UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012 |
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: 33-03094
MetLife Insurance Company of Connecticut
(Exact name of registrant as specified in its charter)
Connecticut | 06-0566090 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
1300 Hall Boulevard, Bloomfield, Connecticut | 06002 | |
(Address of principal executive offices) | (Zip Code) |
(860) 656-3000
(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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ |
Accelerated filer ¨ |
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Non-accelerated filer þ |
(Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
At May 10, 2012, 34,595,317 shares of the registrant’s common stock, $2.50 par value per share, were outstanding, of which 30,000,000 shares were owned directly by MetLife, Inc. and the remaining 4,595,317 shares were owned by MetLife Investors Group, Inc., a wholly-owned subsidiary of MetLife, Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is, therefore, filing this Form 10-Q with the reduced disclosure format.
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As used in this Form 10-Q, “MICC,” the “Company,” “we,” “our” and “us” refer to MetLife Insurance Company of Connecticut, a Connecticut corporation incorporated in 1863, and its subsidiaries, including MetLife Investors USA Insurance Company (“MLI-USA”). MetLife Insurance Company of Connecticut is a wholly-owned subsidiary of MetLife, Inc. (“MetLife”).
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results.
Any or all forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the actual future results of MetLife Insurance Company of Connecticut and its subsidiaries. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements. Risks, uncertainties, and other factors that might cause such differences include the risks, uncertainties and other factors identified in MetLife Insurance Company of Connecticut’s filings with the U.S. Securities and Exchange Commission (the “SEC”). These factors include: (1) difficult conditions in the global capital markets; (2) concerns over U.S. fiscal policy and the trajectory of the national debt of the U.S., as well as rating agency downgrades of U.S. Treasury securities; (3) uncertainty about the effectiveness of governmental and regulatory actions to stabilize the financial system, the imposition of fees relating thereto, or the promulgation of additional regulations; (4) increased volatility and disruption of the capital and credit markets, which may affect our ability to seek financing or access MetLife’s credit facilities; (5) impact of comprehensive financial services regulation reform, including regulation of MetLife by the Federal Reserve, on us; (6) exposure to financial and capital market risk, including as a result of the disruption in Europe and possible withdrawal of one or more countries from the Euro zone; (7) changes in general economic conditions, including the performance of financial markets and interest rates, which may affect our ability to raise capital, generate fee income and market-related revenue and finance statutory reserve requirements and may require us to pledge collateral or make payments related to declines in value of specified assets; (8) potential liquidity and other risks resulting from our participation in a securities lending program and other transactions; (9) investment losses and defaults, and changes to investment valuations; (10) impairments of goodwill and realized losses or market value impairments to illiquid assets; (11) defaults on our mortgage loans; (12) the defaults or deteriorating credit of other financial institutions that could adversely affect us; (13) our ability to address unforeseen liabilities, asset impairments, or rating actions arising from acquisitions or dispositions and to successfully integrate and manage the growth of acquired businesses with minimal disruption; (14) economic, political, legal, currency and other risks relating to our international operations, including with respect to fluctuations of exchange rates; (15) downgrades in our claims paying ability, financial strength ratings or MetLife’s credit ratings; (16) ineffectiveness of MetLife’s risk management policies and procedures; (17) availability and effectiveness of reinsurance or indemnification arrangements, as well as default or failure of counterparties to perform; (18) discrepancies between actual claims experience and assumptions used in setting prices for our products and establishing the liabilities for our obligations for future policy benefits and claims; (19) catastrophe losses; (20) heightened competition, including with respect to pricing, entry of new competitors, consolidation of distributors, the development of new products by new and existing competitors, distribution of amounts available under U.S. government programs, and for
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personnel; (21) unanticipated changes in industry trends; (22) changes in assumptions related to investment valuations, deferred policy acquisition costs, deferred sales inducements, value of business acquired or goodwill; (23) changes in accounting standards, practices and/or policies; (24) increased expenses relating to pension and postretirement benefit plans for employees and retirees of MetLife and its subsidiaries, as well as health care and other employee benefits; (25) exposure to losses related to variable annuity guarantee benefits, including from significant and sustained downturns or extreme volatility in equity markets, reduced interest rates, unanticipated policyholder behavior, mortality or longevity, and the adjustment for nonperformance risk; (26) adverse results or other consequences from litigation, arbitration or regulatory investigations; (27) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (28) discrepancies between actual experience and assumptions used in establishing liabilities related to other contingencies or obligations; (29) regulatory, legislative or tax changes that may affect the cost of, or demand for, our products or services, or increase the cost or administrative burdens of providing benefits to the employees who conduct our business; (30) the effects of business disruption or economic contraction due to disasters such as terrorist attacks, cyberattacks, other hostilities, or natural catastrophes, including any related impact on our disaster recovery systems, cyber- or other information security systems and management continuity planning; (31) the effectiveness of our programs and practices in avoiding giving our associates incentives to take excessive risks; and (32) other risks and uncertainties described from time to time in MetLife Insurance Company of Connecticut’s filings with the SEC.
MetLife Insurance Company of Connecticut does not undertake any obligation to publicly correct or update any forward-looking statement if MetLife Insurance Company of Connecticut later becomes aware that such statement is not likely to be achieved. Please consult any further disclosures MetLife Insurance Company of Connecticut makes on related subjects in reports to the SEC.
Note Regarding Reliance on Statements in Our Contracts
See “Exhibit Index — Note Regarding Reliance on Statements in Our Contracts” for information regarding agreements included as exhibits to this Quarterly Report on Form 10-Q.
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Part I — Financial Information
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Interim Condensed Consolidated Balance Sheets
March 31, 2012 (Unaudited) and December 31, 2011
(In millions, except share and per share data)
March 31, 2012 | December 31, 2011 | |||||||
Assets |
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Investments: |
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Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $44,258 and $44,215, respectively) |
$ | 47,469 | $ | 47,781 | ||||
Equity securities available-for-sale, at estimated fair value (cost: $270 and $295, respectively) |
261 | 252 | ||||||
Other securities, at estimated fair value |
4,265 | 3,665 | ||||||
Mortgage loans (net of valuation allowances of $57 and $61, respectively; includes $3,024 and $3,138, respectively, at estimated fair value, relating to variable interest entities) |
9,558 | 9,800 | ||||||
Policy loans |
1,239 | 1,203 | ||||||
Real estate and real estate joint ventures |
500 | 503 | ||||||
Other limited partnership interests |
1,720 | 1,696 | ||||||
Short-term investments, principally at estimated fair value |
1,852 | 2,578 | ||||||
Other invested assets, principally at estimated fair value |
2,801 | 3,354 | ||||||
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Total investments |
69,665 | 70,832 | ||||||
Cash and cash equivalents, principally at estimated fair value |
1,263 | 745 | ||||||
Accrued investment income (includes $14 and $14, respectively, relating to variable interest entities) |
604 | 568 | ||||||
Premiums, reinsurance and other receivables |
19,101 | 20,223 | ||||||
Deferred policy acquisition costs and value of business acquired |
4,474 | 4,188 | ||||||
Current income tax recoverable |
49 | 140 | ||||||
Goodwill |
953 | 953 | ||||||
Other assets |
2,337 | 856 | ||||||
Separate account assets |
80,646 | 72,559 | ||||||
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Total assets |
$ | 179,092 | $ | 171,064 | ||||
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Liabilities and Stockholders’ Equity |
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Liabilities |
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Future policy benefits |
$ | 25,436 | $ | 25,483 | ||||
Policyholder account balances |
42,146 | 42,075 | ||||||
Other policy-related balances |
3,133 | 2,989 | ||||||
Payables for collateral under securities loaned and other transactions |
8,004 | 8,079 | ||||||
Long-term debt (includes $2,946 and $3,065, respectively, at estimated fair value, relating to variable interest entities) |
3,738 | 3,857 | ||||||
Deferred income tax liability |
770 | 935 | ||||||
Other liabilities (includes $14 and $14, respectively, relating to variable interest entities) |
5,644 | 5,384 | ||||||
Separate account liabilities |
80,646 | 72,559 | ||||||
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Total liabilities |
169,517 | 161,361 | ||||||
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Contingencies, Commitments and Guarantees (Note 8) |
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Stockholders’ Equity |
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Common stock, par value $2.50 per share; 40,000,000 shares authorized; 34,595,317 shares issued and outstanding at March 31, 2012 and December 31, 2011 |
86 | 86 | ||||||
Additional paid-in capital |
6,673 | 6,673 | ||||||
Retained earnings |
1,192 | 1,173 | ||||||
Accumulated other comprehensive income (loss) |
1,624 | 1,771 | ||||||
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Total stockholders’ equity |
9,575 | 9,703 | ||||||
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Total liabilities and stockholders’ equity |
$ | 179,092 | $ | 171,064 | ||||
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See accompanying notes to the interim condensed consolidated financial statements.
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MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Interim Condensed Consolidated Statements of Operations and Comprehensive Income
For the Three Months Ended March 31, 2012 and 2011 (Unaudited)
(In millions)
Three Months | ||||||||
Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Revenues |
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Premiums |
$ | 380 | $ | 136 | ||||
Universal life and investment-type product policy fees |
544 | 455 | ||||||
Net investment income |
892 | 786 | ||||||
Other revenues |
123 | 130 | ||||||
Net investment gains (losses): |
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Other-than-temporary impairments on fixed maturity securities |
(13) | (9) | ||||||
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss) |
(2) | (2) | ||||||
Other net investment gains (losses) |
19 | (3) | ||||||
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Total net investment gains (losses) |
4 | (14) | ||||||
Net derivative gains (losses) |
(439) | (156) | ||||||
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Total revenues |
1,504 | 1,337 | ||||||
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Expenses |
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Policyholder benefits and claims |
589 | 327 | ||||||
Interest credited to policyholder account balances |
439 | 287 | ||||||
Other expenses |
457 | 515 | ||||||
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Total expenses |
1,485 | 1,129 | ||||||
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Income (loss) before provision for income tax |
19 | 208 | ||||||
Provision for income tax expense (benefit) |
— | 57 | ||||||
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Net income |
$ | 19 | $ | 151 | ||||
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Comprehensive income (loss) |
$ | (128) | $ | 101 | ||||
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See accompanying notes to the interim condensed consolidated financial statements.
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MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Interim Condensed Consolidated Statements of Stockholders’ Equity
For the Three Months Ended March 31, 2012 and 2011 (Unaudited)
(In millions)
Accumulated Other Comprehensive Income (Loss) |
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Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Net Unrealized Investment Gains (Losses) |
Other-Than- Temporary Impairments |
Foreign Currency Translation Adjustments |
Total Equity |
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Balance at December 31, 2011 |
$ | 86 | $ | 6,673 | $ | 1,173 | $ | 1,984 | $ | (74) | $ | (139) | $ | 9,703 | ||||||||||||||
Net income |
19 | 19 | ||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax |
(176) | 4 | 25 | (147) | ||||||||||||||||||||||||
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Balance at March 31, 2012 |
$ | 86 | $ | 6,673 | $ | 1,192 | $ | 1,808 | $ | (70) | $ | (114) | $ | 9,575 | ||||||||||||||
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Accumulated Other Comprehensive Income (Loss) |
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Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Net Unrealized Investment Gains (Losses) |
Other-Than- Temporary Impairments |
Foreign Currency Translation Adjustments |
Total Equity |
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Balance at December 31, 2010 |
$ | 86 | $ | 6,719 | $ | 934 | $ | 388 | $ | (51) | $ | (125) | $ | 7,951 | ||||||||||||||
Cumulative effect of change in accounting principle, net of income tax (Note 1) |
(477) | 5 | (472) | |||||||||||||||||||||||||
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Balance at January 1, 2011 |
86 | 6,719 | 457 | 393 | (51) | (125) | 7,479 | |||||||||||||||||||||
Net income |
151 | 151 | ||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax |
(65) | 3 | 12 | (50) | ||||||||||||||||||||||||
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Balance at March 31, 2011 |
$ | 86 | $ | 6,719 | $ | 608 | $ | 328 | $ | (48) | $ | (113) | $ | 7,580 | ||||||||||||||
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See accompanying notes to the interim condensed consolidated financial statements.
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MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Interim Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2012 and 2011 (Unaudited)
(In millions)
Three Months | ||||||||
Ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Net cash provided by (used in) operating activities |
$ | 397 | $ | (4) | ||||
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Cash flows from investing activities |
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Sales, maturities and repayments of: |
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Fixed maturity securities |
2,923 | 3,973 | ||||||
Equity securities |
26 | 19 | ||||||
Mortgage loans |
362 | 210 | ||||||
Real estate and real estate joint ventures |
4 | 5 | ||||||
Other limited partnership interests |
77 | 63 | ||||||
Purchases of: |
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Fixed maturity securities |
(2,595 | ) | (4,005 | ) | ||||
Equity securities |
(2 | ) | (5 | ) | ||||
Mortgage loans |
(109 | ) | (90 | ) | ||||
Real estate and real estate joint ventures |
(5 | ) | (39 | ) | ||||
Other limited partnership interests |
(74 | ) | (84 | ) | ||||
Cash received in connection with freestanding derivatives |
104 | 194 | ||||||
Cash paid in connection with freestanding derivatives |
(231 | ) | (145 | ) | ||||
Net change in policy loans |
(36 | ) | 4 | |||||
Net change in short-term investments |
731 | 63 | ||||||
Net change in other invested assets |
(10 | ) | (150 | ) | ||||
Other, net |
— | 1 | ||||||
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Net cash provided by investing activities |
1,165 | 14 | ||||||
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Cash flows from financing activities |
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Policyholder account balances: |
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Deposits |
3,579 | 5,877 | ||||||
Withdrawals |
(4,428 | ) | (5,545 | ) | ||||
Net change in payables for collateral under securities loaned and other transactions |
(75 | ) | (385 | ) | ||||
Long-term debt repaid |
(121 | ) | (86 | ) | ||||
Financing element on certain derivative instruments |
(3 | ) | (8 | ) | ||||
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Net cash used in financing activities |
(1,048 | ) | (147 | ) | ||||
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Effect of change in foreign currency exchange rates on cash and cash equivalents balances |
4 | 5 | ||||||
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Change in cash and cash equivalents |
518 | (132 | ) | |||||
Cash and cash equivalents, beginning of period |
745 | 1,928 | ||||||
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Cash and cash equivalents, end of period |
$ | 1,263 | $ | 1,796 | ||||
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Supplemental disclosures of cash flow information: |
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Net cash paid (received) during the period for: |
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Interest |
$ | 44 | $ | 96 | ||||
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Income tax |
$ | (1) | $ | 2 | ||||
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See accompanying notes to the interim condensed consolidated financial statements.
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MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
“MICC” or the “Company” refers to MetLife Insurance Company of Connecticut, a Connecticut corporation incorporated in 1863, and its subsidiaries, including MetLife Investors USA Insurance Company (“MLI-USA”). MetLife Insurance Company of Connecticut is a subsidiary of MetLife, Inc. (“MetLife”). The Company offers individual annuities, individual life insurance, and institutional protection and asset accumulation products.
The Company is organized into two segments: Retail Products and Corporate Benefit Funding. See Note 10 for further information on the reorganization of the Company’s segments in the first quarter of 2012, which was retrospectively applied.
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 interim condensed consolidated financial statements.
In applying the Company’s accounting 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 business and operations. Actual results could differ from these estimates.
The accompanying interim condensed consolidated financial statements include the accounts of MetLife Insurance Company of Connecticut and its subsidiaries, as well as partnerships and joint ventures in which the Company has control, and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Intercompany accounts and transactions have been eliminated.
The Company uses the equity method of accounting for investments in equity securities in which it has a significant influence or more than a 20% interest and for real estate joint ventures and other limited partnership interests in which it has more than a minor ownership interest or more than a minor influence over the joint venture’s or 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 investments in real estate joint ventures and other limited partnership interests in which it has a minor equity investment and virtually no influence over the joint venture’s or the partnership’s operations.
Certain amounts in the prior year periods’ interim condensed consolidated financial statements and related footnotes thereto have been reclassified to conform with the 2012 presentation as discussed throughout the Notes to the Interim Condensed Consolidated Financial Statements. See “— Adoption of New Accounting Pronouncements” for discussion of an adoption of new accounting guidance in the first quarter of 2012, which was retrospectively applied.
Since the Company is a member of a controlled group of affiliated companies, its results may not be indicative of those of a stand-alone entity.
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MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The accompanying interim condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly the consolidated financial position of the Company at March 31, 2012, its consolidated results of operations and comprehensive income for the three months ended March 31, 2012 and 2011, its consolidated statements of stockholders’ equity for the three months ended March 31, 2012 and 2011, and its consolidated statements of cash flows for the three months ended March 31, 2012 and 2011, in conformity with GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2011 consolidated balance sheet data was derived from audited consolidated financial statements included in MetLife Insurance Company of Connecticut’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”), filed with the U.S. Securities and Exchange Commission, which include all disclosures required by GAAP. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in the 2011 Annual Report.
Summary of Significant Accounting Policies and Critical Accounting Estimates
See Note 1 of the Notes to the Consolidated Financial Statements included in the 2011 Annual Report for the Summary of Significant Accounting Policies and Critical Accounting Estimates. Described below are the significant changes to such policies based on the adoption of new guidance.
Deferred Policy Acquisition Costs and Value of Business Acquired
The Company incurs significant costs in connection with acquiring new and renewal insurance business. Costs that are related directly to the successful acquisition or renewal of insurance contracts are deferred as deferred policy acquisition costs (“DAC”). Such costs include: (1) incremental direct costs of contract acquisition, such as commissions, (2) the portion of an employee’s total compensation and benefits related to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed, (3) other direct costs essential to contract acquisition that would not have been incurred had a policy not been acquired or renewed, and (4) in limited circumstances, the costs of direct-response advertising whose primary purpose is to elicit sales to customers who could be shown to have responded specifically to the advertising and that results in probable future benefits. All other acquisition-related costs, including those related to general advertising and solicitation, market research, agent training, product development, unsuccessful sales and underwriting efforts, as well as all indirect costs, are expensed as incurred.
The Company’s policies relating to the establishment of value of business acquired (“VOBA”), amortization of DAC and VOBA, review of estimated gross margin and profit projections, and internal replacements are described in Note 1 of the Notes to the Consolidated Financial Statements included in the 2011 Annual Report.
Adoption of New Accounting Pronouncements
Effective January 1, 2012, the Company adopted new guidance regarding comprehensive income that defers the effective date pertaining to reclassification adjustments out of accumulated other comprehensive income. The amendments in this guidance are being made to allow the Financial Accounting Standards Board (“FASB”) time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in the new comprehensive income standard are not affected by this guidance, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements on an annual basis.
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MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Effective January 1, 2012, the Company adopted new guidance regarding comprehensive income that provides companies with the option to present the total of comprehensive income, components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements in annual financial statements. The objective of the standard is to increase the prominence of items reported in other comprehensive income and to facilitate convergence of GAAP and International Financial Reporting Standards (“IFRS”). The standard eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this guidance do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified in net income.
Effective January 1, 2012, the Company adopted new guidance on goodwill impairment testing that simplifies how an entity tests goodwill for impairment. This new guidance allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it needs to perform the quantitative two-step goodwill impairment test. Only if an entity determines, based on qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying value will it be required to calculate the fair value of the reporting unit. The adoption did not have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2012, the Company adopted new guidance regarding fair value measurements that establishes common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRS. Some of the amendments clarify the FASB’s intent on the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The adoption did not have a material impact on the Company’s consolidated financial statements. See also expanded disclosures in Note 4.
Effective January 1, 2012, the Company adopted new guidance regarding effective control in repurchase agreements. The guidance removes from the assessment of effective control, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. The adoption did not have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2012, the Company adopted new guidance regarding accounting for DAC. The guidance specifies that only costs related directly to successful acquisition of new or renewal contracts can be capitalized as DAC; all other acquisition-related costs must be expensed as incurred. Under the new guidance, advertising costs may only be included in DAC if the capitalization criteria in the direct-response advertising guidance in Subtopic 340-20, Other Assets and Deferred Costs—Capitalized Advertising Costs, are met. As a result, certain direct marketing, sales manager compensation and administrative costs previously capitalized by the Company will no longer be deferred.
11
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The following table presents the effects of the retrospective application of the adoption of such new accounting guidance to the Company’s previously reported consolidated balance sheet:
December 31, 2011 | ||||||||||||
As Previously Reported |
Adjustment | As Adjusted | ||||||||||
(In millions) | ||||||||||||
Assets |
||||||||||||
Other invested assets, principally at estimated fair value |
$ | 3,373 | $ | (19) | $ | 3,354 | ||||||
Deferred policy acquisition costs and value of business acquired (1) |
$ | 4,876 | $ | (688) | $ | 4,188 | ||||||
Liabilities |
||||||||||||
Deferred income tax liability |
$ | 1,172 | $ | (237) | $ | 935 | ||||||
Equity |
||||||||||||
Retained earnings |
$ | 1,657 | $ | (484) | $ | 1,173 | ||||||
Accumulated other comprehensive income (loss) |
$ | 1,757 | $ | 14 | $ | 1,771 | ||||||
Total stockholders’ equity |
$ | 10,173 | $ | (470) | $ | 9,703 |
(1) | Value of business acquired was not impacted by the adoption of this guidance. |
The following table presents the effects of the retrospective application of the adoption of such new accounting guidance to the Company’s previously reported consolidated statement of operations and comprehensive income:
Three Months Ended March 31, 2011 |
||||||||||||
As Previously Reported |
Adjustment | As Adjusted | ||||||||||
(In millions) | ||||||||||||
Revenues |
||||||||||||
Net investment income |
$ | 788 | $ | (2) | $ | 786 | ||||||
Expenses |
||||||||||||
Other expenses |
$ | 504 | $ | 11 | $ | 515 | ||||||
Income (loss) before provision for income tax |
$ | 221 | $ | (13) | $ | 208 | ||||||
Provision for income tax expense (benefit) |
$ | 61 | $ | (4) | $ | 57 | ||||||
Net income (loss) |
$ | 160 | $ | (9) | $ | 151 |
The following table presents the effects of the retrospective application of the adoption of such new accounting guidance to the Company’s previously reported consolidated statement of cash flows:
Three Months Ended March 31, 2011 |
||||||||||||
As Previously Reported |
Adjustment | As Adjusted | ||||||||||
(In millions) | ||||||||||||
Net cash used in operating activities |
$ | (3) | $ | (1) | $ | (4) | ||||||
Net change in other invested assets |
$ | (151) | $ | 1 | $ | (150) |
12
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Future Adoption of New Accounting Pronouncements
In December 2011, the FASB issued new guidance regarding balance sheet offsetting disclosures (Accounting Standards Update (“ASU”) 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities), effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance should be applied retrospectively for all comparative periods presented. The amendments in ASU 2011-11 require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effects of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of ASU 2011-11 is to facilitate comparison between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of IFRS. The Company is currently evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
In December 2011, the FASB issued new guidance regarding derecognition of in substance real estate (ASU 2011-10 Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate - a Scope Clarification (a consensus of the FASB Emerging Issues Task Force), effective for fiscal years, and interim periods within those fiscal years, beginning on or after June 15, 2012. The amendments should be applied prospectively to deconsolidation events occurring after the effective date. Under the amendments in ASU 2011-10, when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of a default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
13
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
2. Investments
Fixed Maturity and Equity Securities Available-for-Sale
Presented below is certain information about fixed maturity and equity securities for the periods shown. The unrealized loss amounts presented below include the noncredit loss component of other-than-temporary impairment (“OTTI”) losses:
March 31, 2012 | ||||||||||||||||||||||||
Cost
or Amortized Cost |
Gross Unrealized | Estimated Fair Value |
% of Total |
|||||||||||||||||||||
Gains | Temporary Losses |
OTTI Losses |
||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fixed Maturity Securities: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 16,093 | $ | 1,430 | $ | 183 | $ | — | $ | 17,340 | 36.5 | % | ||||||||||||
Foreign corporate securities |
8,168 | 649 | 60 | — | 8,757 | 18.5 | ||||||||||||||||||
U.S. Treasury and agency securities |
6,582 | 806 | 33 | — | 7,355 | 15.5 | ||||||||||||||||||
Residential mortgage-backed securities (“RMBS”) |
6,313 | 330 | 133 | 121 | 6,389 | 13.5 | ||||||||||||||||||
Commercial mortgage-backed securities (“CMBS”) |
2,091 | 127 | 13 | — | 2,205 | 4.6 | ||||||||||||||||||
State and political subdivision securities |
1,933 | 247 | 38 | — | 2,142 | 4.5 | ||||||||||||||||||
Asset-backed securities (“ABS”) |
1,981 | 47 | 31 | — | 1,997 | 4.2 | ||||||||||||||||||
Foreign government securities |
1,097 | 191 | 4 | — | 1,284 | 2.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturity securities |
$ | 44,258 | $ | 3,827 | $ | 495 | $ | 121 | $ | 47,469 | 100.0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Equity Securities: |
||||||||||||||||||||||||
Common stock |
$ | 134 | $ | 11 | $ | 2 | $ | — | $ | 143 | 54.8 | % | ||||||||||||
Non-redeemable preferred stock |
136 | 6 | 24 | — | 118 | 45.2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total equity securities |
$ | 270 | $ | 17 | $ | 26 | $ | — | $ | 261 | 100.0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
14
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
December 31, 2011 | ||||||||||||||||||||||||
Cost
or Amortized Cost |
Gross Unrealized | Estimated Fair Value |
% of Total |
|||||||||||||||||||||
Gains | Temporary Losses |
OTTI Losses |
||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fixed Maturity Securities: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 16,018 | $ | 1,550 | $ | 229 | $ | — | $ | 17,339 | 36.3 | % | ||||||||||||
Foreign corporate securities |
7,958 | 649 | 114 | — | 8,493 | 17.8 | ||||||||||||||||||
U.S. Treasury and agency securities |
6,832 | 1,217 | 1 | — | 8,048 | 16.8 | ||||||||||||||||||
RMBS |
6,478 | 330 | 189 | 125 | 6,494 | 13.6 | ||||||||||||||||||
CMBS |
2,128 | 115 | 16 | — | 2,227 | 4.7 | ||||||||||||||||||
State and political subdivision securities |
1,891 | 222 | 58 | — | 2,055 | 4.3 | ||||||||||||||||||
ABS |
1,875 | 45 | 42 | — | 1,878 | 3.9 | ||||||||||||||||||
Foreign government securities |
1,035 | 215 | 3 | — | 1,247 | 2.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturity securities |
$ | 44,215 | $ | 4,343 | $ | 652 | $ | 125 | $ | 47,781 | 100.0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Equity Securities: |
||||||||||||||||||||||||
Common stock |
$ | 148 | $ | 11 | $ | 13 | $ | — | $ | 146 | 57.9 | % | ||||||||||||
Non-redeemable preferred stock |
147 | 3 | 44 | — | 106 | 42.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total equity securities |
$ | 295 | $ | 14 | $ | 57 | $ | — | $ | 252 | 100.0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Company held non-income producing fixed maturity securities with an estimated fair value of $5 million with unrealized gains (losses) of ($2) million at both March 31, 2012 and December 31, 2011.
