death benefit, under (a) or (b) immediately above, shall be paid to the Participant's surviving spouse in a single sum. If the Participant has no surviving spouse at the time of death, then the death benefit shall be paid to the Participant's estate. 4A.6. Valuation of Alternative Benefit (a) The actuarial equivalent value of the Single Sum shall be determined using the UP 84 Mortality Table, set forward one year for the Participant and set back four years for the Participant's spouse, (if applicable), and the Pension Benefit Guaranty Corporation immediate interest rate. (b) The actuarial equivalent benefit amount for the Installment Payments for a Specific Period will be determined by converting the Single Sum benefit amount, determined under Article 4A.6(a), using the interest rate basis for the immediate annuity purchase rates offered under the Metropolitan Savings and Investment Plan and its successors. (c) The interest rates referenced in Article 4A.6, (a) and (b) above shall be the rates in effect at the following times: (i) For Participants who are Retirement Eligible when they separate from service with the Company or a Subsidiary, the rate in effect, on their Election Date, but in no event earlier than one year before the Participant's retirement date. (ii) For Participants who are not Retirement Eligible when they separate from service with the Company or a Subsidiary, the rate in effect 12 months before their Distribution Date. 4A.7. Power of Committee. The Committee shall have the discretionary power to make any and all administrative decisions regarding the election and payment of an Alternative Distribution, including but not limited to, (i) the design and format of request forms, (ii) the approval or rejection of requests for an Alternative Distribution, (iii) the design and format of revocation forms and (iv) the sending of notices. Article 5. Unfunded Plan. The Plan is completely unfunded. This Plan is entirely separate from the Retirement Plan and any other plan. Participation in this Plan gives a Participant no right to any funds or assets of the Retirement Plan, or any other plan. The fact that contracts or certificates may be distributed to recipients of benefits under the Retirement Plan in discharge of obligations thereunder shall in no way entitle a Participant in this Plan to receive any such contract or certificate in discharge of obligations under this Plan. Article 6. Non-transferability of Participant's Interest 24 No Participant shall have any power or right to transfer, assign, mortgage, commute or otherwise encumber any of the benefits payable hereunder, nor shall such benefits be subject to seizure for the payment of any debts or judgments, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Article 7. Effect of Taxes In making payments under this Plan, the Company and the Subsidiary shall withhold any Federal, state or local income, employment or other taxes, it determines that it is legally obligated to withhold. All tax liabilities arising out of benefits under this Plan are the sole obligation of the Plan Participant(s) or their beneficiary. In the event that a Participant or beneficiary incurs greater tax burdens from payments under this plan (whether income, employment, estate or other tax burdens) than they would if such payments had been made from the Retirement Plan, the Company and the Subsidiary shall have no obligation to reimburse the Participant or beneficiary for such greater tax burdens. Article 8. Change of Control 8.1. Definitions. (a) Change of Control. For the purposes of this Plan, a "Change of Control" shall be deemed to have occurred if: (i) any Person acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities of the Corporation representing 25% or more of the combined Voting Power of the Corporation's securities; (ii) within any 24-month period, the persons who were directors of the Corporation at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board of Directors of the Corporation (the "Board") or the board of directors of any successor to the Corporation; provided, however, that any director elected or nominated for election to the Board by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this Section 8.1(a)(ii); (iii) the stockholders of the Corporation approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Corporation which is consummated (a "Corporate Event"), and immediately following the consummation of which the stockholders of the Corporation immediately prior to such Corporate Event do not hold, directly or 25 indirectly, a majority of the Voting Power of (A) in the case of a merger or consolidation, the surviving or resulting corporation, (B) in the case of a share exchange, the acquiring corporation, or (C) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the Corporation immediately prior to such Corporate Event; or any other event occurs which the Board declares to be a Change of Control. (b) Corporation. For the Purposes of this Article, "Corporation" means MetLife, Inc. (c) Person. For purposes of the definition of Change of Control, "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as supplemented by Section 13(d)(3) of the Exchange Act, and shall include any group (within the meaning of Rule 13d-5(b) under the Exchange Act); provided, however, that "Person" shall not include (A) the Corporation or any Affiliate, (B) the MetLife Policyholder Trust (or any person(s) who would otherwise be described herein solely by reason of having the power to control the voting of the shares held by that trust), or (C) any employee benefit plan (including an employee stock ownership plan) sponsored by the Corporation, Company or any Affiliate. (d) Voting Power. For purposes of the definition of Change of Control, "Voting Power" shall mean such number of Voting Securities as shall enable the holders thereof to cast all the votes which could be cast in an annual election of directors of a company, and "Voting Securities" shall mean all securities entitling the holders thereof to vote in an annual election of directors of a company. (e) Affiliate. For the purposes of this article, an "Affiliate" shall mean any corporation, partnership, limited liability company, trust or other entity which directly, or indirectly through one or more intermediaries, controls, or is controlled by, the Corporation. (f) Cause. For the purposes of this article, "Cause" means either: (i) Participant's conviction or plea of nolo contendere to a felony, or (ii) any act or acts of dishonesty or gross misconduct on the Participant's part which results or is intended to result in material damage to the business or reputation of MetLife. (g) Good Reason. For the purposes of this article, "Good Reason" means any of: (i) any reduction by the Corporation or an Affiliate in the Participant's base salary rate below the rate in effect immediately before the Change of Control; (ii) any relocation by the Corporation or an Affiliate of the Participant's usual base work location to any other office or location more than 50 miles from 26 the Participant's usual base work location immediately prior to a Change of Control, except for travel reasonably