-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hyy5dYTLjVfFS6oPp1+SYq1Uahag4CNNL8Bqtxq08gO0kx1tVJYjTuITWpEah+ip pxyToxXfn/cEpbAnw60QIQ== 0000950130-99-005949.txt : 19991025 0000950130-99-005949.hdr.sgml : 19991025 ACCESSION NUMBER: 0000950130-99-005949 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19991022 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METROPOLITAN LIFE SEPARATE ACCOUNT UL CENTRAL INDEX KEY: 0000858997 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 333-40161 FILM NUMBER: 99732227 BUSINESS ADDRESS: STREET 1: 1 MADISON AVE STREET 2: METROPOLITAN LIFE INSURANCE CO CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2125788717 MAIL ADDRESS: STREET 1: 1 MADISON AVENUE STREET 2: LAW DEPARTMENT AREA 7 G CITY: NEW YORK STATE: NY ZIP: 10010 497 1 METROPOLITAN LIFE SEP. ACCOUNT UL/EQUITY OPTIONS MetLife's November 1, 1999 Equity Options - -------------------------------------------------------------------------------- Equity Additions(TM) Equity Enricher(SM) Equity Options Prospectuses Prospectuses For . Variable Additional Insurance Dividend Option and Variable Additional Benefits Rider Issued By Metropolitan Life Insurance Company . Metropolitan Series Fund, Inc. MetLife(R) E Q U I T Y O P T I O N S PROSPECTUS FOR The Equity Options Issued by Metropolitan Life Insurance Company November 1, 1999 The Equity Options are the Equity Additions and the Equity Enricher. Each option is designed to supplement benefits available under your MetLife fixed benefit life insurance policy. Equity Options are designed to provide: .Life insurance coverage .A death benefit .A conditional guaranteed minimum death benefit . A funding option for allocating premium payments to the available investment divisions of Metropolitan Life Separate Account UL. A word about risk: This Prospectus discusses the risks associated with purchasing the Equity Options. The Metropolitan Series Fund, Inc. (the "Fund") prospectus discusses the risks associated with investment in the Fund. The Fund prospectus is being provided to you in addition to this Prospectus, because each available investment division invests in a corresponding portfolio of the Fund. This Prospectus is not valid unless you also receive or have received a current Fund prospectus. The purchase of the Equity Options involves risk. You could lose money, as well as the benefits provided under the Equity Options. How to learn more: Before selecting an Equity Option, read the information in this Prospectus and in the prospectus for the Fund. Keep the prospectuses for future reference. ----------- Neither the Securities and Exchange Commission ("SEC") nor any state securities authority has approved or disapproved these securities, nor have they determined if this Prospectus is accurate or complete. This prospectus does not constitute an offering in any jurisdiction where such offering may not lawfully be made. Any representation otherwise is a criminal offense. We do not authorize any representations about this offering other than as contained in this Prospectus or its supplements or in our authorized supplemental sales material. Metropolitan Life Insurance Company 1 Madison Avenue, New York, New York 10010 (800) 638-5000
Page In this Subject Prospectus ------- ---------- Summary......................................... 2 MetLife......................................... 5 Separate Account UL............................. 6 Metropolitan Series Fund, Inc. ................. 7 The Base Policy and Benefit Options............. 7 Issuing Equity Options.......................... 8 Equity Options Benefits......................... 9 Equity Options Rights........................... 12 Equity Options Premiums......................... 14 Equity Options Charges and Deductions........... 17 Net Single Premium.............................. 18 Federal Tax Matters............................. 18 Showing Performance............................. 20 Rights We Reserve............................... 20 Other Policy Provisions......................... 21 Sales and Administration of the Policies........ 22 Voting Rights................................... 23 Reports......................................... 24 Illustration of Equity Options Benefits......... 24 Getting More Information........................ 24 Legal, Accounting and Actuarial Matters......... 25 Management...................................... 26 Financial Statements............................ 29
Summary This summary gives an overview of the Equity Options and is qualified by the more detailed information in this Prospectus, the Equity Options riders, and the relevant fixed benefit life insurance policy. Equity Options MetLife issues the Equity Options as optional benefits to a fixed benefit life insurance policy (the "base policy"). We also offer other optional benefits as additions to the base policy. For ease of reference, we refer to the base policy and all of the optional benefits that are added to the base policy as the "Policy." The Equity Options allow you to experience the potential growth of the equity markets while maintaining your base policy. There are two different Equity Options, and you may elect to include either or both as optional benefits to your base policy: . Equity Additions (also known as Variable Additional Insurance) . Equity Enricher (also known as Variable Additional Benefits). Equity Options Premiums The Equity Options allow some flexibility in making premium payments. . Equity Additions allows you to make premium payments by allocating dividends or other payments from the base policy and from certain benefits options (known as credit options) to the base policy. . Equity Enricher allows you to make planned and unplanned premium payments. 2 Equity Options Cash Value Your cash value in an Equity Option reflects your Equity Option's premium payments, the charges we deduct from the cash value, any investment experience you have in our Separate Account, as well as your transfer, loan and withdrawal activity. MetLife doesn't guarantee the investment performance of any investment division and you should consider your risk tolerance before purchasing an Equity Option. Transfers You may transfer cash value from each Equity Option to pay base policy premiums, charges or loan interest. You may also transfer cash value to or from certain other benefit options to an Equity Option, subject to certain limits. Finally, you may make transfers between the two investment options available under the Equity Enricher. Equity Options Death Benefit Generally, the death benefit is equal to the Equity Option cash value divided by an applicable "net single premium amount" that is specified in your rider and multiplied by $1,000. The Conditional Guaranteed Minimum Death Benefit Generally, you will receive a conditional guaranteed minimum death benefit. In certain situations this guaranteed minimum death benefit can be reduced or eliminated entirely. Surrenders, Partial Withdrawals and Loans Within certain limits, you may take partial withdrawals from and loans against amounts in the Equity Options. You may also surrender your Equity Option for its cash value, less any applicable charges. Tax Treatment In most cases, you will not pay income taxes on withdrawals or surrenders or at the Final Date of the Policy until your cumulative withdrawn amounts exceed the cumulative premiums you have paid under your Policy. If your Policy is a modified endowment contract, you will pay income taxes on loans and withdrawals to the extent of any gains (which is generally the excess of cash value over the premiums paid). In this case, an additional 10% tax may also apply. If the Policy is part of a collateral assignment equity split dollar arrangement with an employer, increases in cash value that are not due to premium payments may be taxed annually. The death benefit may be subject to federal and state estate taxes, but your beneficiary will generally not be taxed on the death benefit. As with any taxation matter, you should consult with and rely on the advice of your own tax advisor. 3 Table of Charges and Expenses This table shows the charges and expenses that you pay under the Equity Options. See "Charges and Deductions," below for more information on the Equity Options charges:
Type of Charge or Expense Amount of Charge or Expense - -------------------------------------------------------------------------------- Monthly Deduction from your Equity Option's cash value Cost of insurance charges: Amount varies depending on the specifics of your Policy./1/ Mortality and expense risk and The charge is equivalent to an effective administrative services charge: annual rate of .75% of the cash value in the Separate Account on each monthly anniversary for riders to base policies that have a face amount less than $250,000, or .50% for riders to base policies that have a face amount of $250,000 or greater. - -------------------------------------------------------------------------------- Equity Enricher only: Charges we deduct from each premium payment Sales charge: 2% of each premium payment Charge for average expected state taxes attributable to premiums: 2% of each premium payment Charge for expected federal taxes attributable to premiums: 1% of each premium payment
- -------- /1/See "Cost of Insurance" under "Charges and Deductions" for a more detailed discussion of factors affecting this charge. If you would like, we will provide you with an illustration of the impact of these and other charges under the Equity Options based on various assumptions. Fund Investment Management Fees and Direct Expenses MetLife receives an investment management fee from the Fund and the Fund incurs direct expenses (see the Fund Prospectus and Statement of Additional Information referred to therein). You bear indirectly your proportionate share of the fees and expenses of the Portfolios of the Fund that correspond to the Separate Account investment division you are using. The following sets forth the applicable Portfolio's fees and expenses for the year ending 12/31/98:
Total 1998 Management Other Annual Portfolio Fee Expenses Expenses - ------------------------------------------------------------------------------------------- MetLife Stock Index .25% .05% .30% - ------------------------------------------------------------------------------------------- Janus Mid Cap .72% .09% .81%
Other Please refer to "Federal Tax Matters--Our Taxation" for a description of certain charges that we currently do not impose but may impose in the future. 4 You can contact us at our Designated Office. MetLife We are a mutual life insurance company. We were formed in 1868 in New York and we currently conduct business in all 50 states, the District of Columbia, Puerto Rico and Canada. We are one of the largest financial services companies in the world with many of the largest United States corporations for clients. As of December 31, 1998, we had total life insurance in force of approximately $1.7 trillion and total assets under management of approximately $359 billion. We have listed our directors and certain key officers under "Management", and our financial information under "Financial Statements," below. On September 28, 1999, MetLife adopted a plan of reorganization to convert from a mutual life insurance company to a stock life insurance company (the "plan"). Upon conversion, MetLife will become a wholly owned subsidiary of a new publicly owned holding company, MetLife, Inc. The plan is subject to approval by the New York State Superintendent of Insurance after a public hearing. In addition, the plan cannot go into effect unless it is approved by a vote of eligible MetLife policyholders and contract holders whose policies or contracts were in force on September 28, 1999. Subject to these approvals and certain other conditions, we expect the plan to become effective during the first quarter of the year 2000. Holders of policies or contracts who are entitled to vote on the plan will be entitled to receive certain compensation pursuant to the terms of the plan. Our conversion to a stock company will have no effect on your rights or our obligations under your Equity Option, all of which will remain exactly as stated in your Equity Option. Upon conversion, however, you will no longer have rights by virtue of the Equity Options as members of MetLife. (These rights consist primarily of the right to vote on matters submitted to policyholders for a vote, including the election of directors, and the right to receive a portion of any remaining surplus if the company is liquidated.) In addition, because your Equity Option was issued after September 28, 1999, the New York Insurance Law provides that you will not (by virtue of that Equity Option) be entitled to vote on the plan or to receive compensation pursuant to the plan. Because your Equity Option was issued after September 28, 1999, you will be receiving a Notice of Pendency of the plan. Upon receipt of the Notice, you will have the right under New York Insurance Law to rescind your Equity Option and obtain a refund of any premiums paid as stated in the Notice. Giving us requests, instructions or notifications Contacting us: You can communicate all of your requests, instructions and notifications to us by contacting us in writing at our Designated Office. We may require that certain requests, instructions and notifications be made on forms that we provide. These include: changing your beneficiary; taking a Policy loan; taking a partial withdrawal; surrendering your Policy or an Equity Option; making transfer requests or changing the benefit option to which you want to allocate your policy credits. Our Designated Office is our home office at 1 Madison Avenue, New York, NY 10010. We may name additional or alternate Designated Offices. If we do, we will notify you in writing. 