Concentrations of Credit Risk— Summary. The Company was not exposed to any concentrations of credit risk of any single issuer within its fixed maturity securities and equity securities greater than 10% of the Company’s stockholders’ equity, other than U.S. Treasury and agency securities summarized in the table below at:
March 31, 2012 | December 31, 2011 | |||||||
Carrying Value (1) | ||||||||
(In millions) | ||||||||
U.S. Treasury and agency securities included in: |
||||||||
Fixed maturity securities |
$ | 7,355 | $ | 8,048 | ||||
Short-term investments |
1,607 | 2,186 | ||||||
Cash equivalents |
610 | 108 | ||||||
|
|
|
|
|||||
Total U.S. Treasury and agency securities |
$ | 9,572 | $ | 10,342 | ||||
|
|
|
|
(1) | Represents estimated fair value for fixed maturity securities, and for short-term investments and cash equivalents, estimated fair value or amortized cost, which approximates estimated fair value. |
15
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Maturities of Fixed Maturity Securities. The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity date (excluding scheduled sinking funds), were as follows at:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Amortized Cost |
Estimated Fair Value |
Amortized Cost |
Estimated Fair Value |
|||||||||||||
(In millions) | ||||||||||||||||
Due in one year or less |
$ | 3,512 | $ | 3,539 | $ | 2,946 | $ | 2,970 | ||||||||
Due after one year through five years |
7,874 | 8,302 | 8,648 | 9,022 | ||||||||||||
Due after five years through ten years |
8,033 | 8,784 | 7,905 | 8,606 | ||||||||||||
Due after ten years |
14,454 | 16,253 | 14,235 | 16,584 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
33,873 | 36,878 | 33,734 | 37,182 | ||||||||||||
RMBS, CMBS and ABS |
10,385 | 10,591 | 10,481 | 10,599 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
$ | 44,258 | $ | 47,469 | $ | 44,215 | $ | 47,781 | ||||||||
|
|
|
|
|
|
|
|
Actual maturities may differ from contractual maturities due to the exercise of call or prepayment options. Fixed maturity securities not due at a single maturity date have been included in the above table in the year of final contractual maturity. RMBS, CMBS and ABS are shown separately in the table, as they are not due at a single maturity.
Evaluating Available-for-Sale Securities for Other-Than-Temporary Impairment
As described more fully in Note 1 of the Notes to the Consolidated Financial Statements included in the 2011 Annual Report, the Company performs a regular evaluation, on a security-by-security basis, of its available-for-sale securities holdings, including fixed maturity securities, equity securities and perpetual hybrid securities, in accordance with its impairment policy in order to evaluate whether such investments are other-than-temporarily impaired.
16
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Net Unrealized Investment Gains (Losses)
The components of net unrealized investment gains (losses), included in accumulated other comprehensive income (loss), were as follows:
March 31, 2012 | December 31, 2011 | |||||||
(In millions) | ||||||||
Fixed maturity securities |
$ | 3,328 | $ | 3,690 | ||||
Fixed maturity securities with noncredit OTTI losses in accumulated other comprehensive income (loss) |
(121) | (125) | ||||||
|
|
|
|
|||||
Total fixed maturity securities |
3,207 | 3,565 | ||||||
Equity securities |
(6) | (41) | ||||||
Derivatives |
142 | 239 | ||||||
Short-term investments |
(2) | (2) | ||||||
Other |
(6) | (5) | ||||||
|
|
|
|
|||||
Subtotal |
3,335 | 3,756 | ||||||
|
|
|
|
|||||
Amounts allocated from: |
||||||||
Insurance liability loss recognition |
(194) | (325) | ||||||
DAC and VOBA related to noncredit OTTI losses recognized in accumulated other comprehensive income (loss) |
12 | 9 | ||||||
DAC and VOBA |
(469) | (509) | ||||||
|
|
|
|
|||||
Subtotal |
(651) | (825) | ||||||
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in accumulated other comprehensive income (loss) |
39 | 42 | ||||||
Deferred income tax benefit (expense) |
(985) | (1,063) | ||||||
|
|
|
|
|||||
Net unrealized investment gains (losses) |
$ | 1,738 | $ | 1,910 | ||||
|
|
|
|
The changes in fixed maturity securities with noncredit OTTI losses included in accumulated other comprehensive income (loss), were as follows:
March 31, 2012 | December 31, 2011 | |||||||
(In millions) | ||||||||
Balance, beginning of period |
$ | (125) | $ | (86) | ||||
Noncredit OTTI losses recognized (1) |
2 | 5 | ||||||
Securities sold with previous noncredit OTTI loss |
4 | 26 | ||||||
Subsequent changes in estimated fair value |
(2) | (70) | ||||||
|
|
|
|
|||||
Balance, end of period |
$ | (121) | $ | (125) | ||||
|
|
|
|
(1) | Noncredit OTTI losses recognized, net of DAC, were $3 million and $8 million for the periods ended March 31, 2012 and December 31, 2011, respectively. |
17
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The changes in net unrealized investment gains (losses) were as follows:
Three Months Ended March 31, 2012 |
||||
(In millions) | ||||
Balance, beginning of period |
$ | 1,910 | ||
Fixed maturity securities on which noncredit OTTI losses have been recognized |
4 | |||
Unrealized investment gains (losses) during the period |
(425) | |||
Unrealized investment gains (losses) relating to: |
||||
Insurance liability gain (loss) recognition |
131 | |||
DAC and VOBA related to noncredit OTTI losses recognized in accumulated other comprehensive income (loss) |
3 | |||
DAC and VOBA |
40 | |||
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in accumulated other comprehensive income (loss) |
(3) | |||
Deferred income tax benefit (expense) |
78 | |||
|
|
|||
Balance, end of period |
$ | 1,738 | ||
|
|
|||
Change in net unrealized investment gains (losses) |
$ | (172) | ||
|
|
18
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Continuous Gross Unrealized Losses and OTTI Losses for Fixed Maturity and Equity Securities Available-for-Sale by Sector
Presented below is certain information about the estimated fair value and gross unrealized losses of fixed maturity and equity securities in an unrealized loss position. The unrealized loss amounts presented below include the noncredit component of OTTI loss. Fixed maturity securities on which a noncredit OTTI loss has been recognized in accumulated other comprehensive income (loss) are categorized by length of time as being “less than 12 months” or “equal to or greater than 12 months” in a continuous unrealized loss position based on the point in time that the estimated fair value initially declined to below the amortized cost basis and not the period of time since the unrealized loss was deemed a noncredit OTTI loss.
March 31, 2012 | ||||||||||||||||||||||||
Less than 12 Months | Equal to or Greater than 12 Months |
Total | ||||||||||||||||||||||
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
|||||||||||||||||||
(In millions, except number of securities) | ||||||||||||||||||||||||
Fixed Maturity Securities: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 1,637 | $ | 58 | $ | 699 | $ | 125 | $ | 2,336 | $ | 183 | ||||||||||||
Foreign corporate securities |
1,046 | 32 | 137 | 28 | 1,183 | 60 | ||||||||||||||||||
U.S. Treasury and agency securities |
1,370 | 31 | 18 | 2 | 1,388 | 33 | ||||||||||||||||||
RMBS |
569 | 80 | 993 | 174 | 1,562 | 254 | ||||||||||||||||||
CMBS |
107 | 2 | 119 | 11 | 226 | 13 | ||||||||||||||||||
State and political subdivision securities |
49 | 1 | 219 | 37 | 268 | 38 | ||||||||||||||||||
ABS |
500 | 7 | 255 | 24 | 755 | 31 | ||||||||||||||||||
Foreign government securities |
131 | 4 | 2 | — | 133 | 4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturity securities |
$ | 5,409 | $ | 215 | $ | 2,442 | $ | 401 | $ | 7,851 | $ | 616 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Equity Securities: |
||||||||||||||||||||||||
Common stock |
$ | 26 | $ | 2 | $ | — | $ | — | $ | 26 | $ | 2 | ||||||||||||
Non-redeemable preferred stock |
8 | 3 | 55 | 21 | 63 | 24 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total equity securities |
$ | 34 | $ | 5 | $ | 55 | $ | 21 | $ | 89 | $ | 26 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total number of securities in an unrealized loss position |
680 | 449 | ||||||||||||||||||||||
|
|
|
|
19
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
December 31, 2011 | ||||||||||||||||||||||||
Less than 12 Months | Equal to or Greater than 12 Months |
Total | ||||||||||||||||||||||
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
|||||||||||||||||||
(In millions, except number of securities) | ||||||||||||||||||||||||
Fixed Maturity Securities: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 1,699 | $ | 71 | $ | 786 | $ | 158 | $ | 2,485 | $ | 229 | ||||||||||||
Foreign corporate securities |
1,213 | 68 | 162 | 46 | 1,375 | 114 | ||||||||||||||||||
U.S. Treasury and agency securities |
118 | — | 20 | 1 | 138 | 1 | ||||||||||||||||||
RMBS |
784 | 114 | 972 | 200 | 1,756 | 314 | ||||||||||||||||||
CMBS |
152 | 4 | 111 | 12 | 263 | 16 | ||||||||||||||||||
State and political subdivision securities |
6 | — | 367 | 58 | 373 | 58 | ||||||||||||||||||
ABS |
803 | 12 | 261 | 30 | 1,064 | 42 | ||||||||||||||||||
Foreign government securities |
70 | 3 | 4 | — | 74 | 3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturity securities |
$ | 4,845 | $ | 272 | $ | 2,683 | $ | 505 | $ | 7,528 | $ | 777 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Equity Securities: |
||||||||||||||||||||||||
Common stock |
$ | 35 | $ | 13 | $ | — | $ | — | $ | 35 | $ | 13 | ||||||||||||
Non-redeemable preferred stock |
32 | 16 | 59 | 28 | 91 | 44 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total equity securities |
$ | 67 | $ | 29 | $ | 59 | $ | 28 | $ | 126 | $ | 57 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total number of securities in an unrealized loss position |
808 | 479 | ||||||||||||||||||||||
|
|
|
|
20
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Aging of Gross Unrealized Losses and OTTI Losses for Fixed Maturity and Equity Securities Available-for-Sale
Presented below is certain information about the aging and severity of gross unrealized losses on fixed maturity and equity securities, including the portion of OTTI loss on fixed maturity securities recognized in accumulated other comprehensive income (loss) at:
March 31, 2012 | ||||||||||||||||||||||||
Cost or Amortized Cost | Gross Unrealized Losses | Number of Securities | ||||||||||||||||||||||
Less than 20% |
20% or more |
Less than 20% |
20% or more |
Less than 20% |
20% or more |
|||||||||||||||||||
(In millions, except number of securities) | ||||||||||||||||||||||||
Fixed Maturity Securities: |
||||||||||||||||||||||||
Less than six months |
$ | 3,625 | $ | 135 | $ | 75 | $ | 32 | 414 | 20 | ||||||||||||||
Six months or greater but less than nine months |
1,365 | 355 | 53 | 99 | 175 | 26 | ||||||||||||||||||
Nine months or greater but less than twelve months |
407 | 99 | 19 | 29 | 64 | 11 | ||||||||||||||||||
Twelve months or greater |
2,144 | 337 | 185 | 124 | 367 | 37 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 7,541 | $ | 926 | $ | 332 | $ | 284 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Percentage of amortized cost |
4 | % | 31 | % | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Equity Securities: |
||||||||||||||||||||||||
Less than six months |
$ | 22 | $ | 21 | $ | 2 | $ | 6 | 6 | 4 | ||||||||||||||
Six months or greater but less than nine months |
11 | 22 | 1 | 8 | 8 | 3 | ||||||||||||||||||
Nine months or greater but less than twelve months |
— | — | — | — | — | — | ||||||||||||||||||
Twelve months or greater |
23 | 16 | 2 | 7 | 7 | 3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 56 | $ | 59 | $ | 5 | $ | 21 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Percentage of cost |
9 | % | 36 | % | ||||||||||||||||||||
|
|
|
|
21
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
December 31, 2011 | ||||||||||||||||||||||||
Cost or Amortized Cost | Gross Unrealized Losses | Number of Securities | ||||||||||||||||||||||
Less than 20% |
20% or more |
Less than 20% |
20% or more |
Less than 20% |
20% or more |
|||||||||||||||||||
(In millions, except number of securities) | ||||||||||||||||||||||||
Fixed Maturity Securities: |
||||||||||||||||||||||||
Less than six months |
$ | 4,205 | $ | 762 | $ | 137 | $ | 213 | 652 | 81 | ||||||||||||||
Six months or greater but less than nine months |
507 | 137 | 36 | 42 | 91 | 13 | ||||||||||||||||||
Nine months or greater but less than twelve months |
131 | 24 | 8 | 6 | 21 | 4 | ||||||||||||||||||
Twelve months or greater |
2,180 | 359 | 197 | 138 | 373 | 40 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 7,023 | $ | 1,282 | $ | 378 | $ | 399 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Percentage of amortized cost |
5 | % | 31 | % | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Equity Securities: |
||||||||||||||||||||||||
Less than six months |
$ | 59 | $ | 85 | $ | 6 | $ | 42 | 17 | 11 | ||||||||||||||
Six months or greater but less than nine months |
— | — | — | — | — | — | ||||||||||||||||||
Nine months or greater but less than twelve months |
8 | — | 1 | — | 1 | — | ||||||||||||||||||
Twelve months or greater |
14 | 17 | 1 | 7 | 6 | 4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 81 | $ | 102 | $ | 8 | $ | 49 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Percentage of cost |
10 | % | 48 | % | ||||||||||||||||||||
|
|
|
|
Equity securities with gross unrealized losses of 20% or more for twelve months or greater were $7 million at both December 31, 2011 and March 31, 2012. As shown in the section “— Evaluating Temporarily Impaired Available-for-Sale Securities” below, all of the equity securities with gross unrealized losses of 20% or more for twelve months or greater at March 31, 2012 were financial services industry investment grade non-redeemable preferred stock, of which 43% were rated A or better.
22
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Concentration of Gross Unrealized Losses and OTTI Losses for Fixed Maturity and Equity Securities Available-for-Sale
The gross unrealized losses related to fixed maturity and equity securities, including the portion of OTTI losses on fixed maturity securities recognized in accumulated other comprehensive income (loss) were $642 million and $834 million at March 31, 2012 and December 31, 2011, respectively. The concentration, calculated as a percentage of gross unrealized losses (including OTTI losses), by sector and industry was as follows at:
March 31, 2012 | December 31, 2011 | |||||||
Sector: |
||||||||
RMBS |
40 | % | 38 | % | ||||
U.S. corporate securities |
28 | 27 | ||||||
Foreign corporate securities |
9 | 14 | ||||||
State and political subdivision securities |
6 | 7 | ||||||
U.S. Treasury and agency securities |
5 | — | ||||||
ABS |
5 | 5 | ||||||
CMBS |
2 | 2 | ||||||
Other |
5 | 7 | ||||||
|
|
|
|
|||||
Total |
100 | % | 100 | % | ||||
|
|
|
|
|||||
Industry: |
||||||||
Mortgage-backed |
42 | % | 40 | % | ||||
Finance |
16 | 24 | ||||||
Consumer |
7 | 7 | ||||||
State and political subdivision securities |
6 | 7 | ||||||
U.S. Treasury and agency securities |
5 | — | ||||||
Asset-backed |
5 | 5 | ||||||
Utility |
3 | 3 | ||||||
Communications |
3 | 4 | ||||||
Industrial |
1 | 1 | ||||||
Other |
12 | 9 | ||||||
|
|
|
|
|||||
Total |
100 | % | 100 | % | ||||
|
|
|
|
Evaluating Temporarily Impaired Available-for-Sale Securities
The following table presents fixed maturity and equity securities, each with gross unrealized losses of greater than $10 million, the number of securities, total gross unrealized losses and percentage of total gross unrealized losses at:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Fixed Maturity Securities |
Equity Securities |
Fixed Maturity Securities |
Equity Securities |
|||||||||||||
(In millions, except number of securities) | ||||||||||||||||
Number of securities |
9 | — | 9 | 1 | ||||||||||||
Total gross unrealized losses |
$ | 139 | $ | — | $ | 152 | $ | 12 | ||||||||
Percentage of total gross unrealized losses |
23 | % | — | % | 20 | % | 22 | % |
23
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Fixed maturity and equity securities, each with gross unrealized losses greater than $10 million, decreased $25 million during the three months ended March 31, 2012. The decline in, or improvement in, gross unrealized losses for the three months ended March 31, 2012 was primarily attributable to narrowing credit spreads, partially offset by an increase in interest rates. These securities were included in the Company’s OTTI review process.
As of March 31, 2012, $252 million of unrealized losses were from fixed maturity securities with an unrealized loss position of 20% or more of amortized cost for six months or greater. Of the $252 million, $139 million, or 55%, was related to unrealized losses on investment grade securities. Unrealized losses on investment grade securities were principally related to widening credit spreads or rising interest rates since purchase. Of the $252 million, $113 million, or 45%, was related to unrealized losses on below investment grade securities. Unrealized losses on below investment grade securities were principally related to non-agency RMBS (primarily alternative residential mortgage loans), U.S. and foreign corporate securities (primarily transportation and financial services securities) and were the result of significantly wider credit spreads resulting from higher risk premiums since purchase, largely due to economic and market uncertainties including concerns over the financial services sector, unemployment levels and valuations of residential real estate supporting non-agency RMBS. See Note 1 of the Notes to the Consolidated Financial Statements included in the 2011 Annual Report for the factors management considers in evaluating these corporate and structured securities. See “— Aging of Gross Unrealized Losses and OTTI Losses for Fixed Maturity and Equity Securities Available-for-Sale” for a discussion of equity securities with an unrealized loss position of 20% or more of cost for 12 months or greater.
In the Company’s impairment review process, the duration and severity of an unrealized loss position for equity securities are given greater weight and consideration than for fixed maturity securities. An extended and severe unrealized loss position on a fixed maturity security may not have any impact on the ability of the issuer to service all scheduled interest and principal payments and the Company’s evaluation of recoverability of all contractual cash flows or the ability to recover an amount at least equal to its amortized cost based on the present value of the expected future cash flows to be collected. In contrast, for an equity security, greater weight and consideration are given by the Company to a decline in market value and the likelihood such market value decline will recover.
The following table presents certain information about the Company’s equity securities available-for-sale with gross unrealized losses of 20% or more at March 31, 2012:
Non-Redeemable Preferred Stock | ||||||||||||||||||||||||||||||||
All
Equity Securities |
All Types
of Non-Redeemable Preferred Stock |
Investment Grade | ||||||||||||||||||||||||||||||
All Industries | Financial Services Industry | |||||||||||||||||||||||||||||||
Gross Unrealized Losses |
Gross Unrealized Losses |
% of All Equity Securities |
Gross Unrealized Losses |
% of All Non-Redeemable Preferred Stock |
Gross Unrealized Losses |
% of All Industries |
% A Rated or Better |
|||||||||||||||||||||||||
(In millions) | (In millions) | (In millions) | ||||||||||||||||||||||||||||||
Less than six months |
$ | 6 | $ | 6 | 100 % | $ | 1 | 17 % | $ | 1 | 100 % | 100 % | ||||||||||||||||||||
Six months or greater but less than twelve months |
8 | 8 | 100 % | 8 | 100 % | 8 | 100 % | 88 % | ||||||||||||||||||||||||
Twelve months or greater |
7 | 7 | 100 % | 7 | 100 % | 7 | 100 % | 43 % | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
All equity securities with gross unrealized losses of 20% or more |
$ | 21 | $ | 21 | 100 % | $ | 16 | 76 % | $ | 16 | 100 % | 69 % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
24
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
In connection with the equity securities impairment review process, the Company evaluated its holdings in non-redeemable preferred stock, particularly those in the financial services sector. The Company considered several factors including whether there has been any deterioration in credit of the issuer and the likelihood of recovery in value of non-redeemable preferred stock with a severe or an extended unrealized loss. The Company also considered whether any issuers of non-redeemable preferred stock with an unrealized loss held by the Company, regardless of credit rating, have deferred any dividend payments. No such dividend payments had been deferred.
With respect to common stock holdings, the Company considered the duration and severity of the unrealized losses for securities in an unrealized loss position of 20% or more; and the duration of unrealized losses for securities in an unrealized loss position of less than 20% in an extended unrealized loss position (i.e., 12 months or greater).
Based on the Company’s current evaluation of available-for-sale securities in an unrealized loss position in accordance with its impairment policy, and the Company’s current intentions and assessments (as applicable to the type of security) about holding, selling and any requirements to sell these securities, the Company has concluded that these securities are not other-than-temporarily impaired.
Future OTTIs will depend primarily on economic fundamentals, issuer performance (including changes in the present value of future cash flows expected to be collected), changes in credit ratings, changes in collateral valuation, changes in interest rates and changes in credit spreads. If economic fundamentals or any of the above factors deteriorate, additional OTTIs may be incurred in upcoming quarters.
Other Securities
The table below presents certain information about the Company’s securities for which the fair value option (“FVO”) has been elected at:
March 31, 2012 | December 31, 2011 | |||||||
(In millions) | ||||||||
FVO general account securities |
$ | 50 | $ | 49 | ||||
FVO contractholder-directed unit-linked investments |
4,215 | 3,616 | ||||||
|
|
|
|
|||||
Total other securities — at estimated fair value |
$ | 4,265 | $ | 3,665 | ||||
|
|
|
|
See Note 1 of the Notes to the Consolidated Financial Statements included in the 2011 Annual Report for discussion of FVO contractholder-directed unit-linked investments. See “— Net Investment Income” and “— Net Investment Gains (Losses)” for the net investment income recognized on other securities and the related changes in estimated fair value subsequent to purchase included in earnings for securities still held as of the end of the respective periods.
25
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Net Investment Gains (Losses)
The components of net investment gains (losses) were as follows:
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Total gains (losses) on fixed maturity securities: |
||||||||
Total OTTI losses recognized |
$ | (13) | $ | (9) | ||||
Less: Noncredit portion of OTTI losses transferred to and recognized in other comprehensive income (loss) |
(2) | (2) | ||||||
|
|
|
|
|||||
Net OTTI losses on fixed maturity securities recognized in earnings |
(15) | (11) | ||||||
Fixed maturity securities — net gains (losses) on sales and disposals |
15 | (20) | ||||||
|
|
|
|
|||||
Total gains (losses) on fixed maturity securities |
— | (31) | ||||||
Other net investment gains (losses): |
||||||||
Equity securities |
(5) | 1 | ||||||
Other securities — FVO general account securities — changes in estimated fair value subsequent to purchase |
1 | — | ||||||
Mortgage loans |
4 | 4 | ||||||
Real estate and real estate joint ventures |
(3) | — | ||||||
Other limited partnership interests |
1 | 2 | ||||||
Other investment portfolio gains (losses) |
1 | (4) | ||||||
|
|
|
|
|||||
Subtotal — investment portfolio gains (losses) |
(1) | (28) | ||||||
|
|
|
|
|||||
FVO consolidated securitization entities (“CSEs”) — changes in estimated fair value: |
||||||||
Commercial mortgage loans |
6 | 18 | ||||||
Long-term debt — related to commercial mortgage loans |
(2) | (6) | ||||||
Other gains (losses) |
1 | 2 | ||||||
|
|
|
|
|||||
Subtotal FVO CSEs and other gains (losses) |
5 | 14 | ||||||
|
|
|
|
|||||
Total net investment gains (losses) |
$ | 4 | $ | (14) | ||||
|
|
|
|
See “— Variable Interest Entities” for discussion of CSEs included in the table above.
Gains (losses) from foreign currency transactions included within net investment gains (losses) were $1 million and ($1) million for the three months ended March 31, 2012 and 2011, respectively.
26
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Proceeds from sales or disposals of fixed maturity and equity securities resulting in a net investment gain (loss) and the components of fixed maturity and equity securities net investment gains (losses) are as shown in the table below. Investment gains and losses on sales of securities are determined on a specific identification basis.
Three Months Ended March 31, | ||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||||||||||||
Fixed Maturity Securities | Equity Securities | Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Proceeds |
$ | 1,915 | $ | 2,513 | $ | 21 | $ | 16 | $ | 1,936 | $ | 2,529 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross investment gains |
$ | 37 | $ | 18 | $ | 5 | $ | 3 | $ | 42 | $ | 21 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Gross investment losses |
(22) | (38) | (4) | (2) | (26) | (40) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total OTTI losses recognized in earnings: |
||||||||||||||||||||||||
Credit-related |
(8) | (11) | — | — | (8) | (11) | ||||||||||||||||||
Other (1) |
(7) | — | (6) | — | (13) | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total OTTI losses recognized in earnings |
(15) | (11) | (6) | — | (21) | (11) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net investment gains (losses) |
$ | — | $ | (31) | $ | (5) | $ | 1 | $ | (5) | $ | (30) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Other OTTI losses recognized in earnings include impairments on equity securities, impairments on perpetual hybrid securities classified within fixed maturity securities where the primary reason for the impairment was the severity and/or the duration of an unrealized loss position and fixed maturity securities where there is an intent-to-sell or it is more likely than not that the Company will be required to sell the security before recovery of the decline in estimated fair value. |
Fixed maturity security OTTI losses recognized in earnings related to the following sectors and industries within the U.S. and foreign corporate securities sector:
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Sector: |
||||||||
U.S. and foreign corporate securities — by industry: |
||||||||
Finance |
$ | 7 | $ | — | ||||
Utility |
3 | — | ||||||
Communications |
2 | 4 | ||||||
Industrial |
1 | — | ||||||
|
|
|
|
|||||
Total U.S. and foreign corporate securities |
13 | 4 | ||||||
RMBS (1) |
2 | 3 | ||||||
CMBS |
— | 3 | ||||||
ABS (1) |
— | 1 | ||||||
|
|
|
|
|||||
Total |
$ | 15 | $ | 11 | ||||
|
|
|
|
27
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
(1) | See Note 3 of the Notes to the Consolidated Financial Statements included in the 2011 Annual Report for discussion of a reclassification from the ABS sector to the RMBS sector for securities backed by sub-prime residential mortgage loans. |
Equity security OTTI losses recognized in earnings of $6 million for the three months ended March 31, 2012 were all in the common stock sector. The Company had no equity security OTTI losses recognized in earnings for the three months ended March 31, 2011.