required in the performance of the Participant's responsibilities; (iii) if the Participant is a party to an Employment Continuation Agreement with the Corporation or an Affiliate, any circumstance or occurrence constituting "Good Reason" under that Employment Continuation Agreement; (iv) the failure of the Corporation or an Affiliate to pay the Employee's base salary or employee benefits as required by law. 8.2. Vesting and Other Rights on and After a Change of Control Subject to Conditions In the event that: (a) there is a Change of Control as defined in Section 8.1(a) of this Article, and, (b) on the date of the Change of Control or on a date before the second anniversary of the Change of Control, a Participant in this Plan: (i) is involuntarily terminated from employment by the Corporation or any Affiliate (other than directly in connection with a transfer of employment to or from the Corporation or any Affiliate) without Cause, (ii) voluntarily terminates employment with the Corporation or any Affiliate for Good Reason, then the Participant's unvested benefits and rights accrued as of the Change of Control in each, the Retirement Plan and this Plan, will vest immediately under this Plan, notwithstanding any other provision of the Retirement Plan or this Plan, or any amendment or termination of this Plan taking place on or after a Change of Control. These accrued benefits will be paid under this Plan according to the ordinary distribution rules of this Plan. The ordinary distribution rules of this Plan are described in Article 4 and where applicable, Article 4A as they existed immediately prior to the Change of Control. If this Section 8.2 is triggered, a Participant under Section 2.2 does not have to obtain Committee approval for an Alternate Distribution in the form of a Single Sum or Installment Payments for a Specific Period. Article 9. Interpretation of the Plan The Committee is empowered to take all actions it deems appropriate in administering this Plan. Claims for benefits and appeals of denied claims under the Plan shall be administered in accordance with Section 503 of ERISA, the regulations thereunder (and any other law that amends, supplements or supersedes said Section of ERISA), and the procedures adopted by the Committee, or its delegate, as appropriate. The claims procedures referenced above are incorporated herein by reference. The Plan shall provide adequate notice to any claimant whose claim for benefits under the Plan has been denied, setting forth the reasons for such denial, and afford a reasonable opportunity to 27 such claimant for a full and fair review by the appropriate administrator of the decision denying the claim. Benefits will be paid under the Plan only if the Committee, or its delegate, determines in its discretion that the applicant is entitled to them. In the event of a difference of opinion between a Participant and the Committee with respect to the meaning or application of the provisions of the Plan, the Committee's final interpretation shall be binding and conclusive. However, once a Change of Control (as defined in Article 8) has occurred, this Article 9 shall no longer apply to differences of opinion between the Committee and a Participant regarding the application of Article 8 of this Plan to a Participant or with regard to any rights or benefits protected under Article 8 of this Plan or otherwise accrued prior to the Change of Control including the vesting thereof. Article 10. Governing Law To the extent not inconsistent with Federal law, the validity of the Plan and its provisions shall be construed according to the laws of the State of New York. Article 11. Amendment and Termination of Plan 11.1. Except to the extent required by law, the Committee may amend or terminate this Plan at any time without the consent of any Participant or of any other person. However, any such amendment or termination will not adversely affect the benefit entitlements of: (a) any Participant receiving benefits under the Plan at or prior to the time of such amendment or termination, or, (b) any employee who is a Participant in the Retirement Plan to the extent of the present value of their accrued benefit under this Plan prior to the time of such amendment or termination. However, amendments may be made to all other aspects of this Plan including, but not limited to: (i) amendments impacting the timing under which the Participant's entire accrued benefit is paid, or, (ii) amendments impacting the optional forms of benefit available for payment of the Participant's entire accrued benefit. Notwithstanding the above, any amendment or group of amendments made effective on the same date, which would increase or decrease the annual cost of Plan benefits for active Plan Participants and former Plan Participants by ten million dollars or more in the aggregate, as determined in good faith by the Committee, shall take effect only after the action is authorized or ratified by the Board of Directors of Metropolitan Life Insurance Company. 11.2. 28 (a) Notwithstanding the provisions of Section 11.1 above, or any other provision of this plan, on or after a Change of Control (as defined in Article 8), amendments can no longer be made to Article 8, Article 9 or Section 11.2 of Article 11 of this Plan; and (b) Participants who: (i) accrued rights or benefits under this Plan prior to a Change of Control (as defined in Article 8), and, (ii) whose rights or benefits are not vested at the time of the Change of Control cannot have the vesting schedule, applicable on the day prior to the Change of Control, amended with regard to such rights or benefits, and cannot forfeit, or be deprived of, their right to vest in these accrued benefits due to any amendment or termination of this Plan. METROPOLITAN LIFE INSURANCE COMPANY Date August 7, 2006 -------------------------------- By /s/ Margery Brittain ---------------------------------- 29 Appendix A. List of Additional Individuals Covered Under This Plan. The following additional individuals, who were covered under this Plan as of January 1, 1995, are grandfathered as Participants under Section 2.2 of this Plan: Anthony E. Amodeo Oliver N. Greeves Sibyl C. Jacobson William D. Kerrigan Alan E. Lazarescu Felix Schirripa Anthony F. Trani 30 EX-31.1 5 y23754exv31w1.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 15(d)-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: August 8, 2006 /s/ C. Robert Henrikson ---------------------------------------- C. Robert Henrikson Chairman, President and Chief Executive Officer EX-31.2 6 y23754exv31w2.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: August 8, 2006 /s/ William J. Wheeler ---------------------------------------- William J. Wheeler Executive Vice President and Chief Financial Officer EX-32.1 7 y23754exv32w1.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 June 30, 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: August 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 8 y23754exv32w2.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 June 30, 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: August 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-----