5 Each available investment division invests in a corresponding Portfolio of the Fund. When your requests, instructions and notifications become effective: . Generally, requests, premium payments and other instructions and notifications are effective on the Date of Receipt. In those cases, the effective time is at the end of a Valuation Period during which we receive them at our Designated Office. (Some exceptions to this general rule are noted below and elsewhere in this Prospectus.) . A Valuation Period is the period between two successive Valuation Dates. It begins at the close of regular trading on the New York Stock Exchange on a Valuation Date and ends at the close of regular trading on the New York Stock Exchange on the next succeeding Valuation Date. The close of regular trading is 4:00 p.m., Eastern Time on most days. . A Valuation Date is: . Each day on which the New York Stock Exchange is open for trading. . Other days, if we, as the Fund's investment manager, think that there has been a sufficient degree of trading in the Fund's portfolio securities that the current net asset value of its redeemable securities might be materially affected. . The initial effective time of your Equity Options' investment in the Separate Account is the Investment Start Date. The Investment Start Date is: . For Equity Additions, the credit payment date of the first base policy credit that is allocated to the option or, if sooner, the date of the first transfer of cash value to Equity Additions from another benefit option. . For the Equity Enricher, the end of the first Valuation Date after the latest of: . The date we receive the first premium payment allocated to the Equity Enricher; . The 20th day following the Date of Policy indicated in the base policy; and . The 20th day following the date we receive the first full premium due for the base policy. Prior to the Investment Start Date, we will place any premium payments you make to the Equity Enricher in our general account, where it will earn a fixed rate of interest, until the Investment Start Date. Separate Account UL We established the Separate Account under New York law on December 13, 1988. The Separate Account receives premium payments from the Equity Options described in this Prospectus and other variable life insurance policies that we issue. We have registered the Separate Account as a unit investment trust under the Investment Company Act of 1940 (the "1940 Act"). The assets in the Separate Account legally belong to us; but they are held solely for the benefit of investors in the Separate Account and no one else, including our other creditors. We will keep an amount in the Separate Account that at least equals the value of our commitments to policy owners that are based on their investments in the Separate Account. We can also 6 You should carefully review the investment objective, strategies and risks of each available Portfolio, which are contained in the Fund prospectus you have also received. The Policy includes the base policy and its benefit options. keep charges that we deduct and other excess amounts in the Separate Account or we can transfer the excess out of the Separate Account. The Separate Account has subdivisions, called "investment divisions." Each investment division invests its assets exclusively in shares of a corresponding Portfolio of the Fund. Currently, only the MetLife Stock Index investment division is available for use with the Equity Additions. Only the MetLife Stock Index and Janus Mid Cap investment divisions are available for use with the Equity Enricher. Amounts you allocate to an investment division receive the investment experience of the investment division, and you bear this investment risk. The Metropolitan Series Fund, Inc. The Fund is a "series" type of mutual fund, which is registered as an open-end management investment company under the 1940 Act. The Fund is divided into Portfolios, each of which represents a different class of stock in which a corresponding investment division of the Separate Account invests. You should read the Fund prospectus, which you have also received. It contains information about the Fund and the MetLife Stock Index Portfolio, including the investment objective, strategies, risks and investment adviser that is associated with the Portfolio. It also contains information on our different separate accounts and our affiliates that invest in the Fund and the risks related thereto. As of the end of each Valuation Period, we purchase and redeem Fund shares for the Separate Account at their net asset value without any sales or redemption charges. These purchases and redemptions reflect the amount of any of the following transactions that take effect at the end of the Valuation Period: . The allocation of premiums (less applicable charges) to the Separate Account. . Dividends and distributions on Fund shares that are reinvested as of the dates paid (which reduces the value of each share of the Fund and increases the number of Fund shares outstanding, but has no affect on the cash value in the Separate Account). . Policy loans and loan repayments allocated to the Separate Account. . Transfers to or from the Separate Account from other Policy parts. . Withdrawals or surrenders taken from the Separate Account. . Transfer between the Equity Enricher's available investment options. The Base Policy and its Benefit Options The base policy and all of its benefit options form the entire Policy. In this Prospectus, we refer to each portion of the Policy as a Policy part. The base policy provides a fixed amount of life insurance. Benefit options may be added to the base policy. In this Prospectus, we refer to some of the benefit options as "credit options." Credit options are methods under which dividends or other credits that become payable under your Policy, as well as cash value that you transfer from any other credit options that you have in effect, are applied to accumulate additional cash value and purchase additional death benefits. The amount of dividends or other credits on your Policy changes annually, is not guaranteed, and is based on a variety of factors. These factors may include 7 the base policy face amount, the death benefit and credit class of the base policy, as well as the amount of our earnings. Any credits due from any Policy part are paid on the last day of a base policy year, as set forth in the benefit option. Credit options include: . Equity Additions: a benefit option described in this Prospectus. . Fixed Additional Insurance: a benefit option that is similar to Equity Additions, except that cash value accumulates at fixed interest rates that we declare. . Dividends with Interest ("DWI"): a benefit option where cash value accumulates with currently taxable interest that we declare periodically. Other benefit options which are not credit options include: . Equity Enricher: a benefit option described in this Prospectus. . Enricher: a fixed paid-up additional insurance benefit option that is similar to Equity Enricher, except that it has a guaranteed cash value which is eligible for a dividend. . Flexible Additional Insurance Rider ("FLAIR"): a benefit rider that provides additional fixed benefit insurance and has a fixed benefit term insurance element. . Disability Waiver of Benefits Options: benefit options that waive certain charges or premium requirements in the event of disability. (No such waiver of premium benefit applies to the Equity Enricher). . Acceleration of Death Benefits Option: a benefit option that can provide a discounted present value of the death benefit, if the insured becomes terminally ill, prior to the insured's death. Subject to certain limits and conditions, we guarantee the cash value in the base policy as well as all of the benefit options, other than the Equity Options. We make this guarantee because these Policy parts provide fixed benefits. Since these fixed benefits are not registered under the federal securities laws, this Prospectus contains only limited information about them. The Policy gives you more information on the operation of these fixed benefits. Issuing Equity Options If you want an Equity Option, then you must complete an application. We will issue an Equity Option to you only if you are also the owner of the base policy. Your completed application must be received by the Designated Office. The Equity Options are available to base policies meeting the minimum face amount and eligibility requirements that we establish. You may not add the Equity Additions while any term insurance is in effect under FLAIR. Once FLAIR becomes fully funded, or you discontinue the term insurance provided by FLAIR, you may add the Equity Additions. We reserve the right to reject an application for any reason permitted by law, and our acceptance of an application is subject to our underwriting rules. The insured will be the same individual as the insured in the base policy. An "insured" is the person upon whose life we issue the Policy. You do not have to be the insured. For the purpose of computing the insured's age under the Policy, we start with the insured's age on the Date of Policy, which is set forth in the base policy. Age under the Policy at any other time is then computed using that issue age and adding the number of full base policy years completed. 8 We will issue an Equity Option to you as owner. You will have all the rights under the option. To elect the Equity Enricher you must complete the Equity Enricher application. We will not require evidence of insurability other than that required in connection with the issuance of the base policy, unless: . The amount of premiums you actually pay for the Equity Enricher during the first year is greater than the cumulative voluntary planned periodic premium payments indicated in the application, or you exceed certain other premium limitations described below after the first year; or . you add the Equity Enricher after we issue the base policy. To elect the Equity Additions, you may complete the Equity Additions application either at the same time as the application for the base policy or after the base policy has been issued. If you decide to add Equity Additions after you own the base policy, it may reduce the amount of premiums that you could pay to your Policy before it would become a modified endowment contract. If you contact us, we will tell you what these premium limits are. We will not require additional evidence of insurability for the Equity Additions, unless you desire to make a payment that is derived from another credit option that does not itself have a death benefit. Insurance coverage under an Equity Option commences on its Investment Start Date, assuming coverage under the base policy is then in effect. Equity Options Benefits Insurance Proceeds We will pay your beneficiary any insurance proceeds as of the end of the Valuation Period that includes the insured's date of death. We will pay this amount after we receive documents that we request as due proof of the insured's death. The beneficiary can receive the death benefit in a single sum or under an income plan described below. You may make this choice during the insured's lifetime. If no selection is made we will place the amount in an account to which we will credit interest, and the beneficiary will have immediate access to all or part of that amount. The beneficiary has one year from the date the insurance proceeds are paid to change the selection from a single sum payment to an income plan, as long as we have made no payments from the interest- bearing account. If the terms of the income plan permit the beneficiary to withdraw the entire amount from the plan, the beneficiary can also name contingent beneficiaries. The insurance proceeds equal the Equity Option's death benefit. Equity Options Death Benefits The Equity Option's death benefit is: . the cash value (after we deduct the Mortality and Expense Risk and Administrative Services Charge and the Cost of Insurance Charge, pro rated for the appropriate period) at the end of the Valuation Period in which the insured dies; divided by . the net single premium for that day (see "Net Single Premium" below); multiplied by . $1,000. Any increase or decrease in the cash value of an Equity Option also will increase or decrease the death benefit that otherwise would apply. In such cases, the death benefit will change by a larger amount than does the cash value. 9 Equity Options offers a conditional guaranteed minimum death benefit. Equity Options are designed to accumulate cash value. Any such increases in death benefit, however, will be partially or wholly offset (and any decreases will be accentuated) by the fact that the net single premium increases the longer your Policy is outstanding. Therefore, in order for your Equity Option death benefit to increase or remain constant, your Equity Option cash value must increase enough to compensate for the effect of the increases in net single premium. If your Equity Option cash value declines to zero (due to adverse investment results, the charges we deduct, and/or insufficient premium payments), your Equity Option death benefit also will be zero. Alternate Death Benefit In no event will the Policy death benefit be lower than the minimum amount required to maintain the Policy as life insurance under the federal income tax laws (which calculation shall exclude coverage provided under the DWI benefit option). Conditional Guaranteed Minimum Death Benefit We provide a conditional guaranteed minimum death benefit that will be in effect during the first 7 years of your base policy or another 7 year period beginning from any date your policy is "materially modified" (within the meaning of the tax law test discussed under "Federal Tax Matters-modified endowment contract status," below). During any such 7 year period, the conditional guaranteed minimum death benefit generally will equal the Equity Option's death benefit at the beginning of each such 7 year period. The guaranteed minimum death benefit ends: . if the Policy becomes a Modified Endowment Contract; or . for the Equity Additions, if you change your credit option to a different credit option for the next credit payment date. The conditional guaranteed minimum death benefit is reduced for any: . loan; . withdrawal; or . cash value transfer from the Equity Option. You should consult with your MetLife account representative before taking any action listed above to find out whether the action will affect the conditional guaranteed minimum death benefit. If your conditional guaranteed minimum death benefit is reduced or ends, your Policy may become a modified endowment contract. Equity Options Cash Values Your Equity Option's cash value equals the Separate Account cash value. The Separate Account cash value is allocated to each applicable investment division. For purposes of taking charges, loans and making transfers or withdrawals, we divide your cash value into "components". Each component is the portion of the Equity Option cash value that is attributable to payments made from its corresponding Policy part. An Equity Option's cash value is calculated as follows: . On the Investment Start Date, we will allocate your cash value to each applicable investment division. 