Credit Loss Rollforward
Presented below is a rollforward of the cumulative credit loss component of OTTI loss recognized in earnings on fixed maturity securities still held for which a portion of the OTTI loss was recognized in other comprehensive income (loss):
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Balance, beginning of period |
$ | 55 | $ | 63 | ||||
Additions: |
||||||||
Initial impairments — credit loss OTTI recognized on securities not previously impaired |
— | — | ||||||
Additional impairments — credit loss OTTI recognized on securities previously impaired |
2 | 3 | ||||||
Reductions: |
||||||||
Sales, maturities, pay downs and prepayments during the period of securities previously impaired as credit loss OTTI |
(1) | (2) | ||||||
Securities impaired to net present value of expected future cash flows |
— | (20) | ||||||
Increases in cash flows — accretion of previous credit loss OTTI |
(6) | (1) | ||||||
|
|
|
|
|||||
Balance, end of period |
$ | 50 | $ | 43 | ||||
|
|
|
|
28
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Net Investment Income
The components of net investment income were as follows:
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Investment income: |
||||||||
Fixed maturity securities |
$ | 533 | $ | 535 | ||||
Equity securities |
2 | 2 | ||||||
Other securities — FVO general account securities (1) |
— | — | ||||||
Mortgage loans |
90 | 84 | ||||||
Policy loans |
15 | 16 | ||||||
Real estate and real estate joint ventures |
14 | (8) | ||||||
Other limited partnership interests |
48 | 80 | ||||||
Cash, cash equivalents and short-term investments |
1 | 2 | ||||||
International joint ventures |
(1) | (3) | ||||||
Other |
1 | 2 | ||||||
|
|
|
|
|||||
Subtotal |
703 | 710 | ||||||
Less: Investment expenses |
24 | 24 | ||||||
|
|
|
|
|||||
Subtotal, net |
679 | 686 | ||||||
|
|
|
|
|||||
Other securities — FVO contractholder-directed unit-linked investments (1) |
168 | 5 | ||||||
FVO CSEs — Commercial mortgage loans |
45 | 95 | ||||||
|
|
|
|
|||||
Subtotal |
213 | 100 | ||||||
|
|
|
|
|||||
Net investment income |
$ | 892 | $ | 786 | ||||
|
|
|
|
(1) | Changes in estimated fair value subsequent to purchase for securities still held as of the end of the respective periods included in net investment income were: |
Other securities — FVO general account securities | $ | 2 | $ | — | ||||
Other securities — FVO contractholder-directed unit-linked investments | $ | 113 | $ | (25) |
See “— Variable Interest Entities” for discussion of CSEs included in the table above.
See “— Related Party Investment Transactions” for discussion of affiliated net investment income and investment expenses included in the table above.
Securities Lending
As described more fully in Note 1 of the Notes to the Consolidated Financial Statements included in the 2011 Annual Report, the Company participates in a securities lending program whereby blocks of securities are loaned to third parties. These transactions are treated as financing arrangements and the associated cash collateral received is recorded as a liability. The Company is obligated to return the cash collateral received to its counterparties.
29
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Elements of the securities lending program are presented below at:
March 31, 2012 | December 31, 2011 | |||||||
(In millions) | ||||||||
Securities on loan: (1) |
||||||||
Amortized cost |
$ | 5,717 | $ | 5,307 | ||||
Estimated fair value |
$ | 6,497 | $ | 6,451 | ||||
Cash collateral on deposit from counterparties (2) |
$ | 6,734 | $ | 6,456 | ||||
Security collateral on deposit from counterparties |
$ | 12 | $ | 137 | ||||
Reinvestment portfolio — estimated fair value |
$ | 6,631 | $ | 6,295 |
(1) | Included within fixed maturity securities, short-term investments and cash and cash equivalents. |
(2) | Included within payables for collateral under securities loaned and other transactions. |
Security collateral on deposit from counterparties in connection with the securities lending transactions may not be sold or repledged, unless the counterparty is in default, and is not reflected in the interim condensed consolidated financial statements.
Invested Assets on Deposit and Pledged as Collateral
Invested assets on deposit and pledged as collateral are presented in the table below at estimated fair value for cash and cash equivalents and fixed maturity securities and at carrying value for mortgage loans.
March 31, 2012 | December 31, 2011 | |||||||
(In millions) | ||||||||
Invested assets on deposit (1) |
$ | 55 | $ | 51 | ||||
Invested assets pledged as collateral (2) |
869 | 897 | ||||||
|
|
|
|
|||||
Total invested assets on deposit and pledged as collateral |
$ | 924 | $ | 948 | ||||
|
|
|
|
(1) | The Company has invested assets on deposit with regulatory agencies consisting primarily of fixed maturity securities. |
(2) | The Company has pledged fixed maturity securities, mortgage loans and cash and cash equivalents in connection with various agreements and transactions, including funding agreements (see Note 7 of the Notes to the Consolidated Financial Statements included in the 2011 Annual Report) and derivative transactions (see Note 3). |
30
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Mortgage Loans
Mortgage loans are summarized as follows at:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Carrying Value |
% of Total |
Carrying Value |
% of Total |
|||||||||||||
(In millions) | (In millions) | |||||||||||||||
Mortgage loans: |
||||||||||||||||
Commercial |
$ | 5,341 | 55.9 | % | $ | 5,390 | 55.0 | % | ||||||||
Agricultural |
1,250 | 13.1 | 1,333 | 13.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
6,591 | 69.0 | % | 6,723 | 68.6 | % | ||||||||||
Valuation allowances |
(57) | (0.6) | (61) | (0.6) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal mortgage loans, net |
6,534 | 68.4 | % | 6,662 | 68.0 | % | ||||||||||
Commercial mortgage loans held by CSEs |
3,024 | 31.6 | 3,138 | 32.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total mortgage loans, net |
$ | 9,558 | 100.0 | % | $ | 9,800 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
See “— Variable Interest Entities” for discussion of CSEs included in the table above.
See “— Related Party Investment Transactions” for discussion of affiliated mortgage loans included in the table above.
The following tables present certain information about mortgage loans and valuation allowances, by portfolio segment, at:
Commercial | Agricultural | Total | ||||||||||
(In millions) | ||||||||||||
March 31, 2012: |
||||||||||||
Mortgage loans: |
||||||||||||
Evaluated individually for credit losses |
$ | 23 | $ | — | $ | 23 | ||||||
Evaluated collectively for credit losses |
5,318 | 1,250 | 6,568 | |||||||||
|
|
|
|
|
|
|||||||
Total mortgage loans |
5,341 | 1,250 | 6,591 | |||||||||
|
|
|
|
|
|
|||||||
Valuation allowances: |
||||||||||||
Specific credit losses |
15 | — | 15 | |||||||||
Non-specifically identified credit losses |
39 | 3 | 42 | |||||||||
|
|
|
|
|
|
|||||||
Total valuation allowances |
54 | 3 | 57 | |||||||||
|
|
|
|
|
|
|||||||
Mortgage loans, net of valuation allowance |
$ | 5,287 | $ | 1,247 | $ | 6,534 | ||||||
|
|
|
|
|
|
|||||||
December 31, 2011: |
||||||||||||
Mortgage loans: |
||||||||||||
Evaluated individually for credit losses |
$ | 23 | $ | — | $ | 23 | ||||||
Evaluated collectively for credit losses |
5,367 | 1,333 | 6,700 | |||||||||
|
|
|
|
|
|
|||||||
Total mortgage loans |
5,390 | 1,333 | 6,723 | |||||||||
|
|
|
|
|
|
|||||||
Valuation allowances: |
||||||||||||
Specific credit losses |
15 | — | 15 | |||||||||
Non-specifically identified credit losses |
43 | 3 | 46 | |||||||||
|
|
|
|
|
|
|||||||
Total valuation allowances |
58 | 3 | 61 | |||||||||
|
|
|
|
|
|
|||||||
Mortgage loans, net of valuation allowance |
$ | 5,332 | $ | 1,330 | $ | 6,662 | ||||||
|
|
|
|
|
|
31
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The following tables present the changes in the valuation allowance, by portfolio segment:
Mortgage Loan Valuation Allowances | ||||||||||||
Commercial | Agricultural | Total | ||||||||||
(In millions) | ||||||||||||
For the Three Months Ended March 31, 2012: |
||||||||||||
Balance, beginning of period |
$ | 58 | $ | 3 | $ | 61 | ||||||
Provision (release) |
(4) | — | (4) | |||||||||
Charge-offs, net of recoveries |
— | — | — | |||||||||
|
|
|
|
|
|
|||||||
Balance, end of period |
$ | 54 | $ | 3 | $ | 57 | ||||||
|
|
|
|
|
|
|||||||
For the Three Months Ended March 31, 2011: |
||||||||||||
Balance, beginning of period |
$ | 84 | $ | 3 | $ | 87 | ||||||
Provision (release) |
(4) | 1 | (3) | |||||||||
Charge-offs, net of recoveries |
— | — | — | |||||||||
|
|
|
|
|
|
|||||||
Balance, end of period |
$ | 80 | $ | 4 | $ | 84 | ||||||
|
|
|
|
|
|
See Note 1 of the Notes to the Consolidated Financial Statements included in the 2011 Annual Report for a discussion of all credit quality indicators presented herein. Recorded investment data presented herein is prior to valuation allowance. Unpaid principal balance data presented herein is generally prior to charge-offs.
Commercial Mortgage Loans — by Credit Quality Indicators with Estimated Fair Value. Presented below is certain information about the credit quality of the commercial mortgage loans at:
Commercial | ||||||||||||||||||||||||||||
Recorded Investment | ||||||||||||||||||||||||||||
Debt Service Coverage Ratios | Total | % of Total |
Estimated Fair Value |
% of Total |
||||||||||||||||||||||||
> 1.20x | 1.00x - 1.20x | < 1.00x | ||||||||||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||||||
March 31, 2012: |
||||||||||||||||||||||||||||
Loan-to-value ratios: |
||||||||||||||||||||||||||||
Less than 65% |
$ | 3,492 | $ | 31 | $ | 211 | $ | 3,734 | 69.9 | % | $ | 3,995 | 72.4 | % | ||||||||||||||
65% to 75% |
746 | 39 | 52 | 837 | 15.7 | 865 | 15.7 | |||||||||||||||||||||
76% to 80% |
133 | — | 26 | 159 | 3.0 | 112 | 2.0 | |||||||||||||||||||||
Greater than 80% |
429 | 144 | 38 | 611 | 11.4 | 549 | 9.9 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 4,800 | $ | 214 | $ | 327 | $ | 5,341 | 100.0 | % | $ | 5,521 | 100.0 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
December 31, 2011: |
||||||||||||||||||||||||||||
Loan-to-value ratios: |
||||||||||||||||||||||||||||
Less than 65% |
$ | 3,324 | $ | 135 | $ | 210 | $ | 3,669 | 68.1 | % | $ | 3,888 | 69.9 | % | ||||||||||||||
65% to 75% |
719 | 54 | 52 | 825 | 15.3 | 852 | 15.3 | |||||||||||||||||||||
76% to 80% |
199 | — | 26 | 225 | 4.2 | 221 | 4.0 | |||||||||||||||||||||
Greater than 80% |
452 | 181 | 38 | 671 | 12.4 | 602 | 10.8 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 4,694 | $ | 370 | $ | 326 | $ | 5,390 | 100.0 | % | $ | 5,563 | 100.0 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Agricultural Mortgage Loans — by Credit Quality Indicator. Presented below is certain information about the credit quality of agricultural mortgage loans. The estimated fair value of agricultural mortgage loans was $1.3 billion and $1.4 billion at March 31, 2012 and December 31, 2011, respectively.
Agricultural | ||||||||||||||||
March 31, 2012 | December 31, 2011 | |||||||||||||||
Recorded Investment |
% of Total |
Recorded Investment |
% of Total |
|||||||||||||
(In millions) | (In millions) | |||||||||||||||
Loan-to-value ratios: |
||||||||||||||||
Less than 65% |
$ | 1,179 | 94.3 | % | $ | 1,129 | 84.7 | % | ||||||||
65% to 75% |
71 | 5.7 | 142 | 10.7 | ||||||||||||
76% to 80% |
— | — | 62 | 4.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,250 | 100.0 | % | $ | 1,333 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
Past Due and Interest Accrual Status of Mortgage Loans. The Company has a high quality, well performing, mortgage loan portfolio, with approximately 99% of all mortgage loans classified as performing at both March 31, 2012 and December 31, 2011. The Company defines delinquent mortgage loans consistent with industry practice, when interest and principal payments are past due as follows: commercial mortgage loans — 60 days or more and agricultural mortgage loans — 90 days or more. The Company had no mortgage loans past due and no loans in non-accrual status at both March 31, 2012 and December 31, 2011.
Impaired Mortgage Loans. Presented below is certain information about impaired mortgage loans, by portfolio segment, at:
Impaired Mortgage Loans | ||||||||||||||||||||||||||||||||
Loans with a Valuation Allowance | Loans without a Valuation Allowance |
All Impaired Loans | ||||||||||||||||||||||||||||||
Unpaid Principal Balance |
Recorded Investment |
Valuation Allowances |
Carrying Value |
Unpaid Principal Balance |
Recorded Investment |
Unpaid Principal Balance |
Carrying Value |
|||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
March 31, 2012: |
||||||||||||||||||||||||||||||||
Commercial |
$ | 23 | $ | 23 | $ | 15 | $ | 8 | $ | — | $ | — | $ | 23 | $ | 8 | ||||||||||||||||
Agricultural |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 23 | $ | 23 | $ | 15 | $ | 8 | $ | — | $ | — | $ | 23 | $ | 8 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
December 31, 2011: |
||||||||||||||||||||||||||||||||
Commercial |
$ | 23 | $ | 23 | $ | 15 | $ | 8 | $ | 15 | $ | 15 | $ | 38 | $ | 23 | ||||||||||||||||
Agricultural |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 23 | $ | 23 | $ | 15 | $ | 8 | $ | 15 | $ | 15 | $ | 38 | $ | 23 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The average recorded investment in impaired mortgage loans and the related interest income, by portfolio segment, was:
Impaired Mortgage Loans | ||||||||||||
Average Recorded Investment |
Interest Income Recognized | |||||||||||
Cash Basis | Accrual Basis | |||||||||||
(In millions) | ||||||||||||
For the Three Months Ended March 31, 2012: |
||||||||||||
Commercial |
$ | 30 | $ | 1 | $ | — | ||||||
Agricultural |
— | — | — | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 30 | $ | 1 | $ | — | ||||||
|
|
|
|
|
|
|||||||
For the Three Months Ended March 31, 2011: |
||||||||||||
Commercial |
$ | 45 | $ | 1 | $ | — | ||||||
Agricultural |
12 | — | — | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 57 | $ | 1 | $ | — | ||||||
|
|
|
|
|
|
Mortgage Loans Modified in a Troubled Debt Restructuring. See Note 1 of the Notes to the Consolidated Financial Statements included in the 2011 Annual Report for a discussion of loan modifications that are classified as troubled debt restructuring and the types of concessions typically granted. At March 31, 2012 and 2011, the Company had no mortgage loans modified during the period in a troubled debt restructuring.
During the previous 12 months, the Company had no mortgage loans modified in a troubled debt restructuring with a subsequent payment default during the three months ended March 31, 2012 and 2011. Payment default is determined in the same manner as delinquency status — when interest and principal payments are past due as described above.
Cash Equivalents
The carrying value of cash equivalents, which includes securities and other investments with an original or remaining maturity of three months or less at the time of purchase, was $940 million and $583 million at March 31, 2012 and December 31, 2011, respectively.
Purchased Credit Impaired Investments
See Note 2 of the Notes to the Consolidated Financial Statements included in the 2011 Annual Report for information about investments acquired with evidence of credit quality deterioration since origination and for which it was probable at the acquisition date that the Company would be unable to collect all contractually required payments.
Variable Interest Entities
The Company holds investments in certain entities that are VIEs. In certain instances, the Company holds both the power to direct the most significant activities of the entity, as well as an economic interest in the entity and, as such, is deemed to be the primary beneficiary or consolidator of the entity. The following table presents the total assets and total liabilities relating to VIEs for which the Company has concluded that it is the primary
34
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
beneficiary and which are consolidated at March 31, 2012 and December 31, 2011. Creditors or beneficial interest holders of VIEs where the Company is the primary beneficiary have no recourse to the general credit of the Company, as the Company’s obligation to the VIEs is limited to the amount of its committed investment.
March 31, 2012 | December 31, 2011 | |||||||
(In millions) | ||||||||
CSEs: (1) |
||||||||
Assets: |
||||||||
Mortgage loans held-for-investment (commercial mortgage loans) |
$ | 3,024 | $ | 3,138 | ||||
Accrued investment income |
14 | 14 | ||||||
|
|
|
|
|||||
Total assets |
$ | 3,038 | $ | 3,152 | ||||
|
|
|
|
|||||
Liabilities: |
||||||||
Long-term debt |
$ | 2,946 | $ | 3,065 | ||||
Other liabilities |
14 | 14 | ||||||
|
|
|
|
|||||
Total liabilities |
$ | 2,960 | $ | 3,079 | ||||
|
|
|
|
(1) | The Company consolidates former qualified special purpose entities (“QSPEs”) that are structured as CMBS. The assets of these entities can only be used to settle their respective liabilities, and under no circumstances is the Company liable for any principal or interest shortfalls should any arise. The Company’s exposure was limited to that of its remaining investment in the former QSPEs of $64 million and $59 million at estimated fair value at March 31, 2012 and December 31, 2011, respectively. The long-term debt presented above bears interest primarily at fixed rates ranging from 2.25% to 5.57%, payable primarily on a monthly basis and is expected to be repaid over the next five years. Interest expense related to these obligations, included in other expenses, was $43 million and $93 million for the three months ended March 31, 2012 and 2011, respectively. |
The following table presents the carrying amount and maximum exposure to loss relating to VIEs for which the Company holds significant variable interests but is not the primary beneficiary and which have not been consolidated at:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Carrying Amount |
Maximum Exposure to Loss (1) |
Carrying Amount |
Maximum Exposure to Loss (1) |
|||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||
RMBS (2) |
$ | 6,389 | $ | 6,389 | $ | 6,494 | $ | 6,494 | ||||||||
CMBS (2) |
2,205 | 2,205 | 2,227 | 2,227 | ||||||||||||
ABS (2) |
1,997 | 1,997 | 1,878 | 1,878 | ||||||||||||
U.S. corporate securities |
416 | 416 | 424 | 424 | ||||||||||||
Foreign corporate securities |
245 | 245 | 234 | 234 | ||||||||||||
Other limited partnership interests |
1,296 | 1,907 | 1,302 | 1,982 | ||||||||||||
Real estate joint ventures |
21 | 24 | 22 | 26 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 12,569 | $ | 13,183 | $ | 12,581 | $ | 13,265 | ||||||||
|
|
|
|
|
|
|
|
35
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
(1) | The maximum exposure to loss relating to the fixed maturity securities is equal to their estimated fair value. The maximum exposure to loss relating to the other limited partnership interests and real estate joint ventures is equal to the carrying amounts plus any unfunded commitments of the Company. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee. |
(2) | For these variable interests, the Company’s involvement is limited to that of a passive investor. |
As described in Note 8, the Company makes commitments to fund partnership investments in the normal course of business. Excluding these commitments, the Company did not provide financial or other support to investees designated as VIEs during the three months ended March 31, 2012 or 2011.
Related Party Investment Transactions
As more fully described in Note 2 of the Notes of the Consolidated Financial Statements in the 2011 Annual Report, the Company has loans outstanding to affiliates.
The Company has loans outstanding to wholly-owned real estate subsidiaries of an affiliate, Metropolitan Life Insurance Company (“MLIC”), which are included in mortgage loans. The carrying value of these loans was $307 million at both March 31, 2012 and December 31, 2011. Net investment income from these loans was $4 million for both the three months ended March 31, 2012 and 2011.
The Company also has loans outstanding to Exeter Reassurance Company Ltd. (“Exeter”), an affiliate. The carrying value of these loans was $430 million at both March 31, 2012 and December 31, 2011, which is included in other invested assets. Net investment income from these loans was $6 million for the three months ended March 31, 2012. There was no net investment income for the three months ended March 31, 2011.
The Company receives investment administrative services from an affiliate. These investment administrative service charges were $17 million and $15 million for the three months ended March 31, 2012 and 2011, respectively. The Company also had affiliated net investment income of less than $1 million for both the three months ended March 31, 2012 and 2011.
3. Derivative Financial Instruments
Accounting for Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest rates, foreign currency exchange rates, credit spreads and/or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter (“OTC”) market. The Company uses a variety of derivatives, including swaps, forwards, futures and option contracts, to manage various risks relating to its ongoing business operations. To a lesser extent, the Company uses credit default swaps to synthetically replicate investment risks and returns which are not readily available in the cash market. The Company also purchases certain securities, issues certain insurance policies and investment contracts and engages in certain reinsurance agreements that have embedded derivatives.
Freestanding derivatives are carried in the Company’s consolidated balance sheets either as assets within other invested assets or as liabilities within other liabilities at estimated fair value as determined through the use of quoted market prices for exchange-traded derivatives or through the use of pricing models for OTC derivatives. The determination of estimated fair value of freestanding derivatives, when quoted market values are not available, is
36
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing the instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models.
Accruals on derivatives are generally recorded in accrued investment income or within other liabilities in the consolidated balance sheets. However, accruals that are not expected to settle within one year are included with the derivative carrying value in other invested assets or other liabilities.
The Company does not offset the fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the estimated fair value of the derivative are generally reported in net derivative gains (losses) except for those (i) in policyholder benefits and claims for economic hedges of variable annuity guarantees included in future policy benefits; and (ii) in net investment income for economic hedges of equity method investments in joint ventures. The fluctuations in estimated fair value of derivatives which have not been designated for hedge accounting can result in significant volatility in net income.
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge as either (i) a hedge of the estimated fair value of a recognized asset or liability (“fair value hedge”); or (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). In this documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method which will be used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout the life of the designated hedging relationship. Assessments of hedge effectiveness and measurements of ineffectiveness are also subject to interpretation and estimation and different interpretations or estimates may have a material effect on the amount reported in net income.
The accounting for derivatives is complex and interpretations of the primary accounting guidance continue to evolve in practice. Judgment is applied in determining the availability and application of hedge accounting designations and the appropriate accounting treatment under such accounting guidance. If it was determined that hedge accounting designations were not appropriately applied, reported net income could be materially affected.
Under a fair value hedge, changes in the estimated fair value of the hedging derivative, including amounts measured as ineffectiveness, and changes in the estimated fair value of the hedged item related to the designated risk being hedged, are reported within net derivative gains (losses). The estimated fair values of the hedging derivatives are exclusive of any accruals that are separately reported in the consolidated statement of operations and comprehensive income within interest income or interest expense to match the location of the hedged item.
Under a cash flow hedge, changes in the estimated fair value of the hedging derivative measured as effective are reported within other comprehensive income (loss), a separate component of stockholders’ equity, and the deferred gains or losses on the derivative are reclassified into the consolidated statement of operations and comprehensive income when the Company’s earnings are affected by the variability in cash flows of the hedged
37
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
item. Changes in the estimated fair value of the hedging instrument measured as ineffectiveness are reported within net derivative gains (losses). The estimated fair values of the hedging derivatives are exclusive of any accruals that are separately reported in the consolidated statement of operations and comprehensive income within interest income or interest expense to match the location of the hedged item.
The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item; (ii) the derivative expires, is sold, terminated, or exercised; (iii) it is no longer probable that the hedged forecasted transaction will occur; or (iv) the derivative is de-designated as a hedging instrument.
When hedge accounting is discontinued because it is determined that the derivative is not highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item, the derivative continues to be carried in the consolidated balance sheets at its estimated fair value, with changes in estimated fair value recognized currently in net derivative gains (losses). The carrying value of the hedged recognized asset or liability under a fair value hedge is no longer adjusted for changes in its estimated fair value due to the hedged risk, and the cumulative adjustment to its carrying value is amortized into income over the remaining life of the hedged item. Provided the hedged forecasted transaction is still probable of occurrence, the changes in estimated fair value of derivatives recorded in other comprehensive income (loss) related to discontinued cash flow hedges are released into the consolidated statements of operations and comprehensive income when the Company’s earnings are affected by the variability in cash flows of the hedged item.
When hedge accounting is discontinued because it is no longer probable that the forecasted transactions will occur on the anticipated date or within two months of that date, the derivative continues to be carried in the consolidated balance sheets at its estimated fair value, with changes in estimated fair value recognized currently in net derivative gains (losses). Deferred gains and losses of a derivative recorded in other comprehensive income (loss) pursuant to the discontinued cash flow hedge of a forecasted transaction that is no longer probable are recognized immediately in net derivative gains (losses).
In all other situations in which hedge accounting is discontinued, the derivative is carried at its estimated fair value in the consolidated balance sheets, with changes in its estimated fair value recognized in the current period as net derivative gains (losses).
The Company issues certain products and purchases certain investments that contain embedded derivatives. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated. If the instrument would not be accounted for in its entirety at estimated fair value and it is determined that the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative. Such embedded derivatives are carried in the consolidated balance sheets at estimated fair value with the host contract and changes in their estimated fair value are generally reported in net derivative gains (losses). If the Company is unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income. Additionally, the Company may elect to carry an entire contract on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income if that contract contains an embedded derivative that requires bifurcation.
See Note 4 for information about the fair value hierarchy for derivatives.