10 Generally, the Policy's insurance proceeds, amounts payable at the Final Date or amounts paid upon surrender of your Policy can be paid under an income plan instead of in a lump sum. . Thereafter, at the end of each Valuation Period the cash value in the investment division will equal: . The cash value in the investment division at the beginning of the Valuation Period; plus . All premiums (less applicable charges) and cash value transfers into the investment division during the Valuation Period; minus . All partial cash withdrawals, loan amounts and cash value transfers out of the investment division during the Valuation Period; minus . The portion of any charges and deductions allocated to the cash value in the investment division during the Valuation Period; plus . The net investment return for the Valuation Period on the amount of cash value in the investment division at the beginning of the Valuation Period. The net investment return currently equals the rate of increase or decrease in the net asset value per share of the underlying Fund portfolio over the Valuation Period, adjusted upward to take appropriate account of any dividends and other distributions paid by the portfolio during the period. The net investment return could in the future be reduced by a charge for taxes that we have the right to impose. If your Equity Option has no cash value, we will not provide any insurance coverage under it, nor will we take a monthly deduction, until the Equity Option does have cash value. Benefit at Final Date The Final Date is the Policy anniversary on which the insured is Age 100. We will allow you to extend that date, however, where permitted by state law. If the insured is living on the Final Date, we will pay you the cash value of the Policy, reduced by any applicable charges and outstanding loans (plus accrued interest). You can receive the cash value in a single sum, in an account that earns interest, or under an available income plan. Income Plans Before you purchase an income plan you should consider: . The tax consequences associated with the Policy proceeds, which can vary considerably, depending on whether a plan is chosen. You or your beneficiary should consult with a qualified tax adviser about tax consequences. . That your Policy will terminate at the time you purchase an income plan and you will receive a new contract, which describes the terms of the income plan. You should carefully review the terms of the new contract, because it contains important information about the terms and conditions of the income plan. . That these plans do not have a variable investment return. Generally, we currently make the following income plans available: . Interest Income . Installment Income for a Stated Period - -------------------------------------------------------------------- . Installment Income for a . Single Life Income--Guaranteed Stated Amount Payment Period - -------------------------------------------------------------------- . Joint and Survivor Life Income . Single Life Income--Guaranteed Return
11 You may transfer cash value among the eligible portions of your Policy at any time. You can borrow from us and use your Policy as security for the loan. Equity Options Rights Cash Value Transfers . For the Equity Additions, transfers can only be made among it and the other credit options that are available to you at that time. . For the Equity Enricher, transfers can only be made between the available investment divisions and/or between the Equity Enricher and the Enricher. You may only transfer cash value between a particular component and that component's corresponding Policy Part. This limitation on transfers does not currently affect the Equity Enricher, because cash value transfers can currently only be made between it and the Enricher. We will adjust any credit that would be due under a Policy part to reflect the timing and effect of any transfer. Any transfer will reduce the conditional guaranteed minimum death benefit by the same proportion as it reduces the Equity Options cash value. There is no charge for cash value transfers. If you would like to make a transfer, you must indicate which component and/or investment division, if applicable, and which Policy part are involved in the transfer. Except for transfers to the dividends with interest option, transfers among the investment divisions and transfers among the Equity Options and other Policy parts are not currently taxable transactions. . Automated transfer: We may in the future allow you to make automatic transfers of Equity Option cash values to pay the base policy premiums. If we do, we will set forth the terms and conditions in the forms we provide to you to establish the automatic transfers. . Transfers by telephone: We may, if permitted by state law, allow you to make transfer requests by phone. We may also allow you to authorize your sales representative to make such requests. The following procedures apply: . We must have received your authorization in writing satisfactory to us, to act on instructions from any person that claims to be you or your sales representative, as applicable, as long as that person follows our procedures. . We will institute reasonable procedures to confirm that instructions we receive are genuine. Our procedures will include receiving from the caller your personalized data. . All telephone calls will be recorded. . You will receive a written confirmation of any transaction. . Neither the Separate Account nor we will be liable for any loss, expense or cost arising out of a telephone request if we reasonably believed the request to be genuine. . You should contact our Designated Office with any questions regarding the procedures. Loan Privileges You may obtain a loan from us whenever your Policy has a loan value. The loan value equals the Policy cash value less the anticipated loan interest for the remainder of that base policy year. We will take the loan from available cash value in accordance with our administrative procedures that are in effect at the time you take the loan. 12 As of the Date of Receipt, for any loan request that affects an Equity Option, we will: . Remove an amount equal to the loan from your Equity Option . We will place an equal amount in the Fixed Additional Insurance option (if the loan is from Equity Additions) or in the Enricher (if the loan is from the Equity Enricher), where it will receive interest in accordance with the option's terms. . Charge you interest, which will accrue daily. We will tell you the initial interest rate that applies to your loan and mail you advance notices of any increases applicable to existing loans. Your interest payments are due at the end of each Policy year. If you don't pay the interest, we will treat it as a new Policy loan, which will be taken from the components of the Equity Option in the same manner that the original loan amounts were taken. If one component does not have sufficient cash value, we will take the excess from the remaining components in accordance with our administrative procedures that are in effect at the time you take the loan. The interest rate charged for a base policy year will never be more than the maximum allowed by law and will generally be the greater of: . the published monthly average for the calendar month ending two months before the start of such year; or . the rate used to calculate the guaranteed cash value of the base policy and its riders for the base policy year plus 1%. The published monthly average means (a) Moody's Corporate Bond Yield Average Monthly Average Corporates, as published by Moody's Investors Service, Inc., or any successor service; or (b) If the Moody's average is not published, a substantially similar average established by regulation issued by the insurance supervisory official of the state in which the base policy is delivered. Repaying your loans (plus accrued interest) is done by sending in payments of at least $50. We will allocate your repayment to the fixed additional insurance benefit rider to which we had transferred the Equity Options cash value that you used as security for your loan. You may then transfer such repaid amount to your Equity Option at any time. Before taking a Policy loan, you should consider the following: . Interest payments on loans are generally not deductible for tax purposes. . Under certain situations, Policy loans could be considered taxable distributions. . If you surrender your Policy or if we terminate your Policy, or at the Final Date, any outstanding loan amounts (plus accrued interest) will be taxed as a distribution. (See "Federal Tax Matters--The Policy--Loans" below.) . A Policy loan increases the chances of our terminating your Policy due to insufficient cash value. . An Equity Option's conditional guaranteed minimum death benefit will be reduced by the same proportion as the loan reduces the Equity Option's cash value. . Your Policy's death benefit will be reduced by any unpaid loan (plus accrued interest). 13 You can surrender your Equity Option for its cash value. Surrender and Withdrawal Privileges If you surrender an Equity Option, you can choose to receive the option's cash value or have the proceeds transferred to any benefit option that is permitted to receive premiums at that time. In the event of any transfer, any credit that might be payable on amounts in such option will be adjusted to reflect the timing of receipt of such transfer. We will deem your request for surrender of the base policy also to be a request for surrender of the Equity Option. You may receive the surrender proceeds in a single sum or under an income plan. If you would like to make a partial withdrawal, you may direct from which component and/or investment division, if applicable, the amount will be taken, within the limits of the component's cash value. If you do not so direct, we will withdraw cash value in accordance with our administrative procedures that are in effect at the time of the withdrawal. If you request a partial withdrawal of an amount that exceeds the cash value in the chosen component, or investment division, if applicable, we will tell you and you may then ask for a smaller withdrawal, or a different allocation among the components or investment divisions, or surrender the Equity Option. Before surrendering your Equity Option or requesting a partial withdrawal you should consider the following: . Amounts received may be taxable as income and, if your Policy is a modified endowment contract, subject to certain tax penalties. . Your Policy could become a modified endowment contract. . For partial withdrawals, your death benefit will decrease. . In some cases you may be better off taking a Policy loan, rather than a withdrawal. . The conditional guaranteed minimum death benefit will be reduced by the same proportion as the withdrawal reduces the Equity Option's cash value. Equity Options Premiums The payments into the Equity Options won't guarantee that your Equity Option will have a death benefit. Rather, this depends on the Equity Option's cash value and the conditional guaranteed minimum death benefit. Paying Premiums You can make premium payments, subject to certain limitations discussed below, through: . For the Equity Additions, dividends or other credits on the Policy provided that you direct us in writing at least sixty days prior to the credit payment date (unless Equity Additions is the credit option you currently are using). If you had previously chosen Equity Additions to receive the dividend or other credit, but want to change to a different credit option, you must elect the different credit option at least sixty days prior to the credit payment date. Only one election may be made for any credit payment date and will apply to all credits payable under the Policy. 14 . For the Equity Enricher: . through a voluntary planned periodic premium schedule. You choose the schedule on your Equity Enricher application. The schedule sets forth the amount of premiums, fixed payment intervals, and the period of time that you intend to pay premiums. The schedule can be: (a) annual; (b) semi- annual; (c) periodic automatic pre-authorized transfers from your checking account ("check-o-matic"); (d) systematic through payment plans that your employer makes available; or (e) through another method to which we agree. You do not have to pay premiums in accordance with your voluntary planned period premium schedule. . Subject to the below limits, you can make unscheduled premium payments at any time. Maximum and Minimum Premium Payments . Total premium payments under all benefit options (excluding the Equity Additions, DWI and disability waiver of benefits options) may not exceed $2.5 million in the first base policy year and $500,000 in each year thereafter. . You may not pay premiums that exceed tax law premium limitations for your Policy to qualify as life insurance. We will return any amounts that exceed these limits, except that we will keep any amounts that are required to keep the Policy from terminating. We will let you make premium payments that would turn your Policy into a modified endowment contract, but we will tell you of this status in your annual statement, and if possible we will tell you how to reverse the status. . The following limitations apply to the Equity Enricher. When applying the limits, we aggregate payments to the Equity Enricher with payments to the Enricher: I. You may not make any premium payments: A. While we are considering your application for benefits on the base policy under a disability waiver of benefits option or an acceleration of death benefits option. B. If we are paying benefits under the above options or if all benefits due under one of those options have been paid. C. If you have made no payments to the Equity Enricher during the first year after its issuance or for any two consecutive base policy years (unless, during any part of such period, your right to make payments was terminated for reasons described in A, or, unless you were taking withdrawals from the Equity Enricher to pay for a child's education and you provide us with proof of such payment that we find satisfactory). D. After the later of the base policy anniversary on which the insured is 65, or the tenth base policy anniversary. In no event will payments be accepted after the base policy anniversary on which the insured is age 86. In any of these cases, you may elect to receive the cash value, transfer the cash value to the Enricher, or leave the cash value in the Equity Enricher. If you leave the cash value in the Equity Enricher, it will remain subject to applicable fees and charges. If investment performance is not sufficient to offset the amount of these expenses, the death benefit may decline or terminate. 