38
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Primary Risks Managed by Derivative Financial Instruments
The Company is exposed to various risks relating to its ongoing business operations, including interest rate risk, foreign currency risk, credit risk and equity market risk. The Company uses a variety of strategies to manage these risks, including the use of derivative instruments. The following table presents the gross notional amount, estimated fair value and primary underlying risk exposure of the Company’s derivative financial instruments, excluding embedded derivatives, held at:
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||
Primary Underlying Risk Exposure |
Instrument Type |
Notional Amount |
Estimated Fair Value (1) |
Notional Amount |
Estimated Fair Value (1) |
|||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||
Interest rate |
Interest rate swaps |
$ | 15,276 | $ | 1,101 | $ | 403 | $ | 13,074 | $ | 1,418 | $ | 427 | |||||||||||||
Interest rate floors |
7,986 | 278 | 131 | 7,986 | 330 | 152 | ||||||||||||||||||||
Interest rate caps |
8,383 | 17 | — | 10,133 | 19 | — | ||||||||||||||||||||
Interest rate futures |
3,820 | 2 | 16 | 3,766 | 10 | 1 | ||||||||||||||||||||
Interest rate forwards |
565 | 61 | — | 620 | 128 | — | ||||||||||||||||||||
Foreign currency |
Foreign currency swaps |
1,835 | 290 | 55 | 1,792 | 297 | 62 | |||||||||||||||||||
Foreign currency forwards |
126 | 1 | — | 149 | 9 | — | ||||||||||||||||||||
Credit |
Credit default swaps |
2,428 | 22 | 10 | 2,426 | 18 | 28 | |||||||||||||||||||
Equity market |
Equity futures |
1,155 | 1 | 3 | 1,007 | 4 | — | |||||||||||||||||||
Equity options |
7,067 | 410 | — | 2,111 | 482 | — | ||||||||||||||||||||
Variance swaps |
2,503 | 18 | 35 | 2,430 | 51 | 8 | ||||||||||||||||||||
Total rate of return swaps |
147 | 1 | — | 129 | — | 2 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 51,291 | $ | 2,202 | $ | 653 | $ | 45,623 | $ | 2,766 | $ | 680 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The estimated fair value of all derivatives in an asset position is reported within other invested assets in the consolidated balance sheets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the consolidated balance sheets. |
Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). In an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional principal amount. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by the counterparty at each due date. The Company utilizes interest rate swaps in fair value, cash flow and non-qualifying hedging relationships.
Inflation swaps are used as an economic hedge to reduce inflation risk generated from inflation-indexed liabilities. Inflation swaps are included in interest rate swaps in the preceding table. The Company utilizes inflation swaps in non-qualifying hedging relationships.
Implied volatility swaps are used by the Company primarily as economic hedges of interest rate risk associated with the Company’s investments in mortgage-backed securities. In an implied volatility swap, the Company exchanges fixed payments for floating payments that are linked to certain market volatility measures. If implied volatility rises, the floating payments that the Company receives will increase, and if implied volatility falls, the floating payments that the Company receives will decrease. Implied volatility swaps are included in interest rate swaps in the preceding table. The Company utilizes implied volatility swaps in non-qualifying hedging relationships.
39
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The Company purchases interest rate caps and floors primarily to protect its floating rate liabilities against rises in interest rates above a specified level, and against interest rate exposure arising from mismatches between assets and liabilities (duration mismatches), as well as to protect its minimum rate guarantee liabilities against declines in interest rates below a specified level, respectively. In certain instances, the Company locks in the economic impact of existing purchased caps and floors by entering into offsetting written caps and floors. The Company utilizes interest rate caps and floors in non-qualifying hedging relationships.
In exchange-traded interest rate (Treasury and swap) futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of interest rate securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded interest rate (Treasury and swap) futures are used primarily to hedge mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets, to hedge against changes in value of securities the Company owns or anticipates acquiring and to hedge against changes in interest rates on anticipated liability issuances by replicating Treasury or swap curve performance. The Company utilizes exchange-traded interest rate futures in non-qualifying hedging relationships.
The Company writes covered call options on its portfolio of U.S. Treasury securities as an income generation strategy. In a covered call transaction, the Company receives a premium at the inception of the contract in exchange for giving the derivative counterparty the right to purchase the referenced security from the Company at a predetermined price. The call option is “covered” because the Company owns the referenced security over the term of the option. Covered call options are included in interest rate options. The Company utilizes covered call options in non-qualifying hedging relationships.
The Company enters into interest rate forwards to buy and sell securities. The price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. The Company utilizes interest rate forwards in cash flow hedging relationships.
Foreign currency derivatives, including foreign currency swaps and foreign currency forwards, are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies.
In a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a fixed exchange rate, generally set at inception, calculated by reference to an agreed upon principal amount. The principal amount of each currency is exchanged at the inception and termination of the currency swap by each party. The Company utilizes foreign currency swaps in fair value, cash flow and non-qualifying hedging relationships.
In a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made in a different currency at the specified future date. The Company utilizes foreign currency forwards in non-qualifying hedging relationships.
Certain credit default swaps are used by the Company to hedge against credit-related changes in the value of its investments. In a credit default swap transaction, the Company agrees with another party, at specified intervals, to pay a premium to hedge credit risk. If a credit event, as defined by the contract, occurs, the contract
40
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
may be cash settled or it may be settled gross by the delivery of par quantities of the referenced investment equal to the specified swap notional in exchange for the payment of cash amounts by the counterparty equal to the par value of the investment surrendered. The Company utilizes credit default swaps in non-qualifying hedging relationships.
Credit default swaps are also used to synthetically create investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and one or more cash instruments such as U.S. Treasury securities, agency securities or other fixed maturity securities. These credit default swaps are not designated as hedging instruments.
In exchange-traded equity futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of equity securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded equity futures are used primarily to hedge liabilities embedded in certain variable annuity products offered by the Company. The Company utilizes exchange-traded equity futures in non-qualifying hedging relationships.
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. To hedge against adverse changes in equity indices, the Company enters into contracts to sell the equity index within a limited time at a contracted price. The contracts will be net settled in cash based on differentials in the indices at the time of exercise and the strike price. In certain instances, the Company may enter into a combination of transactions to hedge adverse changes in equity indices within a pre-determined range through the purchase and sale of options. Equity index options are included in equity options in the preceding table. The Company utilizes equity index options in non-qualifying hedging relationships.
Equity variance swaps are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. In an equity variance swap, the Company agrees with another party to exchange amounts in the future, based on changes in equity volatility over a defined period. Equity variance swaps are included in variance swaps in the preceding table. The Company utilizes equity variance swaps in non-qualifying hedging relationships.
Total rate of return swaps (“TRRs”) are swaps whereby the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of an asset or a market index and the London Inter-Bank Offered Rate (“LIBOR”), calculated by reference to an agreed notional principal amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by the counterparty at each due date. The Company uses TRRs to hedge its equity market guarantees in certain of its insurance products. TRRs can be used as hedges or to synthetically create investments. The Company utilizes TRRs in non-qualifying hedging relationships.
41
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Hedging
The following table presents the gross notional amount and estimated fair value of derivatives designated as hedging instruments by type of hedge designation at:
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||
Notional Amount |
Estimated Fair Value | Notional Amount |
Estimated Fair Value | |||||||||||||||||||||
Derivatives Designated as Hedging Instruments |
Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fair value hedges: |
||||||||||||||||||||||||
Foreign currency swaps |
$ | 598 | $ | 197 | $ | 16 | $ | 598 | $ | 188 | $ | 19 | ||||||||||||
Interest rate swaps |
388 | 23 | 6 | 311 | 35 | 6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
986 | 220 | 22 | 909 | 223 | 25 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flow hedges: |
||||||||||||||||||||||||
Foreign currency swaps |
506 | 22 | 8 | 445 | 31 | 12 | ||||||||||||||||||
Interest rate swaps |
748 | 62 | 1 | 355 | 96 | — | ||||||||||||||||||
Interest rate forwards |
565 | 61 | — | 620 | 128 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
1,819 | 145 | 9 | 1,420 | 255 | 12 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total qualifying hedges |
$ | 2,805 | $ | 365 | $ | 31 | $ | 2,329 | $ | 478 | $ | 37 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the gross notional amount and estimated fair value of derivatives that were not designated or do not qualify as hedging instruments by derivative type at:
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||
Derivatives Not Designated or Not Qualifying as Hedging Instruments |
Notional Amount |
Estimated Fair Value | Notional Amount |
Estimated Fair Value | ||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Interest rate swaps |
$ | 14,140 | $ | 1,016 | $ | 396 | $ | 12,408 | $ | 1,287 | $ | 421 | ||||||||||||
Interest rate floors |
7,986 | 278 | 131 | 7,986 | 330 | 152 | ||||||||||||||||||
Interest rate caps |
8,383 | 17 | — | 10,133 | 19 | — | ||||||||||||||||||
Interest rate futures |
3,820 | 2 | 16 | 3,766 | 10 | 1 | ||||||||||||||||||
Foreign currency swaps |
731 | 71 | 31 | 749 | 78 | 31 | ||||||||||||||||||
Foreign currency forwards |
126 | 1 | — | 149 | 9 | — | ||||||||||||||||||
Credit default swaps |
2,428 | 22 | 10 | 2,426 | 18 | 28 | ||||||||||||||||||
Equity futures |
1,155 | 1 | 3 | 1,007 | 4 | — | ||||||||||||||||||
Equity options |
7,067 | 410 | — | 2,111 | 482 | — | ||||||||||||||||||
Variance swaps |
2,503 | 18 | 35 | 2,430 | 51 | 8 | ||||||||||||||||||
Total rate of return swaps |
147 | 1 | — | 129 | — | 2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total non-designated or non-qualifying derivatives |
$ | 48,486 | $ | 1,837 | $ | 622 | $ | 43,294 | $ | 2,288 | $ | 643 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
42
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Net Derivative Gains (Losses)
The components of net derivative gains (losses) were as follows:
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Derivatives and hedging gains (losses) (1) |
$ | (553) | $ | (103) | ||||
Embedded derivatives |
114 | (53) | ||||||
|
|
|
|
|||||
Total net derivative gains (losses) |
$ | (439) | $ | (156) | ||||
|
|
|
|
(1) | Includes foreign currency transaction gains (losses) on hedged items in cash flow and non-qualifying hedging relationships, which are not presented elsewhere in this note. |
The following table presents earned income on derivatives for the:
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Qualifying hedges: |
||||||||
Net investment income |
$ | — | $ | 1 | ||||
Interest credited to policyholder account balances |
10 | 11 | ||||||
Non-qualifying hedges: |
||||||||
Net derivative gains (losses) |
8 | 10 | ||||||
|
|
|
|
|||||
Total |
$ | 18 | $ | 22 | ||||
|
|
|
|
Fair Value Hedges
The Company designates and accounts for the following as fair value hedges when they have met the requirements of fair value hedging: (i) interest rate swaps to convert fixed rate investments to floating rate investments; (ii) interest rate swaps to convert fixed rate liabilities to floating rate liabilities; and (iii) foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated liabilities.
43
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The Company recognizes gains and losses on derivatives and the related hedged items in fair value hedges within net derivative gains (losses). The following table represents the amount of such net derivative gains (losses):
Derivatives in Fair Value |
Hedged Items in Fair Value |
Net Derivative Gains (Losses) Recognized for Derivatives |
Net Derivative Gains (Losses) Recognized for Hedged Items |
Ineffectiveness Recognized in Net Derivative Gains (Losses) |
||||||||||
(In millions) | ||||||||||||||
For the Three Months Ended March 31, 2012: |
||||||||||||||
Interest rate swaps: |
Fixed maturity securities |
$ | — | $ | — | $ | — | |||||||
Policyholder account balances (“PABs”) (1) |
(13) | 12 | (1) | |||||||||||
Foreign currency swaps: |
Foreign-denominated PABs (2) |
12 | (16) | (4) | ||||||||||
|
|
|
|
|
|
|||||||||
Total |
$ | (1) | $ | (4) | $ | (5) | ||||||||
|
|
|
|
|
|
|||||||||
For the Three Months Ended March 31, 2011: |
||||||||||||||
Interest rate swaps: |
Fixed maturity securities |
$ | 1 | $ | (1) | $ | — | |||||||
PABs (1) |
(5) | 4 | (1) | |||||||||||
Foreign currency swaps: |
Foreign-denominated PABs (2) |
22 | (26) | (4) | ||||||||||
|
|
|
|
|
|
|||||||||
Total |
$ | 18 | $ | (23) | $ | (5) | ||||||||
|
|
|
|
|
|
(1) | Fixed rate liabilities. |
(2) | Fixed rate or floating rate liabilities. |
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Cash Flow Hedges
The Company designates and accounts for the following as cash flow hedges when they have met the requirements of cash flow hedging: (i) foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments and liabilities; (ii) interest rate forwards to lock in the price to be paid for forward purchases of investments; (iii) interest rate swaps and interest rate forwards to hedge the forecasted purchases of fixed-rate investments; and (iv) interest rate swaps to convert floating rate investments to fixed rate investments.
In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions did not occur on the anticipated date, within two months of that date, or were no longer probable of occurring. There were no amounts reclassified into net derivative gains (losses) for the three months ended March 31, 2012 and 2011 related to such discontinued cash flow hedges.
At March 31, 2012 and December 31, 2011, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions did not exceed eight years and five years, respectively.
44
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The following table presents the components of accumulated other comprehensive income (loss), before income tax, related to cash flow hedges:
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Accumulated other comprehensive income (loss), balance at beginning of period |
$ | 239 | $ | (109) | ||||
Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges |
(96) | (21) | ||||||
Amounts reclassified to net derivative gains (losses) |
(1) | (2) | ||||||
|
|
|
|
|||||
Accumulated other comprehensive income (loss), balance at end of period |
$ | 142 | $ | (132) | ||||
|
|
|
|
At March 31, 2012, $1 million of deferred net gains (losses) on derivatives in accumulated other comprehensive income (loss) was expected to be reclassified to earnings within the next 12 months.
The following table presents the effects of derivatives in cash flow hedging relationships on the interim condensed consolidated statements of operations and comprehensive income and the interim condensed consolidated statements of stockholders’ equity:
Derivatives in Cash Flow |
Amount of Gains (Losses) Deferred in Accumulated Other Comprehensive Income (Loss) on Derivatives |
Amount and Location of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Loss) |
Amount and Location of Gains (Losses) Recognized in Income (Loss) on Derivatives |
|||||||||
(Effective Portion) | (Effective Portion) | (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
||||||||||
Net Derivative Gains (Losses) |
Net Derivative Gains (Losses) |
|||||||||||
(In millions) | ||||||||||||
For the Three Months Ended March 31, 2012: |
||||||||||||
Interest rate swaps |
$ | (34) | $ | — | $ | — | ||||||
Foreign currency swaps |
(5) | 1 | — | |||||||||
Interest rate forwards |
(57) | — | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | (96) | $ | 1 | $ | 1 | ||||||
|
|
|
|
|
|
|||||||
For the Three Months Ended March 31, 2011: |
||||||||||||
Interest rate swaps |
$ | (11) | $ | — | $ | — | ||||||
Foreign currency swaps |
(1) | 2 | — | |||||||||
Interest rate forwards |
(9) | — | — | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | (21) | $ | 2 | $ | — | ||||||
|
|
|
|
|
|
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Non-Qualifying Derivatives and Derivatives for Purposes Other Than Hedging
The Company enters into the following derivatives that do not qualify for hedge accounting or for purposes other than hedging: (i) interest rate swaps, implied volatility swaps, caps and floors and interest rate futures to economically hedge its exposure to interest rates; (ii) foreign currency forwards and swaps to economically hedge its exposure to adverse movements in exchange rates; (iii) credit default swaps to economically hedge
45
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
exposure to adverse movements in credit; (iv) equity futures, equity index options, interest rate futures, TRRs and equity variance swaps to economically hedge liabilities embedded in certain variable annuity products; (v) credit default swaps to synthetically create investments; (vi) interest rate forwards to buy and sell securities to economically hedge its exposure to interest rates; (vii) inflation swaps to reduce risk generated from inflation-indexed liabilities; (viii) covered call options for income generation; and (ix) equity options to economically hedge certain invested assets against adverse changes in equity indices.
The following table presents the amount and location of gains (losses) recognized in income for derivatives that were not designated or qualifying as hedging instruments:
Net Derivative Gains (Losses) |
Net Investment Income (1) |
Policyholder Benefits and Claims (2) |
||||||||||
(In millions) | ||||||||||||
For the Three Months Ended March 31, 2012: |
||||||||||||
Interest rate swaps |
$ | (178) | $ | — | $ | — | ||||||
Interest rate floors |
(32) | — | — | |||||||||
Interest rate caps |
(2) | — | — | |||||||||
Interest rate futures |
(61) | — | — | |||||||||
Equity futures |
(110) | — | (30) | |||||||||
Foreign currency swaps |
(5) | — | — | |||||||||
Foreign currency forwards |
(2) | — | — | |||||||||
Equity options |
(121) | (1) | — | |||||||||
Interest rate forwards |
(2) | — | — | |||||||||
Variance swaps |
(60) | — | — | |||||||||
Credit default swaps |
20 | — | — | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | (553) | $ | (1) | $ | (30) | ||||||
|
|
|
|
|
|
|||||||
For the Three Months Ended March 31, 2011: |
||||||||||||
Interest rate swaps |
$ | (24) | $ | — | $ | — | ||||||
Interest rate floors |
(17) | — | — | |||||||||
Interest rate caps |
(1) | — | — | |||||||||
Interest rate futures |
(1) | — | — | |||||||||
Equity futures |
— | — | — | |||||||||
Foreign currency swaps |
3 | — | — | |||||||||
Foreign currency forwards |
(11) | — | — | |||||||||
Equity options |
(22) | (1) | — | |||||||||
Interest rate forwards |
— | — | — | |||||||||
Variance swaps |
(6) | — | — | |||||||||
Credit default swaps |
— | — | — | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | (79) | $ | (1) | $ | — | ||||||
|
|
|
|
|
|
(1) | Changes in estimated fair value related to economic hedges of equity method investments in joint ventures. |
(2) | Changes in estimated fair value related to economic hedges of variable annuity guarantees included in future policy benefits. |
46
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Credit Derivatives
In connection with synthetically created investment transactions, the Company writes credit default swaps for which it receives a premium to insure credit risk. Such credit derivatives are included within the non-qualifying derivatives and derivatives for purposes other than hedging table. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the Company paying the counterparty the specified swap notional amount in exchange for the delivery of par quantities of the referenced credit obligation. The Company’s maximum amount at risk, assuming the value of all referenced credit obligations is zero, was $2.2 billion and $2.1 billion at March 31, 2012 and December 31, 2011, respectively. The Company can terminate these contracts at any time through cash settlement with the counterparty at an amount equal to the then current fair value of the credit default swaps. At March 31, 2012, the Company would have received $17 million to terminate all of these contracts, and at December 31, 2011, the Company would have paid $11 million to terminate all of these contracts.
The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps at:
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||
Rating Agency Designation of Referenced |
Estimated Fair Value of Credit Default Swaps |
Maximum Amount of Future Payments under Credit Default Swaps (2) |
Weighted Average Years to Maturity (3) |
Estimated Fair Value of Credit Default Swaps |
Maximum Amount of Future Payments under Credit Default Swaps (2) |
Weighted Average Years to Maturity (3) |
||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Aaa/Aa/A |
||||||||||||||||||||||||
Single name credit default swaps (corporate) |
$ | 2 | $ | 167 | 3.9 | $ | 2 | $ | 212 | 4.3 | ||||||||||||||
Credit default swaps referencing indices |
10 | 661 | 2.8 | — | 661 | 3.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Subtotal |
12 | 828 | 3.0 | 2 | 873 | 3.4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Baa |
||||||||||||||||||||||||
Single name credit default swaps (corporate) |
1 | 524 | 4.5 | (6) | 434 | 4.6 | ||||||||||||||||||
Credit default swaps referencing indices |
4 | 853 | 5.0 | (7) | 793 | 4.8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Subtotal |
5 | 1,377 | 4.8 | (13) | 1,227 | 4.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Ba |
||||||||||||||||||||||||
Single name credit default swaps (corporate) |
— | 15 | 4.3 | — | — | — | ||||||||||||||||||
Credit default swaps referencing indices |
— | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Subtotal |
— | 15 | 4.3 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 17 | $ | 2,220 | 4.2 | $ | (11) | $ | 2,100 | 4.2 | ||||||||||||||
|
|
|
|
|
|
|
|
(1) | The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s Investors Service, Standard & Poor’s Rating Services and Fitch Ratings. If no rating is available from a rating agency, then an internally developed rating is used. |
47
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
(2) | Assumes the value of the referenced credit obligations is zero. |
(3) | The weighted average years to maturity of the credit default swaps is calculated based on weighted average notional amounts. |
Credit Risk on Freestanding Derivatives
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 net positive estimated fair value of derivative contracts at the reporting date after taking into consideration the existence of netting agreements and any collateral received pursuant to credit support annexes.
The Company manages its credit risk related to OTC 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. See Note 4 for a description of the impact of credit risk on the valuation of derivative instruments.
The Company enters into various collateral arrangements, which require both the pledging and accepting of collateral in connection with its OTC derivative instruments. At March 31, 2012 and December 31, 2011, the Company was obligated to return cash collateral under its control of $1.3 billion and $1.6 billion, respectively. This cash collateral is included in cash and cash equivalents or in short-term investments and the obligation to return it is included in payables for collateral under securities loaned and other transactions in the consolidated balance sheets. At March 31, 2012 and December 31, 2011, the Company had received collateral consisting of various securities with a fair market value of $237 million and $315 million, respectively, which were held in separate custodial accounts. Subject to certain constraints, the Company is permitted by contract to sell or repledge this collateral, but at March 31, 2012, none of the collateral had been sold or repledged.
The Company’s collateral arrangements for its OTC derivatives generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the fair value of that counterparty’s derivatives reaches a pre-determined threshold. Certain of these arrangements also include credit-contingent provisions that provide for a reduction of these thresholds (on a sliding scale that converges toward zero) in the event of downgrades in the credit ratings of the Company and/or the counterparty. In addition, certain of the Company’s netting agreements for derivative instruments contain provisions that require the Company to maintain a specific investment grade credit rating from at least one of the major credit rating agencies. If the Company’s credit ratings were to fall below that specific investment grade credit rating, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments that are in a net liability position after considering the effect of netting agreements.
48
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The following table presents the estimated fair value of the Company’s OTC derivatives that are in a net liability position after considering the effect of netting agreements, together with the estimated fair value and balance sheet location of the collateral pledged. The table also presents the incremental collateral that the Company would be required to provide if there was a one notch downgrade in the Company’s credit rating at the reporting date or if the Company’s credit rating sustained a downgrade to a level that triggered full overnight collateralization or termination of the derivative position at the reporting date. Derivatives that are not subject to collateral agreements are not included in the scope of this table.
Estimated Fair Value of Collateral Provided : |
Fair Value of Incremental Collateral Provided Upon: |
|||||||||||||||
Estimated Fair Value of Derivatives in Net Liability Position (1) |
Fixed Maturity Securities (2) |
One Notch Downgrade in the Company’s Credit Rating |
Downgrade in the Company’s Credit Rating to a Level that Triggers Full Overnight Collateralization or Termination of the Derivative Position |
|||||||||||||
(In millions) | ||||||||||||||||
March 31, 2012 |
$ | 33 | $ | 24 | $ | 1 | $ | 11 | ||||||||
December 31, 2011 |
$ | 14 | $ | 9 | $ | 1 | $ | 10 |
(1) | After taking into consideration the existence of netting agreements. |
(2) | Included in fixed maturity securities in the consolidated balance sheets. Subject to certain constraints, the counterparties are permitted by contract to sell or repledge this collateral. At both March 31, 2012 and December 31, 2011, the Company did not provide any cash collateral. |
Without considering the effect of netting agreements, the estimated fair value of the Company’s OTC derivatives with credit-contingent provisions that were in a gross liability position at March 31, 2012 was $129 million. At March 31, 2012, the Company provided collateral of $24 million in connection with these derivatives. In the unlikely event that both: (i) the Company’s credit rating was downgraded to a level that triggers full overnight collateralization or termination of all derivative positions; and (ii) the Company’s netting agreements were deemed to be legally unenforceable, then the additional collateral that the Company would be required to provide to its counterparties in connection with its derivatives in a gross liability position at March 31, 2012 would be $105 million. This amount does not consider gross derivative assets of $96 million for which the Company has the contractual right of offset.
The Company also has exchange-traded futures, which may require the pledging of collateral. At both March 31, 2012 and December 31, 2011, the Company did not pledge any securities collateral for exchange-traded futures. At March 31, 2012 and December 31, 2011, the Company provided cash collateral for exchange-traded futures of $107 million and $140 million, respectively, which is included in premiums, reinsurance and other receivables.
Embedded Derivatives
The Company issues certain products or purchases certain investments that contain embedded derivatives that are required to be separated from their host contracts and accounted for as freestanding derivatives. These host contracts principally include: variable annuities with guaranteed minimum benefits, including guaranteed minimum withdrawal benefits (“GMWBs”), guaranteed minimum accumulation benefits (“GMABs”) and certain
49
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
guaranteed minimum income benefits (“GMIBs”); affiliated ceded reinsurance of guaranteed minimum benefits related to GMWBs, GMABs and certain GMIBs; affiliated assumed reinsurance of guaranteed minimum benefits related to GMWBs and certain GMIBs; ceded reinsurance written on a funds withheld basis; and options embedded in debt or equity securities.