15 II. Your voluntary planned periodic payments must be at least: A. $250 annually ($100 for policies that are part of our Tower or Executive Series or where the insured was under 18 when the base policy was issued). B. $125 semi-annually ($50 for policies that are part of our Tower or Executive Series or where the insured was under 18 when the base policy was issued). C. $25 for all monthly methods of payment ($10 for policies that are part of our Tower or Executive Series or where the insured was under 18 when the base policy was issued). D. $250 ($100 for the Tower or Executive Series or where the insured was under age 18 when the base policy was issued) for each unscheduled premium payment. III. During the first base policy year, we reserve the right to reject any amount that exceeds the cumulative amount of your first base policy year's voluntary planned periodic premiums. IV. During the first base policy year, the maximum annual payment we permit is 15 times the nonsmoker standard annual premium (minus the base policy fee) set forth in your base policy. V. After the first base policy year, the maximum payment we permit is the greater of A. 3 times the base policy's nonsmoker standard annual premium (minus the base policy fee) set forth in your base policy; or B. $5,000 VI. We reserve the right to require evidence of insurability of premium payments that exceed both $25,000 and 2 times the greater of the total payments made in either of the prior two Policy years. Equity Options Termination and Reinstatement Termination We will terminate Equity Options if we terminate the base policy or if you reduce your base policy face amount of insurance below $50,000. We will terminate your base policy if we do not receive sufficient premium payments (or sufficient loan repayments so that the loan portion does not exceed the cash value of the Policy) by the end of a 31 day grace period. If the insured dies during the grace period, the insurance proceeds will still be payable, but we will deduct any due and unpaid base policy premiums and any Policy loan and loan interest from the proceeds. At the end of the grace period, if you have elected to do so, and if there is sufficient cash value in your Equity Option to do so, we will pay your premium from the Equity Option cash value through an automatic loan feature. If the automatic loan feature is not used to pay the base policy premium and the Policy is terminated, we will transfer your Equity Additions cash value into the fixed additional insurance option and your Equity Enricher cash value into the Enricher in accordance with your Policy's provisions and our administrative practices. 16 Carefully review the "Table of Charges and Expenses" in the "Summary" which sets forth the charges that you pay under the Equity Options. Reinstatement We will reinstate the Equity Option if we reinstate your base policy. The reinstated Equity Option will have no cash value until an Equity Option premium payment is made. We will reinstate your base policy subject to certain terms and conditions that the base policy provides. We must receive your reinstatement request within 3 years (or within a longer period if required by state law) after the end of the base policy's grace period and before its Final Date. Equity Options Charges and Deductions The Equity Options charges compensate us for our expenses and risks. The name of a charge can suggest the purposes for which the charge is imposed. For example, the "sales charge" for the Equity Enricher is designed primarily to defray commissions and other costs of marketing that Option. Nevertheless, any distinctions we make about the specific purposes of the different charges are imprecise, and we are free to keep and use our revenues or profits for any other purpose, including paying any of our costs and expenses in connection with the Policies. The following sets forth additional information about some (but not all) of the Equity Options charges. Charge for average expected state taxes attributable to premiums: We make this charge, with respect to the Equity Enricher, to reimburse us for the state premium taxes that we must pay on premiums we receive. Premium taxes vary from state to state and currently range from 0 to 3.5%. Our charge approximates the average tax rate we expect to pay on premiums we receive from all states. Charges included in the Monthly Deduction: We take the monthly deduction from each component and investment division, if applicable, in proportion to the Equity Option's Cash Value in that component or investment division at the beginning of the base policy month, beginning with the first base policy month during which an Equity Option is in effect. We deduct the monthly deduction as of each base policy monthly anniversary. If there is no cash value in the Equity Option, there is no insurance coverage provided under the Option and therefore no monthly deduction is due. . Cost of insurance: This charge varies monthly based on many factors. Each month, we determine the charge by multiplying the applicable cost of insurance percent by the cash value at the end of the prior Policy month. . The cost of insurance percent is based on our expectations as to future experience, taking into account the insured's sex (if permitted by law), age, smoking status and rate class. The percentages will never exceed the guaranteed cost of insurance percentages set forth in your Equity Option rider. These guaranteed percentages are based on certain 1980 Commissioners Standard Ordinary Mortality Tables and the insured's sex (if permitted by law), age and rate class. Our current percentages are lower than the maximums in most cases. We review our percentages periodically and may adjust them, but we will apply the same percentages to everyone who has had their Equity Option for the same amount of time and who is the same age, sex and rate class. As a general rule, the cost of insurance percentage increases each year you own your Equity Option, as the insured's age increases. 17 . Rate class relates to the level of mortality risk we assume with respect to an insured. It can be the standard rate class, or one that is higher or lower (and if the insured is 18 or older, we divide rate class by smoking status). The insured's rate class will affect your charge for insurance coverage. . Mortality and Expense Risk and Administrative services charge: We make this monthly charge primarily to compensate us for: . expenses we incur in the administration of the Equity Option . mortality risks that insureds may live for a shorter period than we expect; and . expense risks that our issuing and administrative expenses may be higher than we expect. If our estimates are correct, we will realize a profit from this charge; otherwise, we could incur a loss. The amount of the charge is lower if the base policy's face amount is at least $250,000 at the date we calculate the charge. Therefore, changes you make in your base policy's face amount could affect the rate at which this charge applies to you. Net Single Premium The net single premium varies from day to day and is based on the 1980 Commissioners Standard Ordinary Mortality Tables and the insured's sex (where permitted by state law or unless the Policy is issued in connection with certain types of employee benefit plans) and age. To determine a death benefit, we divide an Equity Option's cash value by the net single premium. While it is not a charge or expense, the lower the net single premium, the higher the death benefit, and vice versa. The net single premium under your Equity Option will increase each month, as the insured grows older. The amount of your net single premium for each month is prescribed in the Equity Option itself and we will not alter such amounts. Federal Tax Matters The following is a brief summary of some tax rules that may apply to your Policy. You should consult with your own tax advisor to find out how taxes can affect your benefits and rights under your Policy, especially before you make unscheduled premium payments, change coverage provided by base policy or the benefit options, take a loan or withdrawal, or assign or surrender the Policy. The Policy Insurance proceeds . Generally excludable from your beneficiary's gross income. . The proceeds may be subject to federal estate tax: (i) if paid to the insured's estate; or (ii) if paid to a different beneficiary if the insured possessed incidents of ownership at or within three years before death. . If you die before the insured, the value of your Policy (determined under IRS rules) is included in your estate and may be subject to federal estate tax. . Whether or not any federal estate tax is due is based on a number of factors including the estate size. 18 Cash value (if your Policy is not a modified endowment contract) . You are generally not taxed on your cash value (except with respect to the DWI option) until you withdraw it, surrender your Policy or receive a distribution on the Final Date. In these cases, you are generally permitted to take withdrawals up to the amount of premiums paid without any tax consequences. However, withdrawals will be subject to income tax after you have received amounts equal to the total premiums you paid. Somewhat different rules apply in the first 15 Policy years when a distribution may be subject to tax if there is a gain in your Policy (which is generally when your cash value exceeds the cumulative premiums you paid). Finally, if your Policy is part of a collateral assignment equity split dollar arrangement, there is a risk that increases in cash value may be taxed annually. For income tax purposes, if you surrender an Equity Option for its cash value but the base policy remains in force, you will be considered to have made a partial withdrawal. A transfer to the DWI also will be taxed as a withdrawal. Loans . Loan amounts received will generally not be subject to income tax, unless your Policy is or becomes a modified endowment contract or terminates. . Interest on loans is generally not deductible. For businesses that own a Policy, at least part of the interest deduction unrelated to the Policy may be disallowed unless the insured is a 20% owner, officer, director or employee of the business. . If your Policy terminates (upon surrender, cancellation, lapse or the Final Date) while any Policy loan is outstanding, the amount of the loan plus accrued interest thereon will be deemed to be a "distribution" to you. Any such distribution will have the same tax consequences as any other Policy distribution. Modified Endowment Contracts These contracts are life insurance contracts where the premiums paid during the first 7 years after the Policy is issued, or after a material change in the Policy, exceeds tax law limits referred to as the "7-pay test." Material changes in the Policy include changes in the level of benefits and certain other changes to your Policy after the issue date. Reductions in benefits during a 7-pay period may cause your Policy to become a modified endowment contract. Generally, a life insurance policy that is received in exchange for a modified endowment contract will also be considered a modified endowment contract. If your Policy is considered a modified endowment contract the following applies: . The death benefit will generally be income tax free to your beneficiary, as discussed above. . Amounts withdrawn or distributed before the insured's death, including loans, assignments and pledges, are treated as income first and subject to income tax. All modified endowment contracts you purchase from us and our affiliates during the same calendar year are treated as a single contract for purposes of determining the amount of any such income. . An additional 10% income tax generally applies to the taxable portion of the amounts received before age 59 1/2, except generally if you are disabled or if the distribution is part of a series of substantially equal periodic payments. 19 Diversification In order for your Policy to qualify as life insurance, we must comply with certain diversification standards with respect to the investments underlying the Equity Options. We believe that we satisfy and will continue to satisfy these diversification standards. Inadvertent failure to meet these standards may be able to be corrected. Failure to meet these standards would result in immediate taxation to Policy owners of gains under their Policies. Changes to tax rules and interpretations Changes in applicable tax rules and interpretations can adversely affect the tax treatment of your Policy. These changes may take effect retroactively. We reserve the right to amend the Policy in any way necessary to avoid any adverse tax treatment. Examples of changes that could create adverse tax consequences include: . Possible taxation of cash value transfers among the options within the Policy. . Possible taxation as if you were the owner of your allocable portion of the Separate Account's assets. . Possible changes in the tax treatment of Policy benefits and rights. Our taxation We don't expect to incur federal, state or local taxes upon the earnings or realize capital gains attributable to the Separate Account. If we do incur such taxes at some time in the future, we reserve the right to charge cash value allocated to the Separate Account for these taxes. Showing Performance We may advertise or otherwise show: . Investment division performance ranking and rating information as it compares among similar investments as compiled by independent organizations. . Comparisons of the investment division with performance of similar investments and appropriate indices. . Our insurance company ratings that are assigned by independent rating agencies and that are relevant when considering our ability to honor our guarantees. . Personalized illustrations based on historical Separate Account performance. Rights We Reserve We reserve the right to make certain changes if we believe the changes are in the best interest of our Policy owners or would help carry out the purposes of the Policy. We will make these changes in the manner permitted by applicable law and only after getting any necessary owner and regulatory approval. We will notify you of any changes that result in a material change in the underlying investments in the investment divisions, and you will have a chance to transfer out of the affected division (without charge). Some of the changes we may make include: . Operating the Separate Account in any other form that is permitted by applicable law. 20 Carefully review your Policy which contains a full discussion of all its provisions. . Changes to obtain or continue exemptions from the 1940 Act. . Transferring assets among investment divisions or to other separate accounts, or our general account or combining or removing investment divisions from the Separate Account. . Substituting Fund shares in an investment division for shares of another portfolio of the Fund or another fund or investment permitted by law. . Changing the way we assess charges without exceeding the aggregate amount of the Equity Option's guaranteed maximum charges. . Making any necessary technical changes to the Policy to conform it to the changes we have made. Other Policy Provisions You should read your Policy, including the Equity Options riders, for a full discussion of their provisions. The following is a brief discussion of some of the provisions that you should consider: Free Look Period You can return the Policy during this period. The period is the later of: . 