The following table presents the estimated fair value of the Company’s embedded derivatives at:
March 31, 2012 | December 31, 2011 | |||||||
(In millions) | ||||||||
Net embedded derivatives within asset host contracts: |
||||||||
Ceded guaranteed minimum benefits |
$ | 1,889 | $ | 2,815 | ||||
Options embedded in debt or equity securities |
(5) | (2) | ||||||
|
|
|
|
|||||
Net embedded derivatives within asset host contracts |
$ | 1,884 | $ | 2,813 | ||||
|
|
|
|
|||||
Net embedded derivatives within liability host contracts: |
||||||||
Direct guaranteed minimum benefits |
$ | 403 | $ | 1,363 | ||||
Assumed guaranteed minimum benefits |
(1) | 4 | ||||||
Funds withheld on ceded reinsurance |
339 | 416 | ||||||
|
|
|
|
|||||
Net embedded derivatives within liability host contracts |
$ | 741 | $ | 1,783 | ||||
|
|
|
|
The following table presents changes in estimated fair value related to embedded derivatives:
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Net derivative gains (losses) (1), (2) |
$ | 114 | $ | (53) |
(1) | The valuation of direct and assumed guaranteed minimum benefits includes an adjustment for nonperformance risk. The amounts included in net derivative gains (losses), in connection with this adjustment, were ($238) million and ($29) million for the three months ended March 31, 2012 and 2011, respectively. In addition, the valuation of ceded guaranteed minimum benefits includes an adjustment for nonperformance risk. The amounts included in net derivative gains (losses), in connection with this adjustment, were $331 million and $41 million for the three months ended March 31, 2012 and 2011, respectively. |
(2) | See Note 11 for discussion of affiliated net derivative gains (losses) included in the table above. |
4. Fair Value
Considerable judgment is often required in interpreting market data to develop estimates of fair value, and the use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
50
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Assets and Liabilities Measured at Fair Value
Recurring Fair Value Measurements
The assets and liabilities measured at estimated fair value on a recurring basis, including those items for which the Company has elected the FVO, were determined as described below. These estimated fair values and their corresponding placement in the fair value hierarchy are summarized as follows:
March 31, 2012 | ||||||||||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Estimated Fair Value |
|||||||||||||
(In millions) | ||||||||||||||||
Assets: |
||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
U.S. corporate securities |
$ | — | $ | 15,847 | $ | 1,493 | $ | 17,340 | ||||||||
Foreign corporate securities |
— | 8,135 | 622 | 8,757 | ||||||||||||
U.S. Treasury and agency securities |
3,767 | 3,588 | — | 7,355 | ||||||||||||
RMBS |
— | 6,033 | 356 | 6,389 | ||||||||||||
CMBS |
— | 2,053 | 152 | 2,205 | ||||||||||||
State and political subdivision securities |
— | 2,117 | 25 | 2,142 | ||||||||||||
ABS |
— | 1,740 | 257 | 1,997 | ||||||||||||
Foreign government securities |
— | 1,282 | 2 | 1,284 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
3,767 | 40,795 | 2,907 | 47,469 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity securities: |
||||||||||||||||
Common stock |
44 | 74 | 25 | 143 | ||||||||||||
Non-redeemable preferred stock |
— | 26 | 92 | 118 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total equity securities |
44 | 100 | 117 | 261 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other securities: |
||||||||||||||||
FVO general account securities |
— | 50 | — | 50 | ||||||||||||
FVO contractholder-directed unit-linked investments |
4,215 | — | — | 4,215 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other securities |
4,215 | 50 | — | 4,265 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Short-term investments (1) |
806 | 992 | 20 | 1,818 | ||||||||||||
Mortgage loans held by CSEs |
— | 3,024 | — | 3,024 | ||||||||||||
Derivative assets: (2) |
||||||||||||||||
Interest rate contracts |
2 | 1,349 | 108 | 1,459 | ||||||||||||
Foreign currency contracts |
— | 291 | — | 291 | ||||||||||||
Credit contracts |
— | 12 | 10 | 22 | ||||||||||||
Equity market contracts |
— | 412 | 18 | 430 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative assets |
2 | 2,064 | 136 | 2,202 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net embedded derivatives within asset host contracts (3) |
— | — | 1,889 | 1,889 | ||||||||||||
Separate account assets (4) |
210 | 80,287 | 149 | 80,646 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 9,044 | $ | 127,312 | $ | 5,218 | $ | 141,574 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities: (2) |
||||||||||||||||
Interest rate contracts |
$ | 16 | $ | 521 | $ | 13 | $ | 550 | ||||||||
Foreign currency contracts |
— | 55 | — | 55 | ||||||||||||
Credit contracts |
— | 9 | 1 | 10 | ||||||||||||
Equity market contracts |
3 | — | 35 | 38 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative liabilities |
19 | 585 | 49 | 653 | ||||||||||||
Net embedded derivatives within liability host contracts (3) |
— | — | 741 | 741 | ||||||||||||
Long-term debt of CSEs |
— | 2,946 | — | 2,946 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 19 | $ | 3,531 | $ | 790 | $ | 4,340 | ||||||||
|
|
|
|
|
|
|
|
51
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
December 31, 2011 | ||||||||||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Estimated Fair Value |
|||||||||||||
(In millions) | ||||||||||||||||
Assets: |
||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
U.S. corporate securities |
$ | — | $ | 15,907 | $ | 1,432 | $ | 17,339 | ||||||||
Foreign corporate securities |
— | 7,913 | 580 | 8,493 | ||||||||||||
U.S. Treasury and agency securities |
4,326 | 3,722 | — | 8,048 | ||||||||||||
RMBS |
— | 6,255 | 239 | 6,494 | ||||||||||||
CMBS |
— | 2,080 | 147 | 2,227 | ||||||||||||
State and political subdivision securities |
— | 2,032 | 23 | 2,055 | ||||||||||||
ABS |
— | 1,658 | 220 | 1,878 | ||||||||||||
Foreign government securities |
— | 1,245 | 2 | 1,247 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturity securities |
4,326 | 40,812 | 2,643 | 47,781 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity securities: |
||||||||||||||||
Common stock |
51 | 74 | 21 | 146 | ||||||||||||
Non-redeemable preferred stock |
— | 30 | 76 | 106 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total equity securities |
51 | 104 | 97 | 252 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other securities: |
||||||||||||||||
FVO general account securities |
— | 49 | — | 49 | ||||||||||||
FVO contractholder-directed unit-linked investments |
3,616 | — | — | 3,616 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other securities |
3,616 | 49 | — | 3,665 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Short-term investments (1) |
865 | 1,684 | 10 | 2,559 | ||||||||||||
Mortgage loans held by CSEs |
— | 3,138 | — | 3,138 | ||||||||||||
Derivative assets: (2) |
||||||||||||||||
Interest rate contracts |
10 | 1,708 | 187 | 1,905 | ||||||||||||
Foreign currency contracts |
— | 306 | — | 306 | ||||||||||||
Credit contracts |
— | 12 | 6 | 18 | ||||||||||||
Equity market contracts |
4 | 482 | 51 | 537 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative assets |
14 | 2,508 | 244 | 2,766 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net embedded derivatives within asset host contracts (3) |
— | — | 2,815 | 2,815 | ||||||||||||
Separate account assets (4) |
185 | 72,244 | 130 | 72,559 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 9,057 | $ | 120,539 | $ | 5,939 | $ | 135,535 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities: (2) |
||||||||||||||||
Interest rate contracts |
$ | 1 | $ | 566 | $ | 13 | $ | 580 | ||||||||
Foreign currency contracts |
— | 62 | — | 62 | ||||||||||||
Credit contracts |
— | 21 | 7 | 28 | ||||||||||||
Equity market contracts |
— | 2 | 8 | 10 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative liabilities |
1 | 651 | 28 | 680 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net embedded derivatives within liability host contracts (3) |
— | — | 1,783 | 1,783 | ||||||||||||
Long-term debt of CSEs |
— | 3,065 | — | 3,065 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 1 | $ | 3,716 | $ | 1,811 | $ | 5,528 | ||||||||
|
|
|
|
|
|
|
|
(1) | Short-term investments as presented in the tables above differ from the amounts presented in the consolidated balance sheets because certain short-term investments are not measured at estimated fair value on a recurring basis. |
(2) | Derivative assets are presented within other invested assets in the consolidated balance sheets and derivative liabilities are presented within other liabilities in the consolidated balance sheets. The amounts are presented |
52
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
gross in the tables above to reflect the presentation in the consolidated balance sheets, but are presented net for purposes of the rollforward in the Fair Value Measurements Using Significant Unobservable Inputs (Level 3) tables. |
(3) | Net embedded derivatives within asset host contracts are presented within premiums, reinsurance and other receivables in the consolidated balance sheets. Net embedded derivatives within liability host contracts are presented primarily within PABs and other liabilities in the consolidated balance sheets. At March 31, 2012, fixed maturity securities and equity securities also included embedded derivatives of $0 and ($5) million, respectively. At December 31, 2011, fixed maturity securities and equity securities included embedded derivatives of $1 million and ($3) million, respectively. |
(4) | Separate account assets are measured at estimated fair value. Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders whose liability is reflected within separate account liabilities. Separate account liabilities are set equal to the estimated fair value of separate account assets. |
Valuation Process
On behalf of the Company’s chief investment officer and chief financial officer, a pricing and valuation committee, that is independent of the trading and investing functions and comprised of senior management, provides oversight of control systems and valuation policies for securities, derivatives, and mortgage loans. This committee reviews and approves new transaction types and markets, ensures that observable market prices and market-based parameters are used for valuation, wherever possible, and determines that judgmental valuation adjustments, when applied, are based upon established policies and are applied consistently over time, provides oversight of the selection of independent third party pricing providers and the controls and procedures to evaluate pricing from such pricing providers. Periodically the chief accounting officer reports to the audit committee on compliance with fair value accounting standards.
The Company reviews its valuation methodologies on an ongoing basis and revises those methodologies when necessary based on changing market conditions. Assurance is gained on the overall reasonableness and consistent application of input assumptions, valuation methodologies and compliance with accounting standards for fair value determination through controls designed to ensure that the financial assets and financial liabilities are appropriately valued and represent an exit price. Several controls are utilized, including certain monthly controls, which include, but are not limited to, analysis of portfolio returns to corresponding benchmark returns, comparing a sample of executed prices of securities sold to the fair value estimates, comparing fair value estimates to management’s knowledge of the current market, reviewing the bid/ask spreads to assess activity, comparing prices from multiple pricing sources and ongoing due diligence to confirm that independent pricing services use market-based parameters for valuation. The process includes a determination of the observability of inputs used in estimated fair values received from independent pricing services or brokers by assessing whether these inputs can be corroborated by observable market data. The Company ensures that prices received from independent brokers, also referred to herein as “consensus pricing,” represent a reasonable estimate of fair value by reviewing such pricing with the Company’s knowledge of the current market dynamics and current pricing for similar financial instruments. While independent non-binding broker quotations are utilized, they are not used for a significant portion of the portfolio. For example, fixed maturity securities priced using independent non-binding broker quotations represent less than 0.6% of the total estimated fair value of fixed maturity securities and represent only 8% of the total estimated fair value of Level 3 fixed maturity securities.
The Company also applies a formal process to challenge any prices received from independent pricing services that are not considered representative of estimated fair value. If prices received from independent pricing services
53
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
are not considered reflective of market activity or representative of estimated fair value, independent non-binding broker quotes are obtained, or an internally developed valuation is prepared for use in financial reporting. Internally developed valuations of current estimated fair value, which reflect internal estimates of liquidity and non-performance risks, compared with pricing received from the independent pricing services, did not produce material differences in the estimated fair values for the majority of the portfolio, accordingly, overrides have not been material. This is, in part, because internal estimates of liquidity and non-performance risks are generally based on available market evidence and estimates used by other market participants. In the absence of such market-based evidence, management’s best estimate is used. As a result, the prices provided by the independent pricing services are typically used.
Guaranteed minimum benefits accounted for as embedded derivatives are calculated within the Company’s actuarial department. The calculation is based on in-force business, and is performed using standard actuarial valuation software which projects future cash flows from the embedded derivative over multiple risk neutral stochastic scenarios. The embedded derivative asset or liability is calculated as the average present value of future cash flows less the present value of future premiums associated with the embedded derivative, over multiple scenarios. The premium associated with the embedded derivative is assumed to be the fees in the contract, multiplied by a ratio which is locked in upon issuance of the insurance contract, such that the value of the embedded derivative at issuance is zero.
Capital market assumptions, such as risk free rates and implied volatilities, are based on market prices for publicly traded instruments to the extent that prices for such instruments are observable. Implied volatilities beyond the observable period are extrapolated based on observable implied volatilities and historical volatilities. Actuarial assumptions, including mortality, lapse, withdrawal and utilization, are unobservable and are reviewed at least annually based on actuarial studies of historical experience.
Valuation Methods and Assumptions
The methods and assumptions used to estimate the fair value of the most significant financial instruments are summarized as follows:
Securities and Short-term Investments
When available, the estimated fair value of the Company’s fixed maturity securities, equity securities, other securities and short-term investments are based on quoted prices in active markets that are readily and regularly obtainable. Generally, these are the most liquid of the Company’s securities holdings and valuation of these securities does not involve management’s judgment.
When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies, giving priority to observable inputs. The market standard valuation methodologies utilized include: discounted cash flow (“DCF”) methodologies, matrix pricing or other similar techniques. The inputs in applying these market standard valuation methodologies include, but are not limited to: interest rates, credit standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund requirements, maturity and management’s assumptions regarding estimated duration, liquidity and estimated future cash flows. Accordingly, the estimated fair values are based on available market information and management’s judgments about financial instruments.
The significant inputs to the market standard valuation methodologies for certain types of securities with reasonable levels of price transparency are inputs that are observable in the market or can be derived principally
54
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
from, or corroborated by, observable market data. Such observable inputs include benchmarking prices for similar assets in active markets, quoted prices in markets that are not active and observable yields and spreads in the market.
When observable inputs are not available, the market standard valuation methodologies for determining the estimated fair value of certain types of securities that trade infrequently, and therefore have little or no price transparency, rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. These unobservable inputs can be based in large part on management’s judgment or estimation and cannot be supported by reference to market activity. Even though these inputs are unobservable, management believes they are consistent with what other market participants would use when pricing such securities and are considered appropriate given the circumstances.
The use of different methodologies, assumptions and inputs may have a material effect on the estimated fair values of the Company’s securities holdings.
Mortgage Loans and Long-term Debt Held by CSEs
The Company consolidates certain securitization entities that hold commercial mortgage loans. See “— Valuation Techniques and Inputs” below for a discussion of the methods and assumptions used to estimate the fair value of these financial instruments.
Derivatives
The estimated fair value of derivatives is determined through the use of quoted market prices for exchange-traded derivatives or through the use of pricing models for OTC derivatives. The determination of estimated fair value, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models.
The significant inputs to the pricing models for most OTC derivatives are inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. Significant inputs that are observable generally include: interest rates, foreign currency exchange rates, interest rate curves, credit curves and volatility. However, certain OTC derivatives may rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant inputs that are unobservable generally include references to emerging market currencies and inputs that are outside the observable portion of the interest rate curve, credit curve, volatility or other relevant market measure. These unobservable inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and management believes they are consistent with what other market participants would use when pricing such instruments.
The credit risk of both the counterparty and the Company are considered in determining the estimated fair value for all OTC derivatives, and any potential credit adjustment is based on the net exposure by counterparty after taking into account the effects of netting agreements and collateral arrangements. The Company values its
55
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
derivative positions using the standard swap curve which includes a spread to the risk free rate. This credit spread is appropriate for those parties that execute trades at pricing levels consistent with the standard swap curve. As the Company and its significant derivative counterparties consistently execute trades at such pricing levels, additional credit risk adjustments are not currently required in the valuation process. The Company’s ability to consistently execute at such pricing levels is in part due to the netting agreements and collateral arrangements that are in place with all of its significant derivative counterparties. An evaluation of the requirement to make additional credit risk adjustments is performed by the Company each reporting period.
Most inputs for OTC derivatives are mid market inputs but, in certain cases, bid level inputs are used when they are deemed more representative of exit value. Market liquidity, as well as the use of different methodologies, assumptions and inputs, may have a material effect on the estimated fair values of the Company’s derivatives and could materially affect net income.
Embedded Derivatives Within Asset and Liability Host Contracts
Embedded derivatives principally include certain direct, assumed and ceded variable annuity guarantees and embedded derivatives related to funds withheld on ceded reinsurance. Embedded derivatives are recorded at estimated fair value with changes in estimated fair value reported in net income.
The Company issues certain variable annuity products with guaranteed minimum benefits. GMWBs, GMABs and certain GMIBs are embedded derivatives, which are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within PABs in the consolidated balance sheets.
The fair value of these guarantees is estimated using the present value of projected future benefits minus the present value of projected future fees using actuarial and capital market assumptions including expectations concerning policyholder behavior. A risk neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk free rates. The valuation of these guarantee liabilities includes adjustments for nonperformance risk and for a risk margin related to non-capital market inputs.
The nonperformance adjustment is determined by taking into consideration publicly available information relating to spreads in the secondary market for MetLife’s debt, including related credit default swaps. These observable spreads are then adjusted, as necessary, to reflect the priority of these liabilities and the claims paying ability of the issuing insurance subsidiaries compared to MetLife.
Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of such actuarial assumptions as annuitization, premium persistency, partial withdrawal and surrenders. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees. These guarantees may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates; changes in nonperformance risk; and variations in actuarial assumptions regarding policyholder behavior, mortality and risk margins related to non-capital market inputs may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income.
56
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The Company assumed, from an affiliated insurance company, the risk associated with certain GMIBs and GMWBs. These embedded derivatives are included in other policy-related balances in the consolidated balance sheets with changes in estimated fair value reported in net derivative gains (losses). The value of the embedded derivatives on these assumed risks is determined using a methodology consistent with that described previously for the guarantees directly written by the Company.
The Company ceded, to an affiliated reinsurance company, the risk associated with certain of the GMIBs, GMABs and GMWBs described above that are also accounted for as embedded derivatives. In addition to ceding risks associated with guarantees that are accounted for as embedded derivatives, the Company also cedes, to the same affiliated reinsurance company, certain directly written GMIBs that are accounted for as insurance (i.e., not as embedded derivatives), but where the reinsurance agreement contains an embedded derivative. These embedded derivatives are included within premiums, reinsurance and other receivables in the consolidated balance sheets with changes in estimated fair value reported in net derivative gains (losses). The value of the embedded derivatives on these ceded risks is determined using a methodology consistent with that described previously for the guarantees directly written by the Company with the exception of the input for nonperformance risk that reflects the credit of the reinsurer.
The estimated fair value of the embedded derivatives within funds withheld related to certain ceded reinsurance is determined based on the change in estimated fair value of the underlying assets held by the Company in a reference portfolio backing the funds withheld liability. The estimated fair value of the underlying assets is determined as previously described in “— Securities and Short-term Investments.” The estimated fair value of these embedded derivatives is included, along with their funds withheld hosts, in other liabilities in the consolidated balance sheets with changes in estimated fair value recorded in net derivative gains (losses). Changes in the credit spreads on the underlying assets, interest rates and market volatility may result in significant fluctuations in the estimated fair value of these embedded derivatives that could materially affect net income.
Separate Account Assets
Separate account assets are carried at estimated fair value and reported as a summarized total on the consolidated balance sheets. The estimated fair value of separate account assets is based on the estimated fair value of the underlying assets. Assets within the Company’s separate accounts include: mutual funds, fixed maturity securities, equity securities, derivatives, other limited partnership interests, short-term investments and cash and cash equivalents. See “— Valuation Techniques and Inputs” below for a discussion of the methods and assumptions used to estimate the fair value of these financial instruments.
Valuation Techniques and Inputs
A description of the significant valuation techniques and inputs to the determination of estimated fair value for the more significant asset and liability classes measured at fair value on a recurring basis and categorized within Level 2 and Level 3 of the fair value hierarchy is as follows:
The Company determines the estimated fair value of its investments using primarily the market approach and the income approach. The use of quoted prices for identical assets and matrix pricing or other similar techniques are examples of market approaches, while the use of DCF methodologies is an example of the income approach. The Company attempts to maximize the use of observable inputs and minimize the use of unobservable inputs in selecting whether the market or income approach is used.
57
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Level 2 Measurements:
Securities and Short-term Investments
This level includes fixed maturity securities and equity securities priced principally by independent pricing services using observable inputs. Other securities and short-term investments within this level are of a similar nature and class to the Level 2 securities described below.
U.S. corporate and foreign corporate securities. These securities are principally valued using the market and income approaches. Valuations are based primarily on quoted prices in markets that are not active, or using matrix pricing or other similar techniques that use standard market observable inputs such as benchmark yields, spreads off benchmark yields, new issuances, issuer rating, duration, and trades of identical or comparable securities. Investment grade privately placed securities are valued using DCF methodologies using standard market observable inputs, and inputs derived from, or corroborated by, market observable data including market yield curve, duration, call provisions, observable prices and spreads for similar publicly traded or privately traded issues that incorporate the credit quality and industry sector of the issuer. This level also includes certain below investment grade privately placed fixed maturity securities priced by independent pricing services that use observable inputs.
Structured securities comprised of RMBS, CMBS and ABS. These securities are principally valued using the market approach and income approach. Valuation is based primarily on matrix pricing, DCF methodologies or other similar techniques using standard market inputs including spreads for actively traded securities, spreads off benchmark yields, expected prepayment speeds and volumes, current and forecasted loss severity, rating, weighted average coupon, weighted average maturity, average delinquency rates, geographic region, debt-service coverage ratios and issuance-specific information including, but not limited to: collateral type, payment terms of the underlying assets, payment priority within the tranche, structure of the security, deal performance and vintage of loans.
U.S. Treasury and agency securities. These securities are principally valued using the market approach. Valuation is based primarily on quoted prices in markets that are not active, or using matrix pricing or other similar techniques using standard market observable inputs such as benchmark U.S. Treasury yield curve, the spread off the U.S. Treasury curve for the identical security and comparable securities that are actively traded.
Foreign government and state and political subdivision securities. These securities are principally valued using the market approach. Valuation is based primarily on matrix pricing or other similar techniques using standard market observable inputs including benchmark U.S. Treasury or other yields, issuer ratings, broker-dealer quotes, issuer spreads and reported trades of similar securities, including those within the same sub-sector or with a similar maturity or credit rating.
Common and non-redeemable preferred stock. These securities are principally valued using the market approach where market quotes are available but are not considered actively traded. Valuation is based principally on observable inputs including quoted prices in markets that are not considered active.
Mortgage Loans Held by CSEs
These commercial mortgage loans are principally valued using the market approach. The principal market for these commercial loan portfolios is the securitization market. The Company uses the quoted securitization market
58
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
price of the obligations of the CSEs to determine the estimated fair value of these commercial loan portfolios. These market prices are determined principally by independent pricing services using observable inputs.
Derivative Assets and Derivative Liabilities
This level includes all types of derivative instruments utilized by the Company with the exception of exchange-traded derivatives included within Level 1 and those derivative instruments with unobservable inputs as described in Level 3. These derivatives are principally valued using the income approach.
Interest rate contracts.
Non-option-based — Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve and LIBOR basis curves.
Option-based — Valuations are based on option pricing models, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves and interest rate volatility.
Foreign currency contracts.
Non-option-based — Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves, currency spot rates and cross currency basis curves.
Credit contracts.
Non-option-based — Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve, credit curves and recovery rates.
Equity market contracts.
Non-option-based — Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve, spot equity index levels and dividend yield curves.
Option-based — Valuations are based on option pricing models, which utilize significant inputs that may include the swap yield curve, spot equity index levels, dividend yield curves and equity volatility.
Separate Account Assets
These assets are comprised of investments that are similar in nature to the securities and short-term investments referred to above. Also included are certain mutual funds without readily determinable fair values given prices are not published publicly. Valuation of the mutual funds is based upon quoted prices or reported net asset values (“NAVs”) provided by the fund managers.
Long-term Debt of CSEs
The estimated fair value of the long-term debt of CSEs is based on quoted prices when traded as assets in active markets or, if not available, based on market standard valuation methodologies, consistent with the Company’s methods and assumptions used to estimate the fair value of comparable fixed maturity securities.
59
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Level 3 Measurements:
In general, investments classified within Level 3 use many of the same valuation techniques and inputs as described in Level 2 Measurements. However, if key inputs are unobservable, or if the investments are less liquid and there is very limited trading activity, the investments are generally classified as Level 3. The use of independent non-binding broker quotations to value investments generally indicates there is a lack of liquidity or a lack of transparency in the process to develop the valuation estimates generally causing these investments to be classified in Level 3.
Securities and Short-term Investments
This level includes fixed maturity securities and equity securities priced principally using market standard valuation methodologies, including matrix pricing and DCF methodologies, using inputs that are not market observable or cannot be derived principally from, or corroborated by, observable market data; inputs including quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2; and to a much lesser extent, independent non-binding broker quotations. Short-term investments within this level are of a similar nature and class to the Level 3 securities described below; accordingly, the valuation techniques and significant market standard observable inputs used in their valuation are also similar to those described below.
U.S. corporate and foreign corporate securities. These securities, including financial services industry hybrid securities classified within fixed maturity securities, are principally valued using the market approach. Valuations are based primarily on matrix pricing or other similar techniques that utilize unobservable inputs or inputs that cannot be derived principally from, or corroborated by, observable market data, including illiquidity premium, delta spread adjustments or spreads over below investment grade curves to reflect industry trends or specific credit-related issues; and inputs including quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2. Certain valuations are based on independent non-binding broker quotations.
Structured securities comprised of RMBS, CMBS and ABS. These securities are principally valued using the market approach and income approach. Valuation is based primarily on matrix pricing, DCF methodologies or other similar techniques that utilize inputs that are unobservable or cannot be derived principally from, or corroborated by, observable market data including spreads over below investment grade curves to reflect industry trends on specific credit-related issues. Below investment grade securities, alternative residential mortgage loan RMBS and RMBS supported by sub-prime mortgage loans included in this level are valued based on inputs including quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2. Certain of these valuations are based on independent non-binding broker quotations.
Foreign government and state and political subdivision securities. These securities are principally valued using the market approach. Valuation is based primarily on independent non-binding broker quotations and on inputs including quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2.
Common and non-redeemable preferred stock. These securities, including privately held securities and financial services industry hybrid securities classified within equity securities, are principally valued using the market and income approaches. Valuations are based primarily on matrix pricing, DCF methodologies
60
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
or other similar techniques using inputs such as comparable credit rating and issuance structure. Certain of these securities are valued based on inputs including quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2 and independent non-binding broker quotations.
Derivative Assets and Derivative Liabilities
These derivatives are principally valued using the income approach. Valuations of non-option-based derivatives utilize present value techniques, whereas valuations of option-based derivatives utilize option pricing models. These valuation methodologies generally use the same inputs as described in the corresponding sections above for Level 2 measurements of derivatives. However, these derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data.
Interest rate contracts.
Non-option-based — Significant unobservable inputs may include the extrapolation beyond observable limits of the swap yield curve and LIBOR basis curves.
Credit contracts.
Non-option-based — Significant unobservable inputs may include credit spreads, repurchase rates and the extrapolation beyond observable limits of the swap yield curve and credit curves. Certain of these derivatives are valued based on independent non-binding broker quotations.
Equity market contracts.
Non-option-based — Significant unobservable inputs may include the extrapolation beyond observable limits of dividend yield curves.
Direct and Assumed Guaranteed Minimum Benefits
These embedded derivatives are principally valued using the income approach. Valuations are based on option pricing techniques, which utilize significant inputs that may include swap yield curve, currency exchange rates and implied volatilities. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include: the extrapolation beyond observable limits of the swap yield curve and implied volatilities, actuarial assumptions for policyholder behavior and mortality and the potential variability in policyholder behavior and mortality, nonperformance risk and cost of capital for purposes of calculating the risk margin.
Reinsurance Ceded on Certain Guaranteed Minimum Benefits
These embedded derivatives are principally valued using the income approach. The valuation techniques and significant market standard unobservable inputs used in their valuation are similar to those previously described under “Direct and Assumed Guaranteed Minimum Benefits” and also include counterparty credit spreads.
61
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Embedded Derivatives Within Funds Withheld Related to Certain Ceded Reinsurance
These embedded derivatives are principally valued using an income approach. Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve and the fair value of assets within the reference portfolio. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include: the fair value of certain assets within the reference portfolio which are not observable in the market and cannot be derived principally from, or corroborated by, observable market data.
Separate Account Assets
These assets are comprised of investments that are similar in nature to the securities and derivative assets referred to above. Separate account assets within this level also include other limited partnership interests. Other limited partnership interests are valued giving consideration to the value of the underlying holdings of the partnerships and by applying a premium or discount, if appropriate, for factors such as liquidity, bid/ask spreads, the performance record of the fund manager or other relevant variables which may impact the exit value of the particular partnership interest.
62
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The following table presents certain quantitative information about the significant unobservable inputs used in the fair value measurement for the more significant asset and liability classes measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
Valuation |
Significant Unobservable Inputs |
Range | Weighted Average |
|||||||||||||
Fixed maturity securities: |
||||||||||||||||
U.S. corporate and foreign corporate securities |
• Matrix pricing |
• Delta spread adjustments (1) |
(100) | – | 420 | 56 | ||||||||||
• Illiquidity premium (1) |
30 | – | 30 | |||||||||||||
• Spreads from below investment grade curves (1) |
30 | – | 889 | 399 | ||||||||||||
• Offered quotes (2) |
- | – | 91 | 30 | ||||||||||||
• Market pricing |
• Quoted prices (2) |
99 | – | 100 | 100 | |||||||||||
• Consensus pricing |
• Offered quotes (2) |
58 | – | 83 | 73 | |||||||||||
Foreign government securities |
• Consensus pricing |
• Offered quotes (2) |
97 | – | 116 | 106 | ||||||||||
RMBS |
• Matrix pricing and DCF |
• Spreads from below investment grade curves (1) |
437 | – | 2,502 | 811 | ||||||||||
CMBS |
• Matrix pricing and DCF |
• Spreads from below investment grade curves (1) |
437 | – | 8,127 | 4,196 | ||||||||||
ABS |
• Market pricing |
• Quoted prices (2) |
97 | – | 101 | 100 | ||||||||||
• Consensus pricing |
• Offered quotes (2) |
45 | – | 103 | 89 | |||||||||||
Derivatives: |
||||||||||||||||
Interest rate contracts |
• Present value techniques |
• Swap yield (1) |
327 | – | 388 | |||||||||||
Credit contracts |
• Present value techniques |
• Credit spreads (1) |
- | – | 100 | |||||||||||
• Consensus pricing |
• Offered quotes (3) |
|||||||||||||||
Equity market contracts |
• Present value techniques |
• Volatility |
17% | – | 29% | |||||||||||
Embedded derivatives: |
||||||||||||||||
Direct and ceded guaranteed minimum benefits |
• Option pricing techniques |
• Mortality rates: |
||||||||||||||
Ages 0 - 40 |
0% | – | 0.10% | |||||||||||||
Ages 41 - 60 |
0.05% | – | 0.64% | |||||||||||||
Ages 61 - 115 |
0.27% | – | 100% | |||||||||||||
• Lapse rates: |
||||||||||||||||
Durations 1 - 10 |
1% | – | 36% | |||||||||||||
Durations 11 - 20 |
5% | – | 30% | |||||||||||||
Durations 21 - 116 |
5% | – | 65% | |||||||||||||
• Utilization rates (4) |
20% | – | 50% | |||||||||||||
• Withdrawal rates |
0.07% | – | 10% | |||||||||||||
• Long-term equity volatilities |
17.40% | – | 25% | |||||||||||||
• Nonperformance risk spread |
0.24% | – | 0.81% |
(1) | For this unobservable input, range and weighted average are presented in basis points. |
(2) | For this unobservable input, range and weighted average are presented in accordance with the market convention for fixed maturity securities of dollars per hundred dollars of par. |
(3) | At March 31, 2012, independent non-binding broker quotations were used in the determination of less than 1% of the total net derivative estimated fair value. |
63
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
(4) | This range is attributable to certain GMIB and lifetime withdrawal benefits. |
The following is a summary of the valuation techniques and significant unobservable inputs used in the fair value measurement for other types of financial instruments classified within Level 3. These financial instruments are subject to the controls described in the above “—Valuation Process” section. Generally, equity securities, other securities, short-term investments, securities included within separate account assets and embedded derivatives within funds withheld related to certain ceded reinsurance classified within Level 3 use the same valuation techniques and significant unobservable inputs as previously described for fixed maturity securities. This includes matrix pricing and DCF methodologies, inputs such as quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2, as well as independent non-binding broker quotations.
A description of the sensitivity of the estimated fair value to changes in the significant unobservable inputs for certain of the major asset and liability classes described above is as follows:
U.S. corporate and foreign corporate securities. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation would result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation would result in substantially lower (higher) valuations. Significant increases (decreases) in offered quotes in isolation would result in substantially higher (lower) valuations.
Foreign government securities. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in expected default rates in isolation would result in substantially lower (higher) valuations. Significant increases (decreases) in offered quotes in isolation would result in substantially higher (lower) valuations.
Structured securities comprised of RMBS, CMBS and ABS. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in offered quotes in isolation would result in substantially higher (lower) valuations. In general, changes in the assumptions used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.
Interest rate contracts. Significant increases (decreases) in the unobservable portion of the swap yield curve in isolation will result in substantial valuation changes.
Credit contracts. Credit contracts with significant unobservable inputs are primarily comprised of credit default swaps written by the Company. Significant credit spread widening in isolation will result in substantially higher adverse valuations, while significant spread tightening will result in substantially lower adverse valuations. Significant increases (decreases) in offered quotes in isolation will result in substantially higher (lower) valuations.
Equity market contracts. Significant decreases in the equity volatility in isolation will adversely impact overall valuation, while significant increases in equity volatility will result in substantial valuation increases.
Direct and ceded guaranteed minimum benefits. For any increase (decrease) in mortality and lapse rates, the fair value of the guarantees will decrease (increase). For any increase (decrease) in utilization and
64
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
volatility, the fair value of the guarantees will increase (decrease). Specifically for GMWB, for any increase (decrease) in withdrawal rates, the fair value of the guarantees will increase (decrease). Specifically for GMAB and GMIB, for any increase (decrease) in withdrawal rates, the fair value of the guarantees will decrease (increase).
Transfers between Levels:
Overall, transfers between levels occur when there are changes in the observability of inputs or market activity. Transfers into and/or out of any level are assumed to occur at the beginning of the period.
Transfers between Levels 1 and 2:
During the three months ended March 31, 2012 and 2011, there were no transfers between Levels 1 and 2.
Transfers into or out of Level 3:
Transfers into and or out of Level 3 are presented in the tables which follow. Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity, a specific event, or one or more significant input(s) becoming observable.
Transfers into Level 3 for fixed maturity securities and separate account assets were due primarily to a lack of trading activity, decreased liquidity and credit ratings downgrades (e.g., from investment grade to below investment grade) which have resulted in decreased transparency of valuations and an increased use of independent non-binding broker quotations and unobservable inputs to determine estimated fair value.
Transfers out of Level 3 for fixed maturity securities and separate account assets resulted primarily from increased transparency of both new issuances that subsequent to issuance and establishment of trading activity, became priced by independent pricing services and existing issuances that, over time, the Company was able to obtain pricing from, or corroborate pricing received from, independent pricing services with observable inputs or increases in market activity and upgraded credit ratings.
65
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The following tables summarize the change of all assets and (liabilities) measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3), including realized and unrealized gains (losses) of all assets and (liabilities) and realized and unrealized gains (losses) of all assets and (liabilities) still held at the end of the respective periods:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||||||||||
U.S. Corporate Securities |
Foreign Corporate Securities |
U.S. Treasury and Agency Securities |
RMBS | CMBS | State and Political Subdivision Securities |
ABS | Foreign Government Securities |
|||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2012: |
||||||||||||||||||||||||||||||||
Balance, beginning of period |
$ | 1,432 | $ | 580 | $ | — | $ | 239 | $ | 147 | $ | 23 | $ | 220 | $ | 2 | ||||||||||||||||
Total realized/unrealized gains (losses) included in: |
||||||||||||||||||||||||||||||||
Earnings: (1), (2) |
||||||||||||||||||||||||||||||||
Net investment income |
2 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net investment gains (losses) |
— | (2) | — | — | (1) | — | — | — | ||||||||||||||||||||||||
Net derivative gains (losses) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Other comprehensive income (loss) |
(17) | 4 | — | 7 | 4 | 2 | 2 | — | ||||||||||||||||||||||||
Purchases (3) |
86 | 38 | — | 121 | 12 | — | 62 | — | ||||||||||||||||||||||||
Sales (3) |
(27) | (5) | — | (11) | (11) | — | (10) | — | ||||||||||||||||||||||||
Issuances (3) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Settlements (3) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Transfers into Level 3 (4) |
22 | 15 | — | — | 1 | — | — | — | ||||||||||||||||||||||||
Transfers out of Level 3 (4) |
(5) | (8) | — | — | — | — | (17) | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, end of period |
$ | 1,493 | $ | 622 | $ | — | $ | 356 | $ | 152 | $ | 25 | $ | 257 | $ | 2 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Changes in unrealized gains (losses) relating to assets and liabilities still held at March 31, 2012 included in earnings: |
||||||||||||||||||||||||||||||||
Net investment income |
$ | 2 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Net investment gains (losses) |
$ | — | $ | (2) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Net derivative gains (losses) |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
66
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||||
Equity Securities: | Net Derivatives: (5) | |||||||||||||||||||||||||||||||
Common Stock |
Non- redeemable Preferred Stock |
Short-term Investments |
Interest Rate Contracts |
Credit Contracts |
Equity Market Contracts |
Net Embedded Derivatives (6) |
Separate Account Assets (7) |
|||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2012: |
||||||||||||||||||||||||||||||||
Balance, beginning of period |
$ | 21 | $ | 76 | $ | 10 | $ | 174 | $ | (1) | $ | 43 | $ | 1,032 | $ | 131 | ||||||||||||||||
Total realized/unrealized gains (losses) included in: |
||||||||||||||||||||||||||||||||
Earnings: (1), (2) |
||||||||||||||||||||||||||||||||
Net investment income |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net investment gains (losses) |
— | (3) | — | — | — | — | — | 19 | ||||||||||||||||||||||||
Net derivative gains (losses) |
— | — | — | (13) | 10 | (60) | 112 | — | ||||||||||||||||||||||||
Other comprehensive income (loss) |
2 | 19 | — | (56) | — | — | — | — | ||||||||||||||||||||||||
Purchases (3) |
— | — | 10 | — | — | — | — | — | ||||||||||||||||||||||||
Sales (3) |
— | — | — | — | — | — | — | (1) | ||||||||||||||||||||||||
Issuances (3) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Settlements (3) |
— | — | — | (10) | — | — | 4 | — | ||||||||||||||||||||||||
Transfers into Level 3 (4) |
2 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Transfers out of Level 3 (4) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, end of period |
$ | 25 | $ | 92 | $ | 20 | $ | 95 | $ | 9 | $ | (17) | $ | 1,148 | $ | 149 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Changes in unrealized gains (losses) relating to assets and liabilities still held at March 31, 2012 included in earnings: |
||||||||||||||||||||||||||||||||
Net investment income |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Net investment gains (losses) |
$ | — | $ | (3) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Net derivative gains (losses) |
$ | — | $ | — | $ | — | $ | (11) | $ | 10 | $ | (60) | $ | 114 | $ | — |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||||||||||
U.S. Corporate Securities |
Foreign Corporate Securities |
U.S. Treasury and Agency Securities |
RMBS (8) | CMBS | State and Political Subdivision Securities |
ABS (8) | Foreign Government Securities |
|||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2011: |
||||||||||||||||||||||||||||||||
Balance, beginning of period |
$ | 1,510 | $ | 880 | $ | 34 | $ | 282 | $ | 130 | $ | 32 | $ | 321 | $ | 14 | ||||||||||||||||
Total realized/unrealized gains (losses) included in: |
||||||||||||||||||||||||||||||||
Earnings: (1), (2) |
||||||||||||||||||||||||||||||||
Net investment income |
2 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net investment gains (losses) |
(2) | 2 | — | (1) | (1) | — | (5) | — | ||||||||||||||||||||||||
Net derivative gains (losses) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Other comprehensive income (loss) |
9 | 17 | — | 1 | 17 | — | 9 | (1) | ||||||||||||||||||||||||
Purchases (3) |
31 | 14 | — | — | 8 | — | 26 | — | ||||||||||||||||||||||||
Sales (3) |
(50) | (102) | (2) | (10) | (2) | — | (27) | (11) | ||||||||||||||||||||||||
Issuances (3) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Settlements (3) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Transfers into Level 3 (4) |
19 | 1 | — | — | — | — | — | — | ||||||||||||||||||||||||
Transfers out of Level 3 (4) |
(91) | (30) | — | (17) | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, end of period |
$ | 1,428 | $ | 782 | $ | 32 | $ | 255 | $ | 152 | $ | 32 | $ | 324 | $ | 2 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Changes in unrealized gains (losses) relating to assets and liabilities still held at March 31, 2011 included in earnings: |
||||||||||||||||||||||||||||||||
Net investment income |
$ | 2 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Net investment gains (losses) |
$ | — | $ | — | $ | — | $ | — | $ | (2) | $ | — | $ | (2) | $ | — | ||||||||||||||||
Net derivative gains (losses) |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
67
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||||
Equity Securities: | Net Derivatives: (5) | |||||||||||||||||||||||||||||||
Common Stock |
Non- redeemable Preferred Stock |
Short-term Investments |
Interest Rate Contracts |
Credit Contracts |
Equity Market Contracts |
Net Embedded Derivatives (6) |
Separate Account Assets (7) |
|||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2011: |
||||||||||||||||||||||||||||||||
Balance, beginning of period |
$ | 22 | $ | 214 | $ | 173 | $ | (61) | $ | 11 | $ | 12 | $ | 677 | $ | 133 | ||||||||||||||||
Total realized/unrealized gains (losses) included in: |
||||||||||||||||||||||||||||||||
Earnings: (1), (2) |
||||||||||||||||||||||||||||||||
Net investment income |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net investment gains (losses) |
2 | — | (1) | — | — | — | — | — | ||||||||||||||||||||||||
Net derivative gains (losses) |
— | — | — | 1 | 1 | (6) | (53) | — | ||||||||||||||||||||||||
Other comprehensive income (loss) |
3 | 12 | — | (8) | — | — | — | (5) | ||||||||||||||||||||||||
Purchases (3) |
9 | — | 34 | — | — | — | — | 3 | ||||||||||||||||||||||||
Sales (3) |
(5) | (7) | (124) | — | — | — | — | (1) | ||||||||||||||||||||||||
Issuances (3) |
— | — | — | — | (1) | — | — | — | ||||||||||||||||||||||||
Settlements (3) |
— | — | — | — | — | — | 23 | — | ||||||||||||||||||||||||
Transfers into Level 3 (4) |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Transfers out of Level 3 (4) |
— | — | — | (7) | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, end of period |
$ | 31 | $ | 219 | $ | 82 | $ | (75) | $ | 11 | $ | 6 | $ | 647 | $ | 130 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Changes in unrealized gains (losses) relating to assets and liabilities still held at March 31, 2011 included in earnings: |
||||||||||||||||||||||||||||||||
Net investment income |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Net investment gains (losses) |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Net derivative gains (losses) |
$ | — | $ | — | $ | — | $ | 1 | $ | 1 | $ | (6) | $ | (51) | $ | — |
(1) | Amortization of premium/discount is included within net investment income. Impairments charged to earnings on securities are included in net investment gains (losses). Lapses associated with embedded derivatives are included in net derivative gains (losses). |
(2) | Interest and dividend accruals, as well as cash interest coupons and dividends received, are excluded from the rollforward. |
(3) | The amount reported within purchases, sales, issuances and settlements is the purchase or issuance price and the sales or settlement proceeds based upon the actual date purchased or issued and sold or settled, respectively. Items purchased/issued and sold/settled in the same period are excluded from the rollforward. Fees attributed to embedded derivatives are included in settlements. |
(4) | Total gains and losses (in earnings and other comprehensive income (loss)) are calculated assuming transfers into and/or out of Level 3 occurred at the beginning of the period. Items transferred into and/or out of Level 3 in the same period are excluded from the rollforward. |
(5) | Freestanding derivative assets and liabilities are presented net for purposes of the rollforward. |
(6) | Embedded derivative assets and liabilities are presented net for purposes of the rollforward. |
68
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
(7) | Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders within separate account liabilities. Therefore, such changes in estimated fair value are not recorded in net income. For the purpose of this disclosure, these changes are presented within net investment gains (losses). |
(8) | See Note 2 of the Notes to the Consolidated Financial Statements included in the 2011 Annual Report for discussion of a reclassification from the ABS sector to the RMBS sector for securities backed by sub-prime residential mortgage loans. |
Fair Value Option
Assets and Liabilities Held by CSEs
The Company has elected the FVO for the following assets and liabilities held by CSEs: commercial mortgage loans and long-term debt. The following table presents these commercial mortgage loans accounted for under the FVO at:
March 31, 2012 | December 31, 2011 | |||||||
(In millions) | ||||||||
Unpaid principal balance |
$ | 2,899 | $ | 3,019 | ||||
Excess of estimated fair value over unpaid principal balance |
125 | 119 | ||||||
|
|
|
|
|||||
Carrying value at estimated fair value |
$ | 3,024 | $ | 3,138 | ||||
|
|
|
|
The following table presents the long-term debt accounted for under the FVO related to commercial mortgage loans at:
March 31, 2012 | December 31, 2011 | |||||||
(In millions) | ||||||||
Contractual principal balance |
$ | 2,804 | $ | 2,925 | ||||
Excess of estimated fair value over contractual principal balance |
142 | 140 | ||||||
|
|
|
|
|||||
Carrying value at estimated fair value |
$ | 2,946 | $ | 3,065 | ||||
|
|
|
|
Interest income on commercial mortgage loans held by CSEs is recorded in net investment income. Interest expense on long-term debt of CSEs is recorded in other expenses. Gains and losses from initial measurement, subsequent changes in estimated fair value and gains or losses on sales of both the commercial mortgage loans and the long-term debt are recognized in net investment gains (losses). See Note 2.
69
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Non-Recurring Fair Value Measurements
Certain assets are measured at estimated fair value on a non-recurring basis and are not included in the tables presented above. The amounts below relate to certain investments measured at estimated fair value during the period and still held at the reporting dates and which are categorized as Level 3 measurements.
Three Months Ended March 31, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Carrying Value Prior to Measurement |
Estimated Fair Value After Measurement |
Net Investment Gains (Losses) |
Carrying Value Prior to Measurement |
Estimated Fair Value After Measurement |
Net Investment Gains (Losses) |
|||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Mortgage loans, net (1) |
$ | 8 | $ | 8 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Other limited partnership interests (2) |
$ | 1 | $ | — | $ | (1) | $ | — | $ | — | $ | — | ||||||||||||
Real estate joint ventures (3) |
$ | 5 | $ | 2 | $ | (3) | $ | — | $ | — | $ | — |
(1) | Mortgage loans — These impaired mortgage loans are written down to their estimated fair values which are reported as losses. Subsequent improvements in estimated fair value on previously impaired loans recorded through a reduction in the previously established valuation allowance are reported as gains. Estimated fair values for impaired mortgage loans are based on observable market prices or, if the loans are in foreclosure or are otherwise determined to be collateral dependent, on the estimated fair value of the underlying collateral, or the present value of the expected future cash flows. |
(2) | Other limited partnership interests — These impaired investments were accounted for using the cost method. Impairments were recognized at estimated fair value determined from information provided in the financial statements of the underlying entities. These investments include private equity and debt funds that typically invest primarily in various strategies including domestic and international leveraged buyout funds; power, energy, timber and infrastructure development funds; venture capital funds; and below investment grade debt and mezzanine debt funds. The estimated fair values of these investments have been determined using NAV data. Distributions will be generated from investment gains, from operating income from the underlying investments of the funds and from liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over the next two to 10 years. Unfunded commitments for these investments were $1 million at March 31, 2012. There were no unfunded commitments for these investments at March 31, 2011. |
(3) | Real estate joint ventures — These impaired investments were accounted for using the cost method. Impairments were recognized at estimated fair value determined from information provided in the financial statements of the underlying entities. These investments include several real estate funds that typically invest primarily in commercial real estate. The estimated fair values of these investments have been determined using NAV data. Distributions will be generated from investment gains, from operating income from the underlying investments of the funds and from liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over the next two to 10 years. Unfunded commitments for these investments were $3 million at March 31, 2012. There were no unfunded commitments for these investments at March 31, 2011. |
70
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Fair Value of Financial Instruments
The tables below exclude certain financial instruments. The excluded financial instruments are as follows: cash and cash equivalents, accrued investment income, payables for collateral under securities loaned and other transactions and those short-term investments that are not securities, such as time deposits, and are excluded from the preceding three level hierarchy table. The estimated fair value of these financial instruments, which are primarily classified in Level 2, approximate carrying value as they are short-term in nature such that the Company believes there is minimal risk of material changes in interest rates or credit quality. The table below also excludes financial instruments reported at estimated fair value on a recurring basis. See “—Recurring Fair Value Measurements.” All remaining balance sheet amounts excluded from the table below are not considered financial instruments subject to this disclosure.
The carrying values, estimated fair values and, for March 31, 2012, their corresponding placement in the fair value hierarchy, for such financial instruments, are summarized as follows:
March 31, 2012 | ||||||||||||||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
Carrying Value |
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Estimated Fair Value |
||||||||||||||||
(In millions) | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Mortgage loans, net |
$ | 6,534 | $ | — | $ | — | $ | 6,836 | $ | 6,836 | ||||||||||
Policy loans |
$ | 1,239 | $ | — | $ | 860 | $ | 471 | $ | 1,331 | ||||||||||
Real estate joint ventures |
$ | 65 | $ | — | $ | — | $ | 112 | $ | 112 | ||||||||||
Other limited partnership interests |
$ | 98 | $ | — | $ | — | $ | 114 | $ | 114 | ||||||||||
Other invested assets |
$ | 430 | $ | — | $ | 509 | $ | — | $ | 509 | ||||||||||
Premiums, reinsurance and other receivables |
$ | 5,977 | $ | — | $ | 106 | $ | 6,667 | $ | 6,773 | ||||||||||
Liabilities: |
||||||||||||||||||||
PABs |
$ | 23,833 | $ | — | $ | — | $ | 25,283 | $ | 25,283 | ||||||||||
Long-term debt |
$ | 792 | $ | — | $ | 946 | $ | — | $ | 946 | ||||||||||
Other liabilities |
$ | 492 | $ | — | $ | 346 | $ | 146 | $ | 492 | ||||||||||
Separate account liabilities |
$ | 1,358 | $ | — | $ | 1,358 | $ | — | $ | 1,358 | ||||||||||
Commitments: (1) |
||||||||||||||||||||
Mortgage loan commitments |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Commitments to fund bank credit facilities and private corporate bond investments |
$ | — | $ | — | $ | 7 | $ | — | $ | 7 |
71
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
December 31, 2011 | ||||||||
Carrying Value |
Estimated Fair Value |
|||||||
(In millions) | ||||||||
Assets: |
||||||||
Mortgage loans, net |
$ | 6,662 | $ | 6,946 | ||||
Policy loans |
$ | 1,203 | $ | 1,307 | ||||
Real estate joint ventures |
$ | 69 | $ | 107 | ||||
Other limited partnership interests |
$ | 98 | $ | 126 | ||||
Other invested assets |
$ | 430 | $ | 477 | ||||
Premiums, reinsurance and other receivables |
$ | 5,973 | $ | 6,880 | ||||
Liabilities: |
||||||||
PABs |
$ | 23,144 | $ | 24,732 | ||||
Long-term debt |
$ | 792 | $ | 970 | ||||
Other liabilities |
$ | 224 | $ | 224 | ||||
Separate account liabilities |
$ | 1,240 | $ | 1,240 | ||||
Commitments: (1) |
||||||||
Mortgage loan commitments |
$ | — | $ | — | ||||
Commitments to fund bank credit facilities and private corporate bond investments |
$ | — | $ | 7 |
(1) | Commitments are off-balance sheet obligations. Negative estimated fair values represent off-balance sheet liabilities. See Note 8 for additional information on these off-balance sheet obligations. |
The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of financial instruments are summarized as follows:
Mortgage Loans
The estimated fair value of mortgage loans was primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar mortgage loans with similar credit risk.
Policy Loans
Policy loans with fixed interest rates are classified within Level 3. The estimated fair values for these loans are determined using a DCF model applied to groups of similar policy loans determined by the nature of the underlying insurance liabilities. Cash flow estimates are developed by applying a weighted-average interest rate to the outstanding principal balance of the respective group of policy loans and an estimated average maturity determined through experience studies of the past performance of policyholder repayment behavior for similar loans. These cash flows are discounted using current risk-free interest rates with no adjustment for borrower credit risk as these loans are fully collateralized by the cash surrender value of the underlying insurance policy. Policy loans with variable interest rates are classified within Level 2 and the estimated fair value approximates carrying value due to the absence of borrower credit risk and the short time period between interest rate resets, which presents minimal risk of a material change in estimated fair value due to changes in market interest rates.
72
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Real Estate Joint Ventures and Other Limited Partnership Interests
The amounts disclosed in the preceding tables consist of those investments accounted for using the cost method.
The estimated fair values for cost method real estate joint ventures and other limited partnership interests are generally based on the Company’s share of the NAV as provided in the financial statements of the investees. In certain circumstances, management may adjust the NAV by a premium or discount when it has sufficient evidence to support applying such adjustments.
Other Invested Assets
Other invested assets within the preceding tables are comprised of loans to affiliates. The estimated fair value of loans to affiliates is determined by discounting the expected future cash flows using market interest rates currently available for instruments with similar terms and remaining maturities.
Premiums, Reinsurance and Other Receivables
Premiums, reinsurance and other receivables in the preceding tables are principally comprised of certain amounts recoverable under reinsurance agreements, amounts on deposit with financial institutions to facilitate daily settlements related to certain derivative positions and amounts receivable for securities sold but not yet settled.
Amounts recoverable under ceded reinsurance agreements, which the Company has determined do not transfer significant risk such that they are accounted for using the deposit method of accounting, have been classified within Level 3. The valuation is based on DCF methodologies using significant unobservable inputs. The estimated fair value is determined using interest rates determined to reflect the appropriate credit standing of the assuming counterparty.
The amounts on deposit for derivative settlements, classified within Level 2, essentially represent the equivalent of demand deposit balances and amounts due for securities sold are generally received over short periods such that the estimated fair value approximates carrying value.
PABs
PABs in the preceding tables include investment contracts. Embedded derivatives on investment contracts and certain variable annuity guarantees accounted for as embedded derivatives are excluded from this caption in the preceding tables as they are separately presented in “— Recurring Fair Value Measurements.”
The investment contracts primarily include certain funding agreements, fixed deferred annuities, modified guaranteed annuities, fixed term payout annuities and total control accounts. The valuation of these investment contracts is based on DCF methodologies using significant unobservable inputs. The estimated fair value is determined using current market risk-free interest rates adding a spread to reflect the nonperformance risk in the liability.
Long-term Debt
The estimated fair values of long-term debt are principally valued using market standard valuation methodologies. Valuations are based primarily on quoted prices in markets that are not active or using matrix
73
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
pricing or other similar techniques that use standard market observable inputs such as quoted prices in markets that are not active and observable yields and spreads in the market. Instruments valued using DCF methodologies use standard market observable inputs including market yield curve, duration, observable prices and spreads for similar publicly traded or privately traded issues.
Other Liabilities
Other liabilities consist primarily of interest payable, amounts due for securities purchased but not yet settled, funds withheld amounts payable, which are contractually withheld by the Company in accordance with the terms of the reinsurance agreements and amounts payable under certain assumed reinsurance agreements, which are recorded using the deposit method of accounting. The Company evaluates the specific terms, facts and circumstances of each instrument to determine the appropriate estimated fair values, which are not materially different from the carrying values.
Separate Account Liabilities
Separate account liabilities included in the preceding tables represent those balances due to policyholders under contracts that are classified as investment contracts.
Separate account liabilities classified as investment contracts primarily represent variable annuities with no significant mortality risk to the Company such that the death benefit is equal to the account balance and certain contracts that provide for benefit funding.
Since separate account liabilities are fully funded by cash flows from the separate account assets which are recognized at estimated fair value as described in the section “— Recurring Fair Value Measurements,” the value of those assets approximates the estimated fair value of the related separate account liabilities. The valuation techniques and inputs for separate account liabilities are similar to those described for separate account assets.
Mortgage Loan Commitments and Commitments to Fund Bank Credit Facilities and Private Corporate Bond Investments
The estimated fair values for mortgage loan commitments that will be held for investment and commitments to fund bank credit facilities and private corporate bonds that will be held for investment reflected in the above tables represents the difference between the discounted expected future cash flows using interest rates that incorporate current credit risk for similar instruments on the reporting date and the principal amounts of the commitments.
74
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Deferred Policy Acquisition Costs and Value of Business Acquired
Information regarding DAC and VOBA was as follows:
Three Months Ended March 31, |
||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
DAC | VOBA | Total | DAC | VOBA | Total | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Balance, beginning of period |
$ | 3,182 | $ | 1,006 | $ | 4,188 | $ | 2,705 | $ | 1,686 | $ | 4,391 | ||||||||||||
Capitalizations |
277 | — | 277 | 282 | — | 282 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
3,459 | 1,006 | 4,465 | 2,987 | 1,686 | 4,673 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Amortization related to: |
||||||||||||||||||||||||
Net investment gains (losses) |
124 | 7 | 131 | 61 | 3 | 64 | ||||||||||||||||||
Other expenses |
(127) | (42) | (169) | (99) | (65) | (164) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total amortization |
(3) | (35) | (38) | (38) | (62) | (100) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Unrealized investment gains (losses) |
1 | 42 | 43 | 5 | (3) | 2 | ||||||||||||||||||
Effect of foreign currency translation |
4 | — | 4 | 2 | — | 2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 3,461 | $ | 1,013 | $ | 4,474 | $ | 2,956 | $ | 1,621 | $ | 4,577 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of DAC and VOBA is attributed to both investment gains and losses and to other expenses for the amount of gross margins or profits originating from transactions other than investment gains and losses. Unrealized investment gains and losses represent the amount of DAC and VOBA that would have been amortized if such gains and losses had been recognized.
See Note 1 for information on the retrospective application of the adoption of new accounting guidance related to DAC.
Information regarding DAC and VOBA by segment, as well as Corporate & Other, was as follows:
DAC | VOBA | Total | ||||||||||||||||||||||
March 31, 2012 |
December 31, 2011 |
March 31, 2012 |
December 31, 2011 |
March 31, 2012 |
December 31, 2011 |
|||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Retail Products |
$ | 3,301 | $ | 3,042 | $ | 1,013 | $ | 1,005 | $ | 4,314 | $ | 4,047 | ||||||||||||
Corporate Benefit Funding |
9 | 12 | — | 1 | 9 | 13 | ||||||||||||||||||
Corporate & Other |
151 | 128 | — | — | 151 | 128 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,461 | $ | 3,182 | $ | 1,013 | $ | 1,006 | $ | 4,474 | $ | 4,188 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
6. Goodwill
In the first quarter of 2012, the Company reorganized its business into two segments: Retail Products and Corporate Benefit Funding. See Note 10 for a discussion on the Company’s new segments. As a result of the reorganization, the Company reallocated goodwill from the former segments to the new segments as shown in the below table under “Goodwill Transfers.”
75
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
The Company tests goodwill for impairment at least annually at the reporting unit level. A reporting unit is the operating segment or a business one level below the operating segment, if discrete financial information is prepared and regularly reviewed by management at that level. For each operating segment, the reporting units were determined to be either the operating segment or the components thereof.
The following table presents the changes in the carrying amount of goodwill in each of the Company’s segments, as well as Corporate & Other, and the balances at:
December 31, 2011 | Goodwill Transfers |
March 31, 2012 | ||||||||||
(In millions) | ||||||||||||
2011 |
||||||||||||
Insurance Products |
$ | 22 | $ | (22) | $ | — | ||||||
Retirement Products |
219 | (219) | — | |||||||||
Corporate Benefit Funding |
307 | (307) | — | |||||||||
Corporate & Other |
405 | (405) | — | |||||||||
2012 |
||||||||||||
Retail Products |
— | 236 | 236 | |||||||||
Corporate Benefit Funding |
— | 307 | 307 | |||||||||
Corporate & Other |
— | 410 | 410 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 953 | $ | — | $ | 953 | ||||||
|
|
|
|
|
|
The Company had no accumulated goodwill impairment at March 31, 2012. Additionally, in 2012 Corporate & Other includes goodwill associated with the non-medical health business (see Note 10).
7. Insurance
Insurance Liabilities
Insurance liabilities, including affiliated insurance liabilities on reinsurance assumed and ceded, were as follows:
Future Policy Benefits |
Policyholder Account Balances |
Other Policy-Related Balances |
||||||||||||||||||||||
March 31, 2012 |
December 31, 2011 |
March 31, 2012 |
December 31, 2011 |
March 31, 2012 |
December 31, 2011 |
|||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Retail Products |
$ | 5,423 | $ | 5,175 | $ | 28,431 | $ | 30,001 | $ | 2,675 | $ | 2,577 | ||||||||||||
Corporate Benefit Funding |
13,975 | 14,028 | 9,454 | 8,375 | 12 | 14 | ||||||||||||||||||
Corporate & Other |
6,038 | 6,280 | 4,261 | 3,699 | 446 | 398 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 25,436 | $ | 25,483 | $ | 42,146 | $ | 42,075 | $ | 3,133 | $ | 2,989 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See Note 11 for discussion of affiliated reinsurance liabilities included in the table above.
76
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
8. Contingencies, Commitments and Guarantees
Contingencies
Litigation
The Company is a defendant in a number of litigation matters. In some of the matters, large and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading practice in the U.S. 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, demonstrates to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value.
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 difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness 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.
The Company establishes liabilities for litigation and regulatory loss contingencies 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 some of the matters 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 at March 31, 2012.
Matters as to Which an Estimate Can Be Made
For some of the matters discussed below, the Company is able to estimate a reasonably possible range of loss. For such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made. As of March 31, 2012, the aggregate range of reasonably possible losses in excess of amounts accrued for these matters was not material for the Company.
Matters as to Which an Estimate Cannot Be Made
For other matters disclosed below, the Company is not currently able to estimate the reasonably possible loss or range of loss. The Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. On a quarterly and annual basis, the Company reviews relevant information with respect to litigation contingencies and updates its accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.
Sales Practices Claims
Over the past several years, the Company has faced claims, including class action lawsuits, alleging improper marketing or sales of individual life insurance policies, annuities, mutual funds or other products. Some of the
77
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
current cases seek substantial damages, including punitive and treble damages and attorneys’ fees. The Company continues to vigorously defend against the claims in these matters. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for sales practices matters.
Connecticut General Life Insurance Company and MetLife Insurance Company of Connecticut are engaged in an arbitration proceeding to determine whether MetLife Insurance Company of Connecticut is owed money from Connecticut General Life Insurance Company or is required to refund several million dollars it collected and/or should stop submitting certain claims under reinsurance contracts in which Connecticut General Life Insurance Company reinsured death benefits payable under certain MetLife Insurance Company of Connecticut annuities.
A former Tower Square financial services representative is alleged to have misappropriated funds from customers. The Illinois Securities Division, the U.S. Postal Inspector, the Internal Revenue Service, FINRA and the U.S. Attorney’s Office have conducted inquiries. Tower Square has made remediation to all the affected customers. The Illinois Securities Division has issued a Statement of Violations to Tower Square, and Tower Square is conducting discussions with the Illinois Securities Division.
Unclaimed Property Inquiries
More than 30 U.S. jurisdictions are auditing MetLife, Inc. and certain of its affiliates, including MetLife Insurance Company of Connecticut, for compliance with unclaimed property laws. Additionally, MLIC and certain of its affiliates have received subpoenas and other regulatory inquiries from certain regulators and other officials relating to claims-payment practices and compliance with unclaimed property laws. An examination of these practices by the Illinois Department of Insurance has been converted into a multi-state targeted market conduct exam. On July 5, 2011, the New York Insurance Department issued a letter requiring life insurers doing business in New York to use data available on the U.S. Social Security Administration’s Death Master File or a similar database to identify instances where death benefits under life insurance policies, annuities, and retained asset accounts are payable, to locate and pay beneficiaries under such contracts, and to report the results of the use of the data. In April 2012, the Company reached agreements with representatives of the U.S. jurisdictions that are conducting the audits referenced above and with the states most directly involved in the targeted market conduct exam referenced above to resolve the audits and the examination. The effectiveness of each agreement is conditioned upon the approval of a specified number of jurisdictions. Pursuant to the settlement to resolve the audits, the Company will, among other things, take specified action to identify liabilities under life insurance, annuity, and retained asset contracts, and, to the extent that it is unable to locate owners of amounts payable, to escheat these amounts with interest at a specified rate to the appropriate states. Pursuant to the settlements, the Company will, among other things, adopt specified procedures for identifying liabilities under life insurance, annuity, and retained asset contracts, for seeking to contact and pay beneficiaries under such liabilities, and for escheating unclaimed property to appropriate states. At least one other jurisdiction is pursuing a similar market conduct exam. It is possible that other jurisdictions may pursue similar exams or audits and that such exams or audits may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and/or further changes to the Company’s procedures. The Company is not currently able to estimate these additional possible costs.
Summary
Various litigation, claims and assessments against the Company, in addition to those discussed previously and those otherwise provided for in the Company’s consolidated financial statements, have arisen in the course of the
78
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
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 possible to predict the ultimate outcome of all pending investigations and legal proceedings. In some of the matters referred to previously, 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 effect upon the Company’s 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 effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods.
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 $1.1 billion and $1.2 billion at March 31, 2012 and December 31, 2011, 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 $82 million and $167 million at March 31, 2012 and December 31, 2011, respectively.
Commitments to Fund Bank Credit Facilities and Private Corporate Bond Investments
The Company commits to lend funds under bank credit facilities and private corporate bond investments. The amounts of these unfunded commitments were $241 million and $248 million at March 31, 2012 and December 31, 2011, respectively.
Other Commitments
The Company has entered into collateral arrangements with affiliates, which require the transfer of collateral in connection with secured demand notes. At March 31, 2012 and December 31, 2011, the Company had agreed to fund up to $86 million and $90 million, respectively, of cash upon the request by these affiliates and had transferred collateral consisting of various securities with a fair market value of $97 million and $109 million, respectively, to custody accounts to secure the notes. Each of these affiliates is permitted by contract to sell or repledge this collateral.
Guarantees
The Company has provided a guarantee on behalf of MetLife International Insurance Company, Ltd. (“MLII”), a former affiliate, that is triggered if MLII cannot pay claims because of insolvency, liquidation or rehabilitation.
79
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Life insurance coverage in-force, representing the maximum potential obligation under this guarantee, was $261 million and $272 million at March 31, 2012 and December 31, 2011, respectively. The Company does not hold any collateral related to this guarantee, but has a recorded liability of $1 million that was based on the total account value of the guaranteed policies plus the amounts retained per policy at both March 31, 2012 and December 31, 2011. The remainder of the risk was ceded to external reinsurers.
9. Other Expenses
Information on other expenses was as follows:
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Compensation |
$ | 93 | $ | 75 | ||||
Commissions |
280 | 306 | ||||||
Volume-related costs |
59 | 38 | ||||||
Affiliated interest costs on ceded reinsurance |
49 | 54 | ||||||
Capitalization of DAC |
(277) | (282) | ||||||
Amortization of DAC and VOBA |
38 | 100 | ||||||
Interest expense on debt and debt issuance costs |
60 | 110 | ||||||
Premium taxes, licenses and fees |
24 | 15 | ||||||
Professional services |
6 | 9 | ||||||
Rent |
9 | 7 | ||||||
Other |
116 | 83 | ||||||
|
|
|
|
|||||
Total other expenses |
$ | 457 | $ | 515 | ||||
|
|
|
|
Capitalization of DAC and Amortization of DAC and VOBA
See Note 5 for DAC and VOBA by segment and a rollforward of each including impacts of capitalization and amortization. See Note 1 for information on the retrospective application of the adoption of new accounting guidance related to DAC.
Affiliated Expenses
Commissions, capitalization of DAC and amortization of DAC include the impact of affiliated reinsurance transactions. See Note 11 for a discussion of affiliated expenses included in the table above.
10. Business Segment Information
As announced in November 2011, MetLife reorganized its business into three broad geographic regions. As a result, in the first quarter of 2012, the Company reorganized into two segments: Retail Products and Corporate Benefit Funding. In addition, the Company reports certain of its results of operations in Corporate & Other. Prior period results have been revised in connection with this reorganization.
The Retail Products segment offers a broad range of protection products and services and a variety of annuities to individuals and employees of corporations and other institutions, and is organized into two businesses:
80
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Annuities and Life. Annuities include a variety of variable and fixed annuities which provide for both asset accumulation and asset distribution needs. Life insurance products and services include variable life, universal life, term life and whole life products.
The Corporate Benefit Funding segment includes an array of annuity and investment products, including guaranteed interest products and other stable value products, income annuities, and separate account contracts for the investment management of defined benefit and defined contribution plan assets.
Corporate & Other contains the excess capital not allocated to the segments, run-off business, the Company’s ancillary international operations and non-medical health business, interest expense related to the majority of the Company’s outstanding debt, expenses associated with certain legal proceedings and income tax audit issues. Corporate & Other also includes the elimination of intersegment amounts.
Operating earnings is the measure of segment profit or loss the Company uses to evaluate segment performance and allocate resources. Consistent with GAAP accounting guidance for segment reporting, operating earnings is the Company’s measure of segment performance and is reported below. Operating earnings should not be viewed as a substitute for GAAP net income (loss). The Company believes the presentation of operating earnings as the Company measures it for management purposes enhances the understanding of its performance by highlighting the results of operations and the underlying profitability drivers of the business.
Operating earnings is defined as operating revenues less operating expenses, both net of income tax.
Operating revenues excludes net investment gains (losses) and net derivative gains (losses). The following additional adjustments are made to GAAP revenues, in the line items indicated, in calculating operating revenues:
• | Universal life and investment-type product policy fees excludes the amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain variable annuity GMIB fees (“GMIB Fees”); and |
• | Net investment income: (i) includes amounts for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of investments but do not qualify for hedge accounting treatment, (ii) excludes certain amounts related to contractholder-directed unit-linked investments, and (iii) excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP. |
The following adjustments are made to GAAP expenses, in the line items indicated, in calculating operating expenses:
• | Policyholder benefits and claims excludes: (i) amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets, (ii) benefits and hedging costs related to GMIBs (“GMIB Costs”), and (iii) market value adjustments associated with surrenders or terminations of contracts (“Market Value Adjustments”); |
• | Interest credited to policyholder account balances includes adjustments for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of PABs but do not qualify for hedge accounting treatment and excludes amounts related to net investment income earned on contractholder-directed unit-linked investments; |
81
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
• | Amortization of DAC and VOBA excludes amounts related to: (i) net investment gains (losses) and net derivative gains (losses), (ii) GMIB Fees and GMIB Costs, and (iii) Market Value Adjustments; |
• | Interest expense on debt excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and |
• | Other expenses excludes costs related to implementation of new insurance regulatory requirements and acquisition and integration costs. |
Set forth in the tables below is certain financial information with respect to the Company’s segments, as well as Corporate & Other for the three months ended March 31, 2012 and 2011. The segment accounting policies are the same as those used to prepare the Company’s consolidated financial statements, except for operating earnings adjustments as defined above. In addition, segment accounting policies include the method of capital allocation described below.
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 business.
82
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
MetLife’s economic capital model aligns segment allocated equity with emerging standards and consistent risk principles. Segment net investment income is credited or charged based on the level of allocated equity; however, changes in allocated equity do not impact the Company’s consolidated net investment income, operating earnings or net income.
Operating Earnings | ||||||||||||||||||||||||
Three Months Ended March 31, 2012 |
Retail Products |
Corporate Benefit Funding |
Corporate & Other |
Total | Adjustments | Total Consolidated |
||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Premiums |
$ | 181 | $ | 117 | $ | 82 | $ | 380 | $ | — | $ | 380 | ||||||||||||
Universal life and investment-type product policy fees |
500 | 8 | 8 | 516 | 28 | 544 | ||||||||||||||||||
Net investment income |
372 | 283 | 53 | 708 | 184 | 892 | ||||||||||||||||||
Other revenues |
122 | 1 | — | 123 | — | 123 | ||||||||||||||||||
Net investment gains (losses) |
— | — | — | — | 4 | 4 | ||||||||||||||||||
Net derivative gains (losses) |
— | — | — | — | (439) | (439) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenues |
1,175 | 409 | 143 | 1,727 | (223) | 1,504 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Expenses |
||||||||||||||||||||||||
Policyholder benefits and claims |
230 | 237 | 81 | 548 | 41 | 589 | ||||||||||||||||||
Interest credited to policyholder account balances |
240 | 45 | — | 285 | 154 | 439 | ||||||||||||||||||
Capitalization of DAC |
(253) | (3) | (21) | (277) | — | (277) | ||||||||||||||||||
Amortization of DAC and VOBA |
170 | 7 | 2 | 179 | (141) | 38 | ||||||||||||||||||
Interest expense on debt |
— | — | 17 | 17 | 43 | 60 | ||||||||||||||||||
Other expenses |
575 | 10 | 56 | 641 | (5) | 636 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total expenses |
962 | 296 | 135 | 1,393 | 92 | 1,485 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Provision for income tax expense (benefit) |
74 | 39 | (13) | 100 | (100) | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating earnings |
$ | 139 | $ | 74 | $ | 21 | 234 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Adjustments to: |
||||||||||||||||||||||||
Total revenues |
(223) | |||||||||||||||||||||||
Total expenses |
(92) | |||||||||||||||||||||||
Provision for income tax (expense) benefit |
100 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net income |
$ | 19 | $ | 19 | ||||||||||||||||||||
|
|
|
|
83
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Operating Earnings | ||||||||||||||||||||||||
Three Months Ended March 31, 2011 |
Retail Products |
Corporate Benefit Funding |
Corporate & Other |
Total | Adjustments | Total Consolidated |
||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Premiums |
$ | 73 | $ | 62 | $ | 1 | $ | 136 | $ | — | $ | 136 | ||||||||||||
Universal life and investment-type product policy fees |
417 | 11 | 7 | 435 | 20 | 455 | ||||||||||||||||||
Net investment income |
360 | 298 | 48 | 706 | 80 | 786 | ||||||||||||||||||
Other revenues |
129 | 1 | — | 130 | — | 130 | ||||||||||||||||||
Net investment gains (losses) |
— | — | — | — | (14) | (14) | ||||||||||||||||||
Net derivative gains (losses) |
— | — | — | — | (156) | (156) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenues |
979 | 372 | 56 | 1,407 | (70) | 1,337 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Expenses |
||||||||||||||||||||||||
Policyholder benefits and claims |
130 | 188 | 2 | 320 | 7 | 327 | ||||||||||||||||||
Interest credited to policyholder account balances |
240 | 50 | — | 290 | (3) | 287 | ||||||||||||||||||
Capitalization of DAC |
(265) | (5) | (12) | (282) | — | (282) | ||||||||||||||||||
Amortization of DAC and VOBA |
159 | 1 | 2 | 162 | (62) | 100 | ||||||||||||||||||
Interest expense on debt |
— | — | 17 | 17 | 93 | 110 | ||||||||||||||||||
Other expenses |
541 | 16 | 30 | 587 | — | 587 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total expenses |
805 | 250 | 39 | 1,094 | 35 | 1,129 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Provision for income tax expense (benefit) |
60 | 43 | (11) | 92 | (35) | 57 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating earnings |
$ | 114 | $ | 79 | $ | 28 | 221 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Adjustments to: |
||||||||||||||||||||||||
Total revenues |
(70) | |||||||||||||||||||||||
Total expenses |
(35) | |||||||||||||||||||||||
Provision for income tax (expense) benefit |
35 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Net income |
$ | 151 | $ | 151 | ||||||||||||||||||||
|
|
|
|
The following table presents total assets with respect to the Company’s segments, as well as Corporate & Other, at:
March 31, 2012 | December 31, 2011 | |||||||
(In millions) | ||||||||
Retail Products |
$ | 127,745 | $ | 120,633 | ||||
Corporate Benefit Funding |
31,579 | 30,836 | ||||||
Corporate & Other |
19,768 | 19,595 | ||||||
|
|
|
|
|||||
Total |
$ | 179,092 | $ | 171,064 | ||||
|
|
|
|
84
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Net investment income is based upon the actual results of each segment’s specifically identifiable asset portfolio adjusted for allocated equity. 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.
11. Related Party Transactions
Service Agreements
The Company has entered into various agreements with affiliates for services necessary to conduct its activities. Typical services provided under these agreements include management, policy administrative functions, personnel, investment advice and distribution services. For certain agreements, charges are based on various performance measures or activity-based costing. The bases for such charges are modified and adjusted by management when necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by the Company and/or affiliate. The aforementioned expenses and fees incurred with affiliates were comprised of the following:
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Compensation |
$ | 90 | $ | 63 | ||||
Commissions |
154 | 185 | ||||||
Volume-related costs |
75 | 48 | ||||||
Professional services |
5 | 4 | ||||||
Rent |
9 | 6 | ||||||
Other |
106 | 71 | ||||||
|
|
|
|
|||||
Total other expenses |
$ | 439 | $ | 377 | ||||
|
|
|
|
Revenues received from affiliates related to these agreements were recorded as follows:
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Universal life and investment-type product policy fees |
$ | 42 | $ | 33 | ||||
Other revenues |
$ | 40 | $ | 31 |
The Company had net receivables from affiliates of $23 million and $93 million at March 31, 2012 and December 31, 2011, respectively, related to the items discussed above. These amounts exclude affiliated reinsurance balances discussed below. See Note 2 for expenses related to investment advice under these agreements, recorded in net investment income.
Reinsurance Transactions
The Company has reinsurance agreements with certain MetLife subsidiaries, including MLIC, MetLife Reinsurance Company of South Carolina, Exeter, General American Life Insurance Company, MetLife Investors Insurance Company and MetLife Reinsurance Company of Vermont, all of which are related parties.
85
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Information regarding the effect of affiliated reinsurance included in the interim condensed consolidated statements of operations and comprehensive income was as follows:
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Premiums: |
||||||||
Reinsurance assumed |
$ | 3 | $ | (2) | ||||
Reinsurance ceded |
(92) | (54) | ||||||
|
|
|
|
|||||
Net premiums |
$ | (89) | $ | (56) | ||||
|
|
|
|
|||||
Universal life and investment-type product policy fees: |
||||||||
Reinsurance assumed |
$ | 21 | $ | 20 | ||||
Reinsurance ceded |
(101) | (91) | ||||||
|
|
|
|
|||||
Net universal life and investment-type product policy fees |
$ | (80) | $ | (71) | ||||
|
|
|
|
|||||
Other revenues: |
||||||||
Reinsurance assumed |
$ | - | $ | - | ||||
Reinsurance ceded |
67 | 80 | ||||||
|
|
|
|
|||||
Net other revenues |
$ | 67 | $ | 80 | ||||
|
|
|
|
|||||
Policyholder benefits and claims: |
||||||||
Reinsurance assumed |
$ | 3 | $ | 3 | ||||
Reinsurance ceded |
(133) | (115) | ||||||
|
|
|
|
|||||
Net policyholder benefits and claims |
$ | (130) | $ | (112) | ||||
|
|
|
|
|||||
Interest credited to policyholder account balances: |
||||||||
Reinsurance assumed |
$ | 18 | $ | 16 | ||||
Reinsurance ceded |
(26) | (18) | ||||||
|
|
|
|
|||||
Net interest credited to policyholder account balances |
$ | (8) | $ | (2) | ||||
|
|
|
|
|||||
Other expenses: |
||||||||
Reinsurance assumed |
$ | 13 | $ | 15 | ||||
Reinsurance ceded |
15 | 45 | ||||||
|
|
|
|
|||||
Net other expenses |
$ | 28 | $ | 60 | ||||
|
|
|
|
86
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
Information regarding the effect of affiliated reinsurance included in the interim condensed consolidated balance sheets was as follows at:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Assumed | Ceded | Assumed | Ceded | |||||||||||||
(In millions) | ||||||||||||||||
Assets: |
||||||||||||||||
Premiums, reinsurance and other receivables |
$ | 37 | $ | 11,575 | $ | 34 | $ | 12,345 | ||||||||
Deferred policy acquisition costs and value of business acquired |
131 | (592) | 134 | (585) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 168 | $ | 10,983 | $ | 168 | $ | 11,760 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Future policy benefits |
$ | 45 | $ | - | $ | 44 | $ | - | ||||||||
Other policy-related balances |
1,532 | 793 | 1,515 | 758 | ||||||||||||
Other liabilities |
15 | 4,036 | 10 | 3,903 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 1,592 | $ | 4,829 | $ | 1,569 | $ | 4,661 | ||||||||
|
|
|
|
|
|
|
|
The Company ceded risks to affiliates related to guaranteed minimum benefit guarantees written directly by the Company. These ceded reinsurance agreements contain embedded derivatives and changes in their fair value are also included within net derivative gains (losses). The embedded derivatives associated with the cessions are included within premiums, reinsurance and other receivables and were assets of $1.9 billion and $2.8 billion at March 31, 2012 and December 31, 2011, respectively. Net derivative gains (losses) associated with the embedded derivatives were ($1.0) billion and ($443) million for the three months ended March 31, 2012 and 2011, respectively.