10 days after you receive the Policy (unless state law requires your Policy to specify a longer period); and . 45 days after we receive Part A of the completed application. If you return your Policy, we will send you a complete refund of any premiums paid (or cash value plus any charges deducted if state law requires) within seven days. Incontestability We will not contest your Policy after 2 years from the base policy's issue or reinstatement. Suicide If the insured commits suicide within the first two base policy years (or another period specified in your base policy, if required by state law), your beneficiary will receive all premiums paid to the Policy (without interest), less any outstanding loans (plus accrued interest) and withdrawals taken. Age and Sex We will adjust benefits to reflect the correct age and sex of the insured if this information isn't correct in any Policy application. Assignment You can designate a new owner or otherwise assign an Equity Option only as part of an assignment of your Policy. You can assign your Policy as collateral if you notify us in writing. The assignment or release of the assignment is effective when it is recorded at the Designated Office. We are not responsible for determining the validity of the assignment or its release. Also, there could be serious adverse tax consequences to you or your beneficiary, so you should consult with your tax adviser before making any assignment. 21 We perform the sales and administrative services for the Policies. Payment and Deferment Generally, we will pay or transfer amounts from the Separate Account within seven days after the Date of Receipt of all necessary documentation required for such payment or transfer. We can defer this if: . The New York Stock Exchange has an unscheduled closing. . There is an emergency so that we could not reasonably determine the investment experience of an Equity Option. . The Securities and Exchange Commission by order permits us to do so for the protection of Equity Option owners (provided that the delay is permitted under New York State insurance law and regulations). . With respect to the insurance proceeds, entitlement to a payment is being questioned or is uncertain. . We are paying amounts attributable to a check. In that case we can wait for a reasonable time (15 days or less) to let the check clear. We currently pay interest on the amount of insurance proceeds at 6% per year (or higher if state law requires) from the date of death until the date we pay the benefit. Dividends The Equity Options are "nonparticipating," which means they are not eligible for dividends from us and do not share in any distributions of our surplus. Sales and Administration of the Policies We serve as the "principal underwriter," as defined in the 1940 Act, for the Policy and other variable life insurance and variable annuity contracts issued by a subsidiary and us. We are registered under the Securities Exchange Act of 1934 as a broker-dealer and are a member of the National Association of Securities Dealers, Inc. We are an investment manager to the Fund and may also provide advisory services to other clients. Computer Systems We use computer systems to process Policy transactions and valuations. These systems need to be adjusted to be able to continue to administer the Policies beginning January 1, 2000. As is the case with most systems conversion projects, risks and uncertainties exist due, in part to reliance on third party vendors and a project could be delayed. Although we cannot give you assurances, we are devoting substantial resources necessary to make these systems modifications and expect that necessary changes will be completed on time and in a way that will result in no disruption to Policy servicing operations. Bonding Our directors, officers and employees are bonded in the amount of $50,000,000, subject to a $5,000,000 deductible. 22 You can give us voting instructions on shares of the Fund portfolio that are attributable to your Equity Option. Distributing the Policies We sell the Policies that include an Equity Option through licensed life insurance sales representatives: . Registered through us. . Registered through other broker-dealers, including a wholly owned subsidiary. Commissions We do not pay commissions for the sale of the Equity Additions. However, representatives who write the Policy receive compensation calculated by adding the cash value in the Policy and in certain other products offered by MetLife and our affiliates. This compensation will not exceed .12% per year of the total aggregate cash value. We pay commissions on the sale of the base policy and certain riders. We pay maximum commissions on the Equity Enricher of 2% of the gross amount paid for each premium payment. The commissions do not increase the charges deducted from the Policy. No commissions have been paid on this product because we will not begin offering it before November 1999. We also pay the sales manager of a sales representative employed by us an override commission based on many factors including the commissions paid to the representative who sold the Equity Option and to other representatives the sales manager supervises. Voting Rights The Fund has shareholder meetings from time to time to, for example, elect directors and approve investment managers. We will vote the shares of each Portfolio that are attributed to your Policy based on your instructions. Should we determine that the 1940 Act no longer requires us to do this, we may decide to vote Fund shares in our own right, without input from you or any other owners of variable life insurance policies or variable annuity contracts that participate in the Fund. If you are eligible to give us voting instructions, we will send you informational material and a form to send back to us. We are entitled to disregard voting instructions in certain limited circumstances prescribed by the SEC. If we do so, we will give you our reasons in the next semi-annual report to Equity Option owners. The number of shares for which you can give us voting instructions is determined as of the record date for the Fund shareholder meeting by dividing: . Your cash value in the corresponding investment division; by . The net asset value of one share of that Portfolio. We will count fractional votes. If we do not receive timely voting instructions from Policy owners and other insurance and annuity owners that are entitled to give us voting instructions, we will vote those shares in the same proportion as the shares held in the same separate account for which we did receive voting instructions. Also, we will vote Fund shares that are not attributable to insurance or annuity 23 Personalized illustrations can help you understand how your Equity Options values can vary. owners (including shares that we hold in our general account) or that are held in separate accounts that are not registered under the 1940 Act in the same proportion as the aggregate of the shares for which we received voting instructions from all insurance and annuity owners. Reports Generally, you will promptly receive statements confirming your significant transactions involving Equity Options such as: . Changes in guarantees. . Transfers between Equity Options and other Policy parts. . Partial withdrawals. . Loan amounts you request. . Premium Payments. If your premium payments are made through check-o-matic or another systematic payment method, we will not send you any confirmation in addition to the one you receive from your bank or employer. We will also send you an annual statement within 30 days after a Policy year that will summarize the year's transactions and include information on: . Deductions and charges. . Status of the death benefit. . Cash values. . Amounts in the investment division. . Status of Policy loans. . Automatic loans to pay interest. . Information on your modified endowment contract status (if applicable). We will also send you the Fund's annual and semi-annual reports to shareholders. Illustration of Equity Options Benefits In order to help you understand how your Equity Option values would vary over time under different sets of assumptions, we will provide you with certain illustrations upon request. These will be based on the age and insurance risk characteristics of the insured under your Policy and such factors as the premium payment amounts and rates of return (within limits) that you request. You can request such illustrations at any time. We have filed an example of such an illustration as an exhibit to the registration statement referred to below. Getting More Information We are regulated by the New York Insurance Department and periodically are examined by them. We are also subject to the laws and regulations of all the jurisdictions in which we do business and, if required, we have filed the Equity Options for approval in every jurisdiction in which the Equity Options are sold. The Equity Options may not be available in every jurisdiction. You should ask your sales representative whether the Equity Options are available in your jurisdiction. 24 We file annual statements on our operations, including financial statements, with insurance departments of various jurisdictions so that they can review our solvency and compliance with applicable laws and regulations. You can review these statements which are available at the offices of the various insurance departments. This Prospectus is part of a registration statement that we filed with the Securities and Exchange Commission under the Securities Act of 1933. The registration statement includes additional information, amendments and exhibits. You can get this information from the Securities and Exchange Commission (a copying fee may apply) by visiting or writing to its Public Reference Room or using its Internet site at: . Securities and Exchange Commission Public Reference Room Washington, D.C. 20549 Call 1-800-SEC-0330 (for information about using the Public Reference Room) Internet site: http://www.sec.gov Legal, Accounting and Actuarial Matters Christopher P. Nicholas, Associate General Counsel at MetLife, has passed upon the legality of the Policies. Messrs. Freedman, Levy, Kroll & Simonds, Washington, D.C., have advised us on certain matters relating to the federal securities laws. Deloitte & Touche LLP, independent auditors, audited the financial statements included in this Prospectus, as stated in their reports appearing herein. The financial statements are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. Our financial statements should be considered only as bearing upon our ability to meet our obligations under the Policy. Marian Zeldin, FSA, MAAA, Vice-President and Actuary of MetLife, has examined actuarial matters included in the registration statement, as stated in her opinion filed as an exhibit to the registration statement. 25 Management The present directors and the senior officers and secretary of MetLife are listed below, together with certain information concerning them: Directors, Officers-Directors
Principal Occupation & Positions and Offices Name Business Address with MetLife - ------------------------------------------------------------------------------------------------- Curtis H. Barnette Chairman and Chief Executive Officer Director Bethlehem Steel Corp. 1170 Eight Ave. -- Martin Tower 2118 Bethlehem, PA 18016 - ------------------------------------------------------------------------------------------------- Robert H. Benmosche Chairman of the Board, President and Chairman of the Board, President, Chief Executive Officer Chief Executive Officer and Director Metropolitan Life Insurance Company One Madison Ave. New York, NY 10010 - ------------------------------------------------------------------------------------------------- Gerald Clark Vice Chairman of the Board and Vice Chairman of the Board, Chief Investment Officer Chief Investment Officer and Director Metropolitan Life Insurance Company One Madison Ave. New York, NY 10010 - ------------------------------------------------------------------------------------------------- Joan Ganz Cooney Chairman, Executive Committee Director Children's Television Workshop One Lincoln Plaza New York, NY 10023 - ------------------------------------------------------------------------------------------------- Burton A. Dole, Jr. Retired Chairman, President and Director Chief Executive Officer Puritan Bennett Overland Park, KS - ------------------------------------------------------------------------------------------------- James R. Houghton Chairman of the Board Emeritus Director and Director Corning Incorporated 80 East Market Street, 2nd Floor Corning, NY 14830 - ------------------------------------------------------------------------------------------------- Harry P. Kamen Chairman and Chief Director Executive Officer (Retired) Metropolitan Life Insurance Company One Madison Ave. New York, NY 10010 - ------------------------------------------------------------------------------------------------- Helene L. Kaplan Of Counsel Director Skadden Arps, Slate, Meagher & Flom 919 Third Ave. New York, NY 10022 - ------------------------------------------------------------------------------------------------- Charles M. Leighton Retired Chairman and Director Chief Executive Officer CML Group, Inc. Bolton, MA 01720 - ------------------------------------------------------------------------------------------------- Allen E. Murray Retired Chairman of the Board and Director Chief Executive Officer Mobil Corporation 375 Park Ave., Suite 2901 New York, NY 10163 - ------------------------------------------------------------------------------------------------- Stewart Nagler Vice Chairman of the Board and Vice Chairman of the Board and Chief Financial Officer Chief Financial Officer and Director Metropolitan Life Insurance Company One Madison Avenue New York, NY 10010
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Principal Occupation & Positions and Offices Name Business Address with MetLife - ------------------------------------------------------------------------------------- John J. Phelan, Jr. Retired Chairman and Director Chief Executive Officer New York Stock Exchange, Inc. P.O. Box 312 Mill Neck, NY 11765 - ------------------------------------------------------------------------------------- Hugh B. Price President and Chief Executive Officer Director National Urban League, Inc. 12 Wall Street New York, NY 10005 - ------------------------------------------------------------------------------------- Robert G. Schwartz Retired Chairman of the Board, Director President and Chief Executive Officer Metropolitan Life Insurance Company 200 Park Ave., Suite 5700 New York, NY 10166 - ------------------------------------------------------------------------------------- Ruth J. Simmons, Ph.D. President Director Smith College College Hall 20 Northhampton, MA 01063 - ------------------------------------------------------------------------------------- William C. Steere, Jr. Chairman of the Board and Director Chief Executive Officer Pfizer, Inc. 235 East 42nd Street New York, NY 10017