MLI-USA cedes two blocks of business to an affiliate on a 90% coinsurance with funds withheld basis. Certain contractual features of this agreement qualify as embedded derivatives, which are separately accounted for at estimated fair value on the Company’s consolidated balance sheets. The embedded derivative related to the funds withheld associated with this reinsurance agreement is included within other liabilities and increased the funds withheld balance by $339 million and $416 million at March 31, 2012 and December 31, 2011, respectively. Net derivative gains (losses) associated with the embedded derivatives were $77 million and $25 million for the three months ended March 31, 2012 and 2011, respectively.
87
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For purposes of this discussion, “MICC,” the “Company,” “we,” “our” and “us” refer to MetLife Insurance Company of Connecticut, a Connecticut corporation incorporated in 1863, and its subsidiaries, including MetLife Investors USA Insurance Company (“MLI-USA”). MetLife Insurance Company of Connecticut is a wholly-owned subsidiary of MetLife, Inc. (“MetLife”). Management’s narrative analysis of the results of operations is presented pursuant to General Instruction H(2)(a) of Form 10-Q. This narrative analysis should be read in conjunction with MetLife Insurance Company of Connecticut’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”), filed with the U.S. Securities and Exchange Commission, the forward-looking statement information included below, the “Risk Factors” set forth in Part II, Item 1A, and the additional risk factors referred to therein, and the Company’s interim condensed consolidated financial statements included elsewhere herein.
This narrative analysis may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results. Any or all forward-looking statements may turn out to be wrong. Actual results could differ materially from those expressed or implied in the forward-looking statements. See “Note Regarding Forward-Looking Statements.”
The following discussion includes references to our performance measure, operating earnings, that is not based on accounting principles generally accepted in the United States of America (“GAAP”). Operating earnings is the measure of segment profit or loss we use to evaluate segment performance and allocate resources. Consistent with GAAP accounting guidance for segment reporting, operating earnings is our measure of segment performance.
Operating earnings is defined as operating revenues less operating expenses, both net of income tax.
Operating revenues excludes net investment gains (losses) and net derivative gains (losses). The following additional adjustments are made to GAAP revenues, in the line items indicated, in calculating operating revenues:
• | Universal life and investment-type product policy fees excludes the amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain variable annuity guaranteed minimum income benefits (“GMIB”) fees (“GMIB Fees”); and |
• | Net investment income: (i) includes amounts for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of investments but do not qualify for hedge accounting treatment, (ii) excludes certain amounts related to contractholder-directed unit-linked investments, and (iii) excludes certain amounts related to securitization entities that are variable interest entities (“VIEs”) consolidated under GAAP. |
The following adjustments are made to GAAP expenses, in the line items indicated, in calculating operating expenses:
• | Policyholder benefits and claims excludes: (i) amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets, (ii) benefits and hedging costs related to GMIBs (“GMIB Costs”), and (iii) market value adjustments associated with surrenders or terminations of contracts (“Market Value Adjustments”); |
88
• | Interest credited to policyholder account balances includes adjustments for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of policyholder account balances (“PABs”) but do not qualify for hedge accounting treatment and excludes amounts related to net investment income earned on contractholder-directed unit-linked investments; |
• | Amortization of deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”) excludes amounts related to: (i) net investment gains (losses) and net derivative gains (losses), (ii) GMIB Fees and GMIB Costs, and (iii) Market Value Adjustments; |
• | Interest expense on debt excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and |
• | Other expenses excludes costs related to implementation of new insurance regulatory requirements and acquisition and integration costs. |
We believe the presentation of operating earnings, as we measure it for management purposes, enhances the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of our business. Operating revenues, operating expenses and operating earnings should not be viewed as substitutes for the following financial measures calculated in accordance with GAAP: GAAP revenues, GAAP expenses and GAAP net income, respectively. Reconciliations of these measures to the most directly comparable GAAP measures are included in “— Results of Operations.”
In this discussion, we sometimes refer to sales activity for various products. These sales statistics do not correspond to revenues under GAAP, but are used as relevant measures of business activity.
Business
As announced in November 2011, MetLife reorganized its business into three broad geographic regions. As a result, in the first quarter of 2012, MICC reorganized into two segments: Retail Products and Corporate Benefit Funding. In addition, the Company reports certain of its results of operations in Corporate & Other. Management continues to evaluate the Company’s segment performance and allocated resources and may adjust such measurements in the future to better reflect segment profitability.
Our Retail Products segment includes our Annuities and Life businesses, which were previously reported in our former Retirement Products and Insurance Products segments, respectively. In addition, our Corporate Benefit Funding segment remains essentially unchanged from prior periods. Lastly, our non-medical health business, which was previously reported in our former Insurance Products segment, is now reported in Corporate & Other.
Our Retail Products segment offers a broad range of protection products and services and a variety of annuities to individuals and employees of corporations and other institutions, and is organized into two businesses: Annuities and Life. Annuities include a variety of variable and fixed annuities which provide for both asset accumulation and asset distribution needs. Life insurance products and services include variable life, universal life, term life and whole life products.
Our Corporate Benefit Funding segment includes an array of annuity and investment products, including guaranteed interest products and other stable value products, income annuities, and separate account contracts for the investment management of defined benefit and defined contribution plan assets.
Corporate & Other contains the excess capital not allocated to the segments, run-off business, the Company’s ancillary international operations and non-medical health business, interest expense related to the majority of the Company’s outstanding debt, expenses associated with certain legal proceedings and income tax audit issues. Corporate & Other also includes the elimination of intersegment amounts.
89
Also in the first quarter of 2012, the Company adopted new guidance regarding accounting for DAC. See Note 1 of the Notes to the Interim Condensed Financial Statements for further information. As a result, prior period results have been revised in connection with MetLife’s reorganization and the retrospective application of the first quarter 2012 adoption of new guidance regarding accounting for DAC.
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the Interim Condensed Consolidated Financial Statements. The most critical estimates include those used in determining:
(i) | estimated fair values of investments in the absence of quoted market values; |
(ii) | investment impairments; |
(iii) | estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation; |
(iv) | capitalization and amortization of DAC and the establishment and amortization of VOBA; |
(v) | measurement of goodwill and related impairment, if any; |
(vi) | liabilities for future policyholder benefits and the accounting for reinsurance; |
(vii) | measurement of income taxes and the valuation of deferred tax assets; and |
(viii) | liabilities for litigation and regulatory matters. |
In applying the Company’s accounting policies, we make 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 business and operations. Actual results could differ from these estimates.
The above critical accounting estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates” and Note 1 of the Notes to the Consolidated Financial Statements in the 2011 Annual Report.
Also, for a discussion of the new accounting guidance on DAC, see Note 1 of the Notes to the Interim Condensed Consolidated Financial Statements.
Capitalization of Deferred Policy Acquisition Costs
The Company incurs significant costs in connection with acquiring new and renewal insurance business. Costs that relate directly to the successful acquisition or renewal of insurance contracts are deferred as DAC. In addition to commissions and other direct costs, deferrable costs include the portion of an employee’s total compensation and benefits related to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed. The Company utilizes various techniques to estimate the portion of an employee’s time spent on qualifying acquisition activities that result in actual sales, including surveys, interviews, representative time studies and other methods. These estimates include assumptions that are reviewed and updated on a periodic basis or more frequently to reflect significant changes in processes or distribution methods.
90
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 business.
MetLife’s economic capital model aligns segment allocated equity with emerging standards and consistent risk principles. Segment net investment income is credited or charged based on the level of allocated equity; however, changes in allocated equity do not impact the Company’s consolidated net investment income, operating earnings or net income.
Results of Operations
Three Months Ended March 31, 2012 Compared with the Three Months Ended March 31, 2011
Consolidated Results
We have experienced growth and an increase in market share in several of our businesses specifically in our variable and universal life and term life businesses. Also, our pension closeout sales in the United Kingdom were strong as we continue to penetrate the market, with an increase in premiums of $55 million, before income tax, compared to the prior period. While the premiums for this business were almost entirely offset by the related change in policyholder benefits, the favorable results contributed to the growth in our investment portfolio. Sales of annuities declined 12% compared to the prior period in response to actions taken to manage sales volume in order to strike the right balance among growth, profitability and risk.
Three Months Ended March 31, |
||||||||||||||||
2012 | 2011 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
Revenues |
||||||||||||||||
Premiums |
$ | 380 | $ | 136 | $ | 244 | ||||||||||
Universal life and investment-type product policy fees |
544 | 455 | 89 | 19.6 | % | |||||||||||
Net investment income |
892 | 786 | 106 | 13.5 | % | |||||||||||
Other revenues |
123 | 130 | (7) | (5.4) | % | |||||||||||
Net investment gains (losses) |
4 | (14) | 18 | |||||||||||||
Net derivative gains (losses) |
(439) | (156) | (283) | |||||||||||||
|
|
|
|
|
|
|||||||||||
Total revenues |
1,504 | 1,337 | 167 | 12.5 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Expenses |
||||||||||||||||
Policyholder benefits and claims |
589 | 327 | 262 | 80.1 | % | |||||||||||
Interest credited to policyholder account balances |
439 | 287 | 152 | 53.0 | % | |||||||||||
Capitalization of DAC |
(277) | (282) | 5 | 1.8 | % | |||||||||||
Amortization of DAC and VOBA |
38 | 100 | (62) | (62.0) | % | |||||||||||
Interest expense on debt |
60 | 110 | (50) | (45.5) | % | |||||||||||
Other expenses |
636 | 587 | 49 | 8.3 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total expenses |
1,485 | 1,129 | 356 | 31.5 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Income (loss) before provision for income tax |
19 | 208 | (189) | (90.9) | % | |||||||||||
Provision for income tax expense (benefit) |
— | 57 | (57) | (100.0) | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Net income |
$ | 19 | $ | 151 | $ | (132) | (87.4) | % | ||||||||
|
|
|
|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
91
During the three months ended March 31, 2012, net income decreased $132 million to $19 million primarily driven by an unfavorable change in net derivative gains (losses), net of related adjustments, principally associated with DAC and VOBA amortization.
We manage our investment portfolio using disciplined Asset/Liability Management principles, focusing on cash flow and duration to support our current and future liabilities. Our intent is to match the timing and amount of liability cash outflows with invested assets that have cash inflows of comparable timing and amount, while optimizing, net of income tax, risk-adjusted net investment income and risk-adjusted total return. Our investment portfolio is heavily weighted toward fixed income investments, with over 80% of our portfolio invested in fixed maturity securities and mortgage loans. These securities and loans have varying maturities and other characteristics which cause them to be generally well suited for matching the cash flow and duration of insurance liabilities. Other invested asset classes including, but not limited to, equity securities, other limited partnership interests and real estate and real estate joint ventures, provide additional diversification and opportunity for long-term yield enhancement in addition to supporting the cash flow and duration objectives of our investment portfolio. We also use derivatives as an integral part of our management of the investment portfolio to hedge certain risks, including changes in interest rates, foreign currencies, credit spreads and equity market levels. Additional considerations for our investment portfolio include current and expected market conditions and expectations for changes within our specific mix of products and business segments. In addition, the general account investment portfolio includes, within other securities, contractholder-directed investments supporting unit-linked variable annuity type liabilities, which do not qualify as separate account assets. The returns on these contractholder-directed investments, which can vary significantly period to period, include changes in estimated fair value subsequent to purchase, inure to contractholders and are offset in earnings by a corresponding change in PABs through interest credited to policyholder account balances.
The composition of the investment portfolio of each business segment is tailored to the specific characteristics of its insurance liabilities, causing certain portfolios to be shorter in duration and others to be longer in duration. Accordingly, certain portfolios are more heavily weighted in longer duration, higher yielding fixed maturity securities, or certain sub-sectors of fixed maturity securities, than other portfolios.
Investments are purchased to support our insurance liabilities and not to generate net investment gains and losses. However, net investment gains and losses are incurred and can change significantly from period to period due to changes in external influences, including changes in market factors such as interest rates, foreign currencies, credit spreads and equity markets, counterparty specific factors such as financial performance, credit rating and collateral valuation, and internal factors such as portfolio rebalancing. Changes in these factors from period to period can significantly impact the levels of both impairments and realized gains and losses on investments sold.
We use freestanding equity, interest rate, currency and credit derivatives to provide economic hedges of certain invested assets and insurance liabilities, including embedded derivatives, within certain of our variable annuity minimum benefit guarantees. For those hedges not designated as accounting hedges, changes in market factors can lead to the recognition of fair value changes in net derivative gains (losses) without an offsetting gain or loss recognized in earnings for the item being hedged even though these are effective economic hedges. Additionally, we issue liabilities and purchase assets that contain embedded derivatives whose changes in estimated fair value are sensitive to changes in market factors and are also recognized in net derivative gains (losses).
The unfavorable change in net derivative gains (losses) of $184 million, from losses of $101 million in the first quarter of 2011 to losses of $285 million in the current period, was primarily driven by an unfavorable change in freestanding derivatives of $292 million, which was partially offset by a favorable change in embedded derivatives of $108 million primarily associated with variable annuity minimum benefit guarantees. The $292 million unfavorable change in freestanding derivatives was primarily attributable to the impact of equity market movements and decreased volatility and rising long-term interest rates. The impact of equity market movements and decreased volatility in the first quarter of 2012 compared to the prior period had a negative impact of $180 million on our equity derivatives, which was attributable to hedges of variable annuity minimum benefit
92
guarantee liabilities that are accounted for as embedded derivatives. Long-term interest rates increased more in the first quarter of 2012 than in the prior period, which had a negative impact of $145 million on our interest sensitive derivatives, $47 million of which was attributable to hedges of variable annuity minimum benefit guarantee liabilities that are accounted for as embedded derivatives.
Certain variable annuity products with minimum benefit guarantees contain embedded derivatives that are measured at estimated fair value separately from the host variable annuity contract with changes in estimated fair value recorded in net derivative gains (losses). These embedded derivatives also include an adjustment for nonperformance risk of the related liabilities carried at estimated fair value. The $108 million favorable change in embedded derivatives was primarily attributable to a favorable change in market factors on direct liabilities of $520 million, a favorable change in the adjustment for the reinsurer’s nonperformance risk of $190 million and a favorable change in other unhedged non-market risks of $27 million on direct liabilities, partially offset by an unfavorable change in ceded affiliated reinsurance assets of $496 million and an unfavorable change in the adjustment for nonperformance risk of $136 million on direct liabilities.
The favorable change in net investment gains of $12 million was primarily due to higher net gains on sales of fixed maturity securities, partially offset by increased other-than-temporary impairment losses on equity securities in the common stock sector.
There was no income tax expense for the three months ended March 31, 2012 compared with $57 million, or 27% of income (loss) before provision for income tax, for the prior period. The Company’s 2012 and 2011 effective tax rates differ from the U.S. statutory rate of 35% primarily due to the impact of certain permanent tax differences, including non-taxable investment income and tax credits for investments in low income housing, in relation to income (loss) before provision for income tax.
As more fully described in the discussion of performance measures above, we use operating earnings, which does not equate to net income, as determined in accordance with GAAP, to analyze our performance, evaluate segment performance, and allocate resources. We believe that the presentation of operating earnings, as we measure it for management purposes, enhances the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of the business. Operating earnings should not be viewed as a substitute for GAAP net income. Operating earnings increased $13 million to $234 million in the first quarter of 2012 from $221 million in the prior period.
Reconciliation of net income to operating earnings
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Net income |
$ | 19 | $ | 151 | ||||
Less: Net investment gains (losses) |
4 | (14) | ||||||
Less: Net derivative gains (losses) |
(439) | (156) | ||||||
Less: Other adjustments to net income (1) |
120 | 65 | ||||||
Less: Provision for income tax (expense) benefit |
100 | 35 | ||||||
|
|
|
|
|||||
Operating earnings |
$ | 234 | $ | 221 | ||||
|
|
|
|
(1) | See definitions of operating revenues and operating expenses for the components of such adjustments. |
93
Reconciliation of GAAP revenues to operating revenues and GAAP expenses to operating expenses
Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(In millions) | ||||||||
Total revenues |
$ | 1,504 | $ | 1,337 | ||||
Less: Net investment gains (losses) |
4 | (14) | ||||||
Less: Net derivative gains (losses) |
(439) | (156) | ||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) |
(4) | (2) | ||||||
Less: Other adjustments to revenues (1) |
216 | 102 | ||||||
|
|
|
|
|||||
Total operating revenues |
$ | 1,727 | $ | 1,407 | ||||
|
|
|
|
|||||
Total expenses |
$ | 1,485 | $ | 1,129 | ||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) |
(131) | (65) | ||||||
Less: Other adjustments to expenses (1) |
223 | 100 | ||||||
|
|
|
|
|||||
Total operating expenses |
$ | 1,393 | $ | 1,094 | ||||
|
|
|
|
(1) | See definitions of operating revenues and operating expenses for the components of such adjustments. |
Consolidated Results – Operating
Three Months Ended March 31, |
||||||||||||||||
2012 | 2011 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES |
||||||||||||||||
Premiums |
$ | 380 | $ | 136 | $ | 244 | ||||||||||
Universal life and investment-type product policy fees |
516 | 435 | 81 | 18.6 | % | |||||||||||
Net investment income |
708 | 706 | 2 | 0.3 | % | |||||||||||
Other revenues |
123 | 130 | (7) | (5.4 | )% | |||||||||||
|
|
|
|
|
|
|||||||||||
Total operating revenues |
1,727 | 1,407 | 320 | 22.7 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
OPERATING EXPENSES |
||||||||||||||||
Policyholder benefits and claims and policyholder dividends |
548 | 320 | 228 | 71.3 | % | |||||||||||
Interest credited to policyholder account balances |
285 | 290 | (5) | (1.7 | )% | |||||||||||
Capitalization of DAC |
(277) | (282) | 5 | 1.8 | % | |||||||||||
Amortization of DAC and VOBA |
179 | 162 | 17 | 10.5 | % | |||||||||||
Interest expense on debt |
17 | 17 | — | — | % | |||||||||||
Other expenses |
641 | 587 | 54 | 9.2 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total operating expenses |
1,393 | 1,094 | 299 | 27.3 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Provision for income tax expense (benefit) |
100 | 92 | 8 | 8.7 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Operating earnings |
$ | 234 | $ | 221 | $ | 13 | 5.9 | % | ||||||||
|
|
|
|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
94
The $13 million increase in operating earnings was driven by favorable mortality and growth in most of our businesses, which increased our policy fees, partially offset by increased expenses.
We experienced favorable mortality in our life, pension and structured settlement businesses, which improved operating earnings by $8 million.
Positive net cash flows, generated from the majority of our businesses, were the primary driver of increases in both invested assets and separate account assets. This growth in separate account assets in turn generated an increase in operating earnings of $53 million, primarily from higher policy fees and other revenues from our annuity business. In our variable annuity products, policy fees are calculated as a percentage of the average assets in separate accounts. In addition, invested asset growth generated higher net investment earnings of $7 million. Consistent with our increase in invested assets, the growth in insurance liabilities resulted in higher interest credited on long-duration contracts and on our PABs, which resulted in a decrease in operating earnings of $19 million. Finally, other non-variable expenses increased $37 million due to growth in our existing businesses.
Market factors, including the impact of the current low interest rate environment as well as improving equity markets, had a slight positive net impact on operating earnings. As a result of the decline in interest rates, average crediting rates on annuity fixed rate funds declined, contributing an increase of $14 million to operating earnings. The favorable equity market performance increased our average separate account balances, triggering an increase in policy fees and other revenues, most notably in our annuity business, resulting in a $5 million increase in operating earnings. Partially offsetting these increases was a $6 million decrease in investment earnings due to lower yields and an increase in certain expenses. DAC, VOBA and deferred sales inducements (“DSI”) amortization and certain insurance-related liabilities are sensitive to market fluctuations, which was the primary driver of a $12 million increase in DAC and DSI amortization.
Adoption of New Accounting Pronouncements
See Note 1 of the Notes to the Interim Condensed Consolidated Financial Statements.
Future Adoption of New Accounting Pronouncements
See Note 1 of the Notes to the Interim Condensed Consolidated Financial Statements.
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 Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), 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 15d-15(f) during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
95
The following should be read in conjunction with (i) Part I, Item 3, of MetLife Insurance Company of Connecticut’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”), filed with the U.S. Securities and Exchange Commission (“SEC”); and (ii) Note 8 of the Notes to the Interim Condensed Consolidated Financial Statements in Part I of this report.
Unclaimed Property Inquiries
More than 30 U.S. jurisdictions are auditing MetLife, Inc. and certain of its affiliates, including MetLife Insurance Company of Connecticut, for compliance with unclaimed property laws. Additionally, Metropolitan Life Insurance Company and certain of its affiliates have received subpoenas and other regulatory inquiries from certain regulators and other officials relating to claims-payment practices and compliance with unclaimed property laws. An examination of these practices by the Illinois Department of Insurance has been converted into a multi-state targeted market conduct exam. On July 5, 2011, the New York Insurance Department issued a letter requiring life insurers doing business in New York to use data available on the U.S. Social Security Administration’s Death Master File or a similar database to identify instances where death benefits under life insurance policies, annuities, and retained asset accounts are payable, to locate and pay beneficiaries under such contracts, and to report the results of the use of the data. In April 2012, the Company reached agreements with representatives of the U.S. jurisdictions that are conducting the audits referenced above and with the states most directly involved in the targeted market conduct exam referenced above to resolve the audits and the examination. The effectiveness of each agreement is conditioned upon the approval of a specified number of jurisdictions. Pursuant to the settlement to resolve the audits, the Company will, among other things, take specified action to identify liabilities under life insurance, annuity, and retained asset contracts, and, to the extent that it is unable to locate owners of amounts payable, to escheat these amounts with interest at a specified rate to the appropriate states. Pursuant to the settlements, the Company will, among other things, adopt specified procedures for identifying liabilities under life insurance, annuity, and retained asset contracts, for seeking to contact and pay beneficiaries under such liabilities, and for escheating unclaimed property to appropriate states. At least one other jurisdiction is pursuing a similar market conduct exam. It is possible that other jurisdictions may pursue similar exams or audits and that such exams or audits may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and/or further changes to the Company’s procedures. The Company is not currently able to estimate these additional possible costs.
Summary
Various litigation, claims and assessments against the Company, in addition to those discussed previously and those otherwise provided for in the Company’s consolidated financial statements, have arisen in the course of the Company’s business, including, but not limited to, in connection with its activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company’s compliance with applicable insurance and other laws and regulations.
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. In some of the matters referred to previously, 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 effect upon the Company’s 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 effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods.
96
The following should be read in conjunction with, and supplements and amends, the factors that may affect the Company’s business or operations described under “Risk Factors” in Part I, Item 1A, of the 2011 Annual Report.
If Our Business Does Not Perform Well or if Actual Experience Versus Estimates Used in Valuing and Amortizing Deferred Policy Acquisition Costs (“DAC”), Deferred Sales Inducements (“DSI”) and Value of Business Acquired (“VOBA”) Vary Significantly, We May Be Required to Accelerate the Amortization and/or Impair the DAC, DSI and VOBA Which Could Adversely Affect Our Results of Operations or Financial Condition
We incur significant costs in connection with acquiring new and renewal insurance business. Costs that are related directly to the successful acquisition of new and renewal insurance business are deferred as DAC. Bonus amounts credited to certain policyholders, either immediately upon receiving a deposit or as excess interest credits for a period of time, are referred to as DSI. The recovery of DAC and DSI is dependent upon the future profitability of the related business. The amount of future profit or margin 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, we anticipate 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 profits or margins, which generally are used to amortize such costs.
If the estimates of gross profits or margins were overstated, then the amortization of such costs would be accelerated in the period the actual experience is known and would result in a charge to income. Significant or sustained equity market declines could result in an acceleration of amortization of DAC and DSI related to variable annuity and variable universal life contracts, resulting in a charge to income. Such adjustments could have a material adverse effect on our results of operations or financial condition.
VOBA represents the excess of book value over the estimated fair value of acquired insurance, annuity, and investment-type contracts in-force at the acquisition date. The estimated fair value of the acquired liabilities is based on actuarially determined projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment returns, nonperformance risk adjustment 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 a charge to income. Also, as VOBA is amortized similarly to DAC and DSI, an acceleration of the amortization of VOBA would occur if the estimates of gross profits or margins were overstated. Accordingly, the amortization of such costs would be accelerated in the period in which the actual experience is known and would result in a charge to net income. Significant or sustained equity market declines could result in an acceleration of amortization of the VOBA related to variable annuity and variable universal life contracts, resulting in a charge to income. Such adjustments could have a material adverse effect on our results of operations or financial condition. See “Risk Factors — Changes in Accounting Standards Issued by the Financial Accounting Standards Board or Other Standard-Setting Bodies May Adversely Affect Our Financial Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Deferred Policy Acquisition Costs and Value of Business Acquired” in the 2011 Annual Report, and Note 1 of the Notes to the Interim Condensed Consolidated Financial Statements for further consideration of DAC and VOBA.
97
(Note Regarding Reliance on Statements in Our Contracts: In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about MetLife Insurance Company of Connecticut and its subsidiaries, or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and (i) should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; (iii) may apply standards of materiality in a way that is different from what may be viewed as material to investors; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about MetLife Insurance Company of Connecticut and its subsidiaries may be found elsewhere in this Quarterly Report on Form 10-Q and MetLife Insurance Company of Connecticut’s other public filings, which are available without charge through the SEC’s website at www.sec.gov.)
Exhibit No. |
Description | |
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. | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
98
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
METLIFE INSURANCE COMPANY OF CONNECTICUT | ||||
By: | /s/ | Peter M. Carlson | ||
Name: | Peter M. Carlson | |||
Title: | Executive Vice President, Finance | |||
Operations and Chief Accounting Officer | ||||
(Authorized Signatory and Principal Accounting Officer) |
Date: May 10, 2012
99
(Note Regarding Reliance on Statements in Our Contracts: In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about MetLife Insurance Company of Connecticut and its subsidiaries, or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and (i) should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; (iii) may apply standards of materiality in a way that is different from what may be viewed as material to investors; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about MetLife Insurance Company of Connecticut and its subsidiaries may be found elsewhere in this Quarterly Report on Form 10-Q and MetLife Insurance Company of Connecticut’s other public filings, which are available without charge through the SEC’s website at www.sec.gov.)
Exhibit No. |
Description | |
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. | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
E-1