27
Name of Officer* Position with Metropolitan Life - ----------------------------------------------------------------------------------- Robert H. Benmosche Chairman of the Board, President and Chief Executive Officer - ----------------------------------------------------------------------------------- Gerald Clark Vice Chairman of the Board and Chief Investment Officer - ----------------------------------------------------------------------------------- Stewart G. Nagler Vice Chairman of the Board and Chief Financial Officer - ----------------------------------------------------------------------------------- Gary A. Beller Senior Executive Vice-President and General Counsel - ----------------------------------------------------------------------------------- James M. Benson President, Individual Business; Chairman Chief Executive Officer and President, New England Life Insurance Company - ----------------------------------------------------------------------------------- C. Robert Henrikson Senior Executive Vice-President - ----------------------------------------------------------------------------------- Catherine A. Rein Senior Executive Vice President; President and Chief Executive Officer, Metropolitan Property and Casualty Insurance Company - ----------------------------------------------------------------------------------- William J. Toppeta President, Client Services and Chief Administrative Officer - ----------------------------------------------------------------------------------- John H. Tweedie Senior Executive Vice-President - ----------------------------------------------------------------------------------- Judy E. Weiss Executive Vice-President and Chief Actuary - ----------------------------------------------------------------------------------- Lisa M. Weber Senior Vice-President
- ------------ * The principal occupation of each officer, except for the following officers, during the last five years has been as an officer of Metropolitan Life or an affiliate thereof. Gary A. Beller has been an officer of Metropolitan Life since November, 1994; prior thereto, he was a Consultant and Executive Vice- President and General Counsel of the Americana Express Company. Robert H. Benmosche has been an officer of Metropolitan Life since September, 1995; prior thereto, he was an Executive Vice-President of Paine Webber. Lisa Weber has been an officer of Metropolitan Life since March 16, 1998; prior thereto, she was a Director of Diversity Strategies and Development and an Associate Director of Human Resources of Paine Webber. James M. Benson has been an officer of Metropolitan Life or an affiliate since June 1997. Mr. Benson was the President and Chief Operating Officer of The Equitable Companies Incorporated (insurance and investment management) from February 1996 to May 1997, and was President of The Equitable Life Assurance Society of the United States from February 1994 to May 1997, Chief Executive Officer from February 1996 to May 1997, Chief Operating Officer from February 1994 to February 1996 and Senior Executive Vice-President from March 1993 to February 1994. The business address of each officer is 1 Madison Avenue, New York, New York 10010. 28 INDEPENDENT AUDITORS' REPORT To the Board of Directors Metropolitan Life Insurance Company: We have audited the accompanying statements of assets and liabilities of the State Street Research Growth, State Street Research Income, State Street Research Money Market, State Street Research Diversified, State Street Research Aggressive Growth, MetLife Stock Index, Santander International Stock, Loomis Sayles High Yield Bond, Janus Mid Cap, T. Rowe Price Small Cap Growth and Scudder Global Equity Divisions of Metropolitan Life Separate Account UL (the "Separate Account") as of December 31, 1998, and the related statements (i) of operations for the year ended December 31, 1998 and of changes in net assets for the years ended December 31, 1998 and 1997 of the State Street Research Growth, State Street Research Income, State Street Research Money Market, State Street Research Diversified, State Street Research Aggressive Growth, MetLife Stock Index and Santander International Stock Divisions and (ii) of operations for the year ended December 31, 1998 and of changes in net assets for the year ended December 31, 1998 and for the period March 3, 1997 (commencement of operations) to December 31, 1997 of the Loomis Sayles High Yield Bond, Janus Mid Cap, T. Rowe Price Small Cap Growth and Scudder Global Equity Divisions. These financial statements are the responsibility of the Separate Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1998 by correspondence with the custodian and depositor of the Separate Account. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the State Street Research Growth, State Street Research Income, State Street Research Money Market, State Street Research Diversified, State Street Research Aggressive Growth, MetLife Stock Index, Santander International Stock, Loomis Sayles High Yield Bond, Janus Mid Cap, T. Rowe Price Small Cap Growth and Scudder Global Equity Divisions of Metropolitan Life Separate Account UL at December 31, 1998 and the results of their operations and the changes in their net assets for the respective stated periods, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York March 15, 1999 1 Metropolitan Life Separate Account UL STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1998
State Street State Street State Street State Street State Street Research MetLife Santander Research Research Research Research Aggressive Stock International Growth Income Money Market Diversified Growth Index Stock Division Division Division Division Division Division Division ------------ ------------ ------------ ------------ ------------ ------------ ------------- ASSETS: Investments in Metropolitan Series Fund,Inc. at Value (Note 1A): State Street Research Growth Portfolio (8,991,252 shares; cost $262,836,766).......... $333,575,453 -- -- -- -- -- -- State Street Research Income Portfolio (4,419,504 shares; cost $56,262,271)........... -- $56,481,257 -- -- -- -- -- State Street Research Money Market Portfolio (2,150,767 shares; cost $22,944,978)........... -- -- $22,265,813 -- -- -- -- State Street Research Diversified Portfolio (11,376,036 shares; cost $184,766,024)..... -- -- -- $209,205,308 -- -- -- State Street Research Aggressive Growth Portfolio (5,227,911 shares; cost $136,845,160).......... -- -- -- -- $154,380,221 -- -- MetLife Stock Index Portfolio (4,498,549 shares; cost $118,596,732).......... -- -- -- -- -- $159,158,678 -- Santander International Stock Portfolio (2,566,510 shares; cost $32,397,518)........... -- -- -- -- -- -- $36,290,449 Loomis Sayles High Yield Bond Portfolio (303,096 shares; cost $3,041,405)............ -- -- -- -- -- -- -- Janus Mid Cap Portfolio (1,214,612 shares; cost $16,647,482)........... -- -- -- -- -- -- -- T. Rowe Price Small Cap Growth Portfolio (1,084,560 shares; cost $12,826,959)........... -- -- -- -- -- -- -- Scudder Global Equity Portfolio (671,753 shares; cost $7,767,908)............ -- -- -- -- -- -- -- ------------ ----------- ----------- ------------ ------------ ------------ ----------- Total Assets........... 333,575,453 56,481,257 22,265,813 209,205,308 154,380,221 159,158,678 36,290,449 LIABILITIES............. 1,013,304 41,286 5,651 384,868 298,061 292,002 37,716 ------------ ----------- ----------- ------------ ------------ ------------ ----------- NET ASSETS.............. $332,562,149 $56,439,971 $22,260,162 $208,820,440 $154,082,160 $158,866,676 $36,252,733 ============ =========== =========== ============ ============ ============ ===========
See Notes to Financial Statements. 2
Loomis T. Rowe Sayles Price Scudder High Yield Janus Small Cap Global Bond Mid Cap Growth Equity Division Division Division Division - ---------- ----------- ----------- ---------- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- $2,542,977 -- -- -- -- $21,170,685 -- -- -- -- $13,329,240 -- -- -- -- $8,316,299 - ---------- ----------- ----------- ---------- 2,542,977 21,170,685 13,329,240 8,316,299 3,066 44,138 23,779 13,441 - ---------- ----------- ----------- ---------- $2,539,911 $21,126,547 $13,305,461 $8,302,858 ========== =========== =========== ==========
3 Metropolitan Life Separate Account UL STATEMENTS OF OPERATIONS For the year ended December 31, 1998
State State State State State Street Street Street Street Street Research MetLife Santander Research Research Research Research Aggressive Stock International Growth Income Money Market Diversified Growth Index Stock Division Division Division Division Division Division Division ----------- ---------- ------------ ----------- ----------- ----------- ------------- INVESTMENT INCOME: Income: Dividends (Note 2)..... $30,285,471 $4,298,707 $1,166,116 $19,448,803 $ 8,619,767 $ 6,486,305 $ 404,896 Expenses: Mortality and expense charges (Note 3).............. 2,500,061 420,836 143,978 1,610,657 1,146,158 1,020,115 284,929 ----------- ---------- ---------- ----------- ----------- ----------- ---------- Net investment income (loss)................. 27,785,410 3,877,871 1,022,138 17,838,146 7,473,609 5,466,190 119,967 ----------- ---------- ---------- ----------- ----------- ----------- ---------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: (Note 1B) Net realized gain (loss) from security transactions........... 1,828,922 239,248 139,583 522,086 390,678 2,060,324 251,518 Change in unrealized appreciation (depreciation) of investments............ 38,462,367 (12,424) (384,125) 12,721,568 9,316,026 21,573,004 5,740,557 ----------- ---------- ---------- ----------- ----------- ----------- ---------- Net realized and unrealized gain (loss) on investments......... 40,291,289 226,824 (244,542) 13,243,654 9,706,704 23,633,328 5,992,075 ----------- ---------- ---------- ----------- ----------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS........ $68,076,699 $4,104,695 $ 777,596 $31,081,800 $17,180,313 $29,099,518 $6,112,042 =========== ========== ========== =========== =========== =========== ==========
See Notes to Financial Statements. 4
Loomis T. Rowe Sayles Price Scudder High Yield Janus Small Cap Global Bond Mid Cap Growth Equity Division Division Division Division ---------- ---------- --------- -------- $ 256,747 $ 98,545 $ 0 $125,120 15,303 88,984 71,325 42,804 --------- ---------- -------- -------- 241,444 9,561 (71,325) 82,316 --------- ---------- -------- -------- (15,746) 178,428 (14,908) 35,936 (428,334) 4,299,801 455,213 556,946 --------- ---------- -------- -------- (444,080) 4,478,229 440,305 592,882 --------- ---------- -------- -------- $(202,636) $4,487,790 $368,980 $675,198 ========= ========== ======== ========
5 Metropolitan Life Separate Account UL STATEMENTS OF CHANGES IN NET ASSETS
State Street Research State Street Research State Street Research Growth Division Income Division Money Market Division -------------------------- -------------------------- -------------------------- For the Year For the Year For the Year For the Year For the Year For the Year Ended Ended Ended Ended Ended Ended December 31, December 31, December 31, December 31, December 31, December 31, 1998 1997 1998 1997 1998 1997 ------------ ------------ ------------ ------------ ------------ ------------ INCREASE (DECREASE) IN NET ASSETS: From operations: Net investment income (loss)................ $ 27,785,410 $ 40,418,794 $ 3,877,871 $ 2,617,788 $ 1,022,138 $ 353,194 Net realized gain (loss) from security transactions.......... 1,828,922 1,080,724 239,248 32,950 139,583 68,458 Change in unrealized appreciation (depreciation) of investments........... 38,462,367 6,378,588 (12,424) 748,796 (384,125) (49,717) ------------ ------------ ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations............ 68,076,699 47,878,106 4,104,695 3,399,534 777,596 371,935 ------------ ------------ ----------- ----------- ----------- ----------- From capital transactions: Net premiums........... 68,697,236 59,834,638 13,501,414 13,090,983 28,800,532 13,691,749 Redemptions............ (9,651,413) (7,416,220) (1,455,088) (1,082,695) (292,311) (357,692) Net portfolio transfers............. 462,907 3,569,720 2,032,607 1,296,485 (12,984,969) (12,877,177) Other net transfers.... (33,909,522) (29,309,077) (5,444,551) (4,895,666) (2,036,921) (887,059) ------------ ------------ ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from capital transactions.......... 25,599,208 26,679,061 8,634,382 8,409,107 13,486,331 (430,179) ------------ ------------ ----------- ----------- ----------- ----------- NET CHANGE IN NET AS- SETS................... 93,675,907 74,557,167 12,739,077 11,808,641 14,263,927 (58,244) NET ASSETS--BEGINNING OF YEAR................... 238,886,242 164,329,075 43,700,894 31,892,253 7,996,235 8,054,479 ------------ ------------ ----------- ----------- ----------- ----------- NET ASSETS--END OF YEAR................... $332,562,149 $238,886,242 $56,439,971 $43,700,894 $22,260,162 $ 7,996,235 ============ ============ =========== =========== =========== ===========
See Notes to Financial Statements. 6
State Street Research Santander State Street Research Aggressive Growth MetLife International Stock Diversified Division Division Stock Index Division Division - -------------------------- -------------------------- -------------------------- -------------------------- For the Year For the Year For the Year For the Year For the Year For the Year For the Year For the Year Ended Ended Ended Ended Ended Ended Ended Ended December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31, 1998 1997 1998 1997 1998 1997 1998 1997 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ $ 17,838,146 $ 22,302,995 $ 7,473,609 $ 3,470,806 $ 5,466,190 $ 1,186,647 $ 119,967 $ (232,079) 522,086 418,723 390,678 136,827 2,060,324 1,210,648 251,518 (84,952) 12,721,568 1,103,869 9,316,026 2,615,059 21,573,004 13,344,725 5,740,557 (691,181) - ------------ ------------ ------------ ------------ ------------ ----------- ----------- ----------- 31,081,800 23,825,587 17,180,313 6,222,692 29,099,518 15,742,020 6,112,042 (1,008,212) - ------------ ------------ ------------ ------------ ------------ ----------- ----------- ----------- 48,746,380 41,236,061 48,080,744 52,235,040 59,343,787 38,059,853 10,224,172 11,240,912 (5,712,146) (4,829,385) (4,373,459) (3,613,975) (2,361,734) (1,198,193) (1,153,624) (1,139,393) 2,809,643 1,557,340 (6,687,894) (5,941,719) 9,729,932 9,580,428 (2,377,311) (3,084,541) (23,504,994) (19,209,913) (18,773,580) (20,670,473) (23,041,439) (13,547,536) (3,678,501) (5,008,528) - ------------ ------------ ------------ ------------ ------------ ----------- ----------- ----------- 22,338,883 18,754,103 18,245,811 22,008,873 43,670,546 32,894,552 3,014,736 2,008,450 - ------------ ------------ ------------ ------------ ------------ ----------- ----------- ----------- 53,420,683 42,579,690 35,426,124 28,231,565 72,770,064 48,636,572 9,126,778 1,000,238 155,399,757 112,820,067 118,656,036 90,424,471 86,096,612 37,460,040 27,125,955 26,125,717 - ------------ ------------ ------------ ------------ ------------ ----------- ----------- ----------- $208,820,440 $155,399,757 $154,082,160 $118,656,036 $158,866,676 $86,096,612 $36,252,733 $27,125,955 ============ ============ ============ ============ ============ =========== =========== ===========
7 Metropolitan Life Separate Account UL STATEMENTS OF CHANGES IN NET ASSETS (Continued)
Loomis Sayles Janus High Yield Bond Division Mid Cap Division --------------------------- ---------------------------- For the Period For the Period For the Year March 3, 1997 For the Year March 3, 1997 Ended to Ended to December 31, December 31, December 31, December 31, 1998 1997 1998 1997 ------------ -------------- ------------ -------------- INCREASE (DECREASE) IN NET ASSETS: From operations: Net investment income (loss)................ $ 241,444 $ 59,549 $ 9,561 $ 5,937 Net realized gain (loss) from security transactions.......... (15,746) 9,361 178,428 26,779 Change in unrealized appreciation (depreciation) of investments........... (428,334) (70,093) 4,299,801 223,402 ---------- ---------- ----------- ---------- Net increase (decrease) in net assets resulting from operations............ (202,636) (1,183) 4,487,790 256,118 ---------- ---------- ----------- ---------- From capital transactions: Net premiums........... 1,559,975 590,158 13,796,446 2,676,784 Redemptions............ (29,635) (1,126) (179,560) (46,974) Net portfolio transfers............. 180,422 1,002,454 4,280,509 1,554,471 Other net transfers.... (451,340) (107,178) (5,121,876) (577,161) ---------- ---------- ----------- ---------- Net increase in net assets resulting from capital transactions.. 1,259,422 1,484,308 12,775,519 3,607,120 ---------- ---------- ----------- ---------- NET CHANGE IN NET ASSETS................. 1,056,786 1,483,125 17,263,309 3,863,238 NET ASSETS--BEGINNING OF PERIOD................. 1,483,125 -- 3,863,238 -- ---------- ---------- ----------- ---------- NET ASSETS--END OF PERIOD................. $2,539,911 $1,483,125 $21,126,547 $3,863,238 ========== ========== =========== ==========
See Notes to Financial Statements. 8
T. Rowe Price Scudder Small Cap Growth Division Global Equity Division ------------------------------------ ---------------------------------------------- For the Period For the Period For the Year March 3, 1997 For the Year March 3, 1997 Ended to Ended to December 31, December 31, December 31, December 31, 1998 1997 1998 1997 ------------ -------------- ------------ -------------- $ (71,325) $ (8,790) $ 82,316 $ 23,414 (14,908) 47,764 35,936 21,982 455,213 47,067 556,946 (8,556) ----------- ---------- ----------- ---------- 368,980 86,041 675,198 36,840 ----------- ---------- ----------- ---------- 8,413,079 1,816,732 3,660,518 1,425,649 (87,656) (40,707) (44,451) (7,873) 3,021,876 3,110,800 2,251,711 1,855,028 (2,968,930) (414,754) (1,263,459) (286,303) ----------- ---------- ----------- ---------- 8,378,369 4,472,071 4,604,319 2,986,501 ----------- ---------- ----------- ---------- 8,747,349 4,558,112 5,279,517 3,023,341 4,558,112 -- 3,023,341 -- ----------- ---------- ----------- ---------- $13,305,461 $4,558,112 $ 8,302,858 $3,023,341 =========== ========== =========== ==========
9 Metropolitan Life Separate Account UL NOTES TO FINANCIAL STATEMENTS December 31, 1998 Metropolitan Life Separate Account UL (the "Separate Account") is a multi- division unit investment trust registered under the Investment Company Act of 1940 and consists of eleven investment divisions used to support variable universal life insurance policies. The assets in each division are invested in shares of the corresponding portfolio of the Metropolitan Series Fund, Inc. (the "Fund'). Each portfolio has varying investment objectives relative to growth of capital and income. The Separate Account was formed by Metropolitan Life Insurance Company ("Metropolitan Life") on December 13, 1988, and registered as a unit investment trust on January 5, 1990. The assets of the Separate Account are the property of Metropolitan Life. On March 3, 1997, operations commenced for the four new investment divisions added to the Separate Account on that date: the Loomis Sayles High Yield Bond Division, the Janus Mid Cap Division, the T. Rowe Price Small Cap Growth Division and the Scudder Global Equity Division. A summary of significant accounting policies, all of which are in accordance with generally accepted accounting principles, is set forth below: 1.SIGNIFICANT ACCOUNTING POLICIES A.Valuation of Investments Investments in shares of the Fund are valued at the reported net asset values of the respective portfolios. A summary of investments of the eleven designated portfolios of the Fund in which the eleven investment divisions of the Separate Account invests as of December 31, 1998 is included as Note 5. B.Security Transactions Purchases and sales are recorded on the trade date. Realized gains and losses on sales of investments are determined on the basis of identified cost. C.Federal Income Taxes In the opinion of counsel of Metropolitan Life, the Separate Account will be treated as a part of Metropolitan Life and its operations, and the Separate Account will not be taxed separately as a "regulated investment company" under existing law. Metropolitan Life is taxed as a life insurance company. The policies permit Metropolitan Life to charge against the Separate Account any taxes, or reserves for taxes, attributable to the maintenance or operation of the Separate Account. Metropolitan Life is not currently charging any Federal income taxes against the Separate Account arising from the earnings or realized capital gains attributable to the Separate Account. Such charges may be imposed in future years depending on market fluctuations and transactions involving the Separate Account. D.Net Premiums Metropolitan Life deducts a sales load and a state premium tax charge from premiums before amounts are allocated to the Separate Account. In the case of certain of the policies, Metropolitan Life also deducts a Federal income tax charge before amounts are allocated to the Separate Account. The Federal income tax charge is imposed in connection with certain of the policies to recover a portion of the Federal income tax adjustment attributable to policy acquisition expenses. 2.DIVIDENDS On May 5, 1998 and December 16, 1998, the Fund declared dividends for all shareholders of record on May 7, 1998 and December 23, 1998, respectively. The amount of dividends received by the Separate Account was $71,190,477. The dividends were paid to Metropolitan Life on May 8, 1998 and December 24, 1998, respectively, and were immediately reinvested in additional shares of the portfolios in which the investment divisions invest. As a result of 10 NOTES TO FINANCIAL STATEMENTS--(Continued) this reinvestment, the number of shares of the Fund held by each of the eleven investment divisions increased by the following: State Street Research Growth Portfolio, 827,171 shares; State Street Research Income Portfolio, 339,329 shares; State Street Research Money Market Portfolio, 112,807 shares; State Street Research Diversified Portfolio, 1,066,122 shares; State Street Research Aggressive Growth Portfolio, 304,920 shares; MetLife Stock Index Portfolio, 183,724 shares; Santander International Stock Portfolio, 28,929 shares; Loomis Growth Sayles High Yield Bond Portfolio, 30,811 shares; Janus Mid Cap Portfolio, 6,072 shares; T. Rowe Price Small Cap Growth Portfolio, 0 shares and Scudder Global Equity Portfolio, 10,237 shares. 3.EXPENSES With respect to assets in the Separate Account that support certain policies, Metropolitan Life applies a charge against the assets attributable to the Separate Account for the mortality and expense risks assumed by Metropolitan Life. This charge varies by policy type but will not be higher than an effective annual rate of .90% of the average daily value of the net assets or the monthly anniversary value of the net assets in the Separate Account which are attributable to such policies. 4.CHANGE OF NAME Effective November 9, 1998, Santander Global Advisors, Inc. became the sub- investment manager of the Santander International Stock Portfolio (formerly State Street Research International Stock Portfolio) of the Metropolitan Series Fund, Inc. Simultaneously with that change, the corresponding investment division had its name changed to the Santander International Stock Division. 11 NOTES TO FINANCIAL STATEMENTS--(Continued) 5.SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1998 Below are summarized information of the investments of the portfolios of the Fund in which each of the investment divisions invest. Metropolitan Series Fund, Inc.
State Street State Street State Street State Street Research Research Research Research Growth Income Money Market Diversified Portfolio Portfolio Portfolio Portfolio -------------- ------------ ------------ -------------- COMMON STOCK Automotive............. $ 50,517,664 (1.6%) $ 22,855,593 (0.9%) Banking................ 172,519,438 (5.5%) 80,028,947 (3.0%) Broadcasting........... 225,213,831 (7.2%) 105,681,212 (4.0%) Business Services...... 18,336,219 (0.6%) 8,507,594 (0.3%) Chemicals.............. 62,797,294 (2.0%) 29,250,869 (1.1%) Computer Equipment & 41,206,377 (1.3%) 19,014,400 (0.7%) Service............... Drugs & Health Care.... 131,563,219 (4.2%) 60,383,637 (2.3%) Electrical Equipment... 138,582,619 (4.5%) 63,888,537 (2.4%) Electronics............ 138,832,022 (4.5%) 64,421,153 (2.4%) Entertainment & 27,114,300 (0.9%) 12,803,681 (0.5%) Leisure............... Financial Services..... 191,024,825 (6.1%) 88,565,588 (3.3%) Food & Beverages....... 134,094,937 (4.3%) 60,573,275 (2.3%) Forest Products & 32,516,000 (1.0%) 14,948,000 (0.6%) Paper................. Hotel & Motel.......... 19,960,981 (0.6%) 9,194,031 (0.3%) Household Products..... 46,167,600 (1.5%) 21,275,813 (0.8%) Insurance.............. 141,994,575 (4.6%) 64,324,269 (2.4%) Medical Equipment & 117,281,881 (3.8%) 54,248,912 (2.0%) Supply................ Miscellaneous.......... 44,334,619 (1.7%) Multi-Industry......... 95,549,138 (3.1%) Office & Business 191,625,919 (6.2%) 88,440,600 (3.3%) Equipment............. Oil & Gas Exploration.. 7,017,606 (0.2%) 3,077,344 (0.1%) Oil.................... 45,891,390 (1.5%) 21,240,514 (0.8%) Oil-Domestic........... 53,123,188 (1.7%) 24,575,613 (0.9%) Oil-International...... 54,448,875 (1.7%) 25,169,625 (1.0%) Pollution Control...... 16,542,550 (0.5%) 7,697,788 (0.3%) Restaurant............. 56,595,225 (1.8%) 26,450,950 (1.0%) Retail Grocery......... 96,199,400 (3.1%) 44,458,550 (1.7%) Retail Trade........... 203,995,450 (6.6%) 94,199,631 (3.5%) Software............... 82,984,778 (2.7%) 38,365,860 (1.4%) Telecommunications 20,702,053 (0.7%) 9,738,909 (0.4%) Equipment & Services.. Tobacco................ 55,233,400 (1.8%) 26,279,200 (1.0%) Transportation- 288 (0.0%) Trucking.............. Utilities-Electric..... 85,602,613 (2.8%) 38,564,994 (1.5%) Utilities-Gas 28,536,956 (0.9%) 13,312,681 (0.5%) Distribution & Pipelines............. Utilities-Telephone.... 178,222,078 (5.7%) 82,338,872 (3.1%) -------------- -------------- Total Common Stock..... 2,961,994,401 (95.2%) 1,368,211,549 (51.5%) -------------- -------------- LONG-TERM DEBT SECURITIES Corporate Bonds: Asset Backed........... $ 5,952,261 (1.1%) 55,261 (0.0%) Banking................ 4,912,622 (0.9%) 17,413,654 (0.7%) Collateralized Mortgage 23,365,521 (4.4%) 44,988,869 (1.7%) Obligations........... Drugs & Health Care.... 4,023,433 (0.8%) 9,762,956 (0.4%) Electrical Equipment... 5,669,210 (0.2%) Finance & Banking...... 12,285,984 (0.5%) Financial Services..... 88,530,073 (16.8%) 187,150,983 (7.0%) Food & Beverages....... 7,991,697 (1.5%) Healthcare Services.... 10,514,202 (2.0%) 19,278,706 (0.7%) Household Products..... 4,022,759 (0.8%) 5,804,994 (0.2%) Industrials............ 25,394,604 (4.8%) 96,688,722 (3.6%) Insurance.............. 2,999,260 (0.6%) 6,981,640 (0.3%) Miscellaneous.......... 2,397,587 (0.5%) 9,052,290 (0.3%) Mortgage Related....... 2,067,088 (0.4%) 18,490,416 (0.7%) Multi-Industry......... 4,255,312 (0.8%) 14,878,388 (0.6%) Newspapers............. 10,184,873 (1.9%) 20,021,470 (0.7%) Pollution Control...... 6,608,464 (1.3%) 17,460,438 (0.7%) Restaurant............. 3,312,855 (0.6%) 4,164,732 (0.2%) Retail Grocery......... 5,018,800 (0.9%) 10,149,300 (0.4%) Utilities-Electric..... 11,597,255 (2.2%) 11,922,582 (0.4%) Utilities-Telephone.... 4,725,144 (0.9%) 15,953,880 (0.6%) ------------ -------------- Total Corporate Bonds.. 227,873,810 (43.2%) 528,174,475 (19.9%) Federal Agency 43,969,433 (8.3%) 99,933,906 (3.8%) Obligations............ Federal Treasury 190,468,139 (36.2%) 413,509,607 (15.6%) Obligations............ Foreign Obligations..... 14,827,292 (2.8%) 31,091,792 (1.2%) State Agency 20,142,424 (3.8%) 50,582,786 (1.9%) Obligation............. Yankee Bonds............ 21,382,026 (4.1%) 43,966,468 (1.6%) ------------ -------------- Total Bonds............ 518,663,124 (98.4%) 1,167,259,034 (44.0%) ------------ -------------- SHORT-TERM OBLIGATIONS Commercial Paper....... 153,385,000 (4.9%) 24,658,252 (4.7%) $38,907,115 (94.5%) 144,348,000 (5.4%) -------------- ------------ ----------- -------------- FOREIGN OBLIGATIONS .... 1,978,317 (4.8%) ----------- TOTAL INVESTMENTS....... 3,115,379,401 (100.1%) 543,321,376 (103.1%) 40,885,432 (99.3%) 2,679,818,583 (100.9%) Other Assets Less (3,298,290) (-0.1%) (16,467,003) (-3.1%) 299,303 (0.7%) (22,831,517) (-0.9%) Liabilities........... -------------- ------------ ----------- -------------- NET ASSETS.............. $3,112,081,111 (100.0%) $526,854,373 (100.0%) $41,184,735 (100.0%) $2,656,987,066 (100.0%) ============== ============ =========== ==============
12 NOTES TO FINANCIAL STATEMENTS--(Continued) 5.SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1998--(CONTINUED) Metropolitan Series Fund, Inc.
State Street Research Santander MetLife Aggressive International Stock Index Growth Stock Portfolio Portfolio Portfolio -------------- -------------- ------------- COMMON STOCK Aerospace............... $ 39,162,797 (1.3%) $ 19,058,175 (1.3%) $ 1,022,761 (0.3%) Automotive.............. 50,697,557 (1.6%) 50,687,806 (3.6%) 9,542,116 (3.2%) Banking................. 226,942,249 (7.3%) 13,915,069 (1.0%) 43,646,670 (14.7%) Broadcasting............ 68,923,306 (2.2%) 129,192,089 (9.0%) Business Services....... 182,199,234 (12.7%) Building & 11,707,369 (0.4%) 6,667,401 (2.2%) Construction............ Business Services....... 44,921,087 (1.4%) Chemicals............... 56,423,606 (1.8%) 52,643,156 (3.7%) 539,483 (0.2%) Computer Equipment & 117,894,780 (3.8%) 39,012,934 (2.7%) Service................. Construction & Mining 148,738 (0.0%) Equipment............... Construction Materials.. 8,604,883 (2.9%) Consumer Products....... 581,507 (0.2%) Containers & Glass...... 5,030,406 (0.2%) 11,219,387 (0.8%) Cosmetics............... 5,524,500 (0.2%) Drugs & Health Care..... 275,280,674 (8.8%) 57,715,516 (4.0%) 30,583,278 (10.3%) Education............... 21,623,094 (1.5%) Electrical Equipment.... 133,697,394 (4.3%) 7,149,188 (0.5%) 5,308,380 (1.8%) Electronics............. 162,610,341 (5.2%) 72,071,731 (5.0%) 8,966,121 (3.0%) Entertainment & 29,081,710 (0.9%) 89,647,425 (6.3%) Leisure................. Financial Services...... 155,792,983 (5.0%) 26,278,875 (1.8%) 10,369,932 (3.5%) Food & Beverages........ 142,667,553 (4.6%) 3,010,144 (1.0%) Forest Products & 27,901,546 (0.9%) 593,175 (0.2%) Paper................... Healthcare Services..... 1,019,313 (0.0%) 20,341,956 (1.4%) Homebuilders............ 1,575,306 (0.1%) 3,931,488 (1.3%) Hospital Management..... 9,035,485 (0.3%) 16,403,625 (1.2%) Hotel & Motel........... 5,102,388 (0.2%) 20,250,769 (1.4%) Household Appliances & 5,126,825 (0.2%) 4,650,482 (1.6%) Home Furnishings........ Household Products...... 88,111,919 (2.8%) Industrial Components & 231,000 (0.0%) Material................ Insurance............... 100,057,086 (3.2%) 42,106,469 (2.9%) 28,578,219 (9.6%) Liquor.................. 4,647,400 (0.1%) Machinery............... 21,152,778 (0.7%) Medical Equipment & 86,922,531 (2.8%) 13,084,500 (0.9%) Supply.................. Metals-Aluminum......... 7,229,194 (0.2%) Metals-Gold............. 5,043,754 (0.2%) Metals-Non-Ferrous...... 1,590,626 (0.1%) 2,856,153 (1.0%) Metals-Steel & Iron..... 2,500,224 (0.1%) 649,136 (0.2%) Mining.................. 1,733,106 (0.1%) Miscellaneous........... 21,171,351 (0.7%) 12,238,669 (0.9%) 3,109,774 (1.0%) Multi-Industry.......... 11,674,256 (0.4%) 2,932,702 (1.0%) Newspapers.............. 14,141,700 (0.5%) Office & Business 139,575,075 (4.5%) 38,931,731 (2.7%) 1,794,427 (0.6%) Equipment............... Oil & Gas Exploration... 2,982,744 (0.1%) 15,520,862 (1.1%) 5,273,395 (1.8%) Oil-Domestic............ 23,193,860 (0.7%) Oil-International....... 133,887,606 (4.3%) 10,485,842 (3.5%) Oil-Services............ 17,001,025 (0.5%) Photography............. 7,522,413 (0.2%) 3,083,591 (1.0%) Pollution Control....... 9,371,951 (0.3%) 24,137,762 (1.7%) Printing & Publishing... 8,504,231 (0.3%) 32,332,737 (2.3%) Restaurant.............. 20,110,638 (0.6%) Retail Grocery.......... 24,447,469 (0.8%) 4,145,160 (1.4%) Retail Trade............ 177,505,612 (5.7%) 190,272,119 (13.3%) 7,371,495 (2.5%) Software................ 148,059,255 (4.8%) 99,577,969 (7.0%) Telecommunications 73,478,888 (5.1%) 12,397,259 (4.2%) Equipment & Services.... Textiles & Apparel...... 7,063,863 (0.2%) 10,687,669 (0.8%) Tires & Rubber.......... 3,766,669 (0.1%) 1,421,457 (0.5%) Tobacco................. 45,493,656 (1.5%) 9,957,902 (3.3%) Toys & Amusements....... 3,494,528 (0.1%) 11,522,594 (0.8%) 1,598,187 (0.5%) Transportation.......... 624,855 (0.2%) Transportation- 9,437,948 (0.3%) 3,280,800 (1.1%) Airlines................ Transportation- 3,068,259 (1.0%) Miscellaneous........... Transportation- 14,912,864 (0.5%) 508,639 (0.2%) Railroad................ Transportation- 572,000 (0.0%) Trucking................ Utilities-Electric...... 75,968,625 (2.4%) 11,213,151 (3.8%) Utilities-Gas 13,329,126 (0.4%) 16,061,906 (1.1%) 3,019,359 (1.0%) Distribution & Pipelines............... Utilities- 1,886,504 (0.1%) 2,707,194 (0.9%) Miscellaneous........... Utilities-Telephone..... 259,132,899 (8.3%) 33,505,139 (11.3%) -------------- -------------- ------------ Total Common Stock...... 3,089,695,399 (99.3%) 1,409,363,904 (98.5%) 291,599,916 (98.0%) ------------ PREFERRED STOCK Retail Trade............ 269,563 (0.1%) ------------ Total Preferred Stock... 269,563 (0.1%) ------------ Total Equity 291,869,479 Securities.............. SHORT-TERM OBLIGATIONS-- 6,447,000 (2.2%) REPURCHASE AGREEMENTS... ------------ SHORT-TERM OBLIGATIONS-- 1,574,324 (0.1%) COMMERCIAL PAPER........ -------------- -------------- TOTAL INVESTMENTS....... 3,089,695,399 (99.3%) 1,410,938,228 (98.6%) 298,316,479 (100.3%) Other Assets Less 22,223,585 (0.7%) 20,398,358 (1.4%) (935,567) (-0.3%) Liabilities............. -------------- -------------- ------------ NET ASSETS.............. $3,111,918,984 (100.0%) $1,431,336,586 (100.0%) $297,380,912 (100.0%) ============== ============== ============
13 NOTES TO FINANCIAL STATEMENTS--(Continued) 5.SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1998--(CONTINUED) Metropolitan Series Fund, Inc.
Loomis Sayles High Yield Bond Portfolio --------------- COMMON STOCK Banking............................................... $ 15,557 (0.0%) Forest Products & Paper............................... 870,986 (2.1%) Oil & Gas Exploration................................. 52,216 (0.1%) Real Estate........................................... 539,556 (1.3%) Restaurant............................................ 12,460 (0.0%) Utilities-Electric.................................... 89,870 (0.2%) ----------- Total Common Stock.................................... 1,580,645 (3.7%) ----------- PREFERRED STOCK Banking............................................... 212,295 (0.4%) Construction Materials................................ 62,344 (0.2%) Financial Services.................................... 164,529 (0.4%) Metals-Steel & Iron................................... 265,687 (0.6%) Office & Business Equipment........................... 820,589 (1.9%) Oil-Services.......................................... 112,219 (0.3%) Transportation-Shipping............................... 232,000 (0.6%) Transportation-Trucking............................... 51,000 (0.1%) Utilities-Electric.................................... 320,200 (0.8%) Utilities-Telephone................................... 213,750 (0.5%) ----------- Total Preferred Stock................................. 2,454,613 (5.8%) ----------- LONG-TERM DEBT SECURITIES Convertible Bonds: Automotive............................................ 351,750 (0.8%) Building & Construction............................... 84,000 (0.2%) Computer Equipment & Service.......................... 3,652,187 (8.6%) Drugs & Health Care................................... 1,117,000 (2.6%) Electronics........................................... 1,819,762 (4.3%) Entertainment & Leisure............................... 75,580 (0.2%) Foreign Obligation.................................... 4,378,810 (10.3%) Healthcare Services................................... 171,313 (0.4%) Industrial Components & Material...................... 73,750 (0.2%) Industrials........................................... 117,975 (0.3%) Medical Equipment & Supply............................ 407,825 (1.0%) Metals-Steel & Iron................................... 0 (0.0%) Mining................................................ 354,875 (0.8%) Oil & Gas Exploration................................. 136,000 (0.3%) Oil-Services.......................................... 261,056 (0.6%) Pollution Control..................................... 375,458 (0.9%) Real Estate........................................... 94,000 (0.2%) Restaurant............................................ 608,630 (1.4%) Retail Trade.......................................... 81,000 (0.2%) Telecommunications Equipment & Services............... 190,000 (0.5%) Textiles & Apparel.................................... 411,162 (1.0%) Transportation-Shipping............................... 241,125 (0.6%) Transportation-Trucking............................... 128,000 (0.3%) ----------- Total Convertible Bonds............................... 15,131,258 (35.7%) ----------- Corporate Bonds: Broadcasting.......................................... 1,762,079 (4.2%) Food & Beverages...................................... 588,209 (1.4%) Industrials........................................... 484,325 (1.1%) Oil & Gas Exploration................................. 856,500 (2.0%) Retail Grocery........................................ 216,000 (0.5%) Retail Trade.......................................... 389,250 (0.9%) Telecommunications Equipment & Services............... 2,226,525 (5.3%) Transportation........................................ 412,500 (1.0%) Transportation-Shipping............................... 360,000 (0.9%) Utilities-Electric.................................... 783,500 (1.8%) Utilities-Telephone................................... 1,162,125 (2.7%) ----------- Total Corporate Bonds................................. 9,241,013 (21.8%) ----------- Foreign Obligations.................................... 9,503,947 (22.4%) ----------- Yankee Bonds........................................... 2,867,825 (6.7%) ----------- Total Bonds........................................... 36,744,043 (96.1%) ----------- SHORT-TERM OBLIGATIONS--REPURCHASE AGREEMENTS.......... 794,000 (1.9%) ----------- TOTAL INVESTMENTS...................................... 41,573,301 (98.0%) Other Assets Less Liabilities......................... 829,690 (2.0%) ----------- NET ASSETS............................................. $42,402,991 (100.0%) ===========
14 NOTES TO FINANCIAL STATEMENTS--(Continued) 5.SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1998--(CONTINUED) Metropolitan Series Fund, Inc.
Janus T. Rowe Price Scudder Mid Cap Small Cap Growth Global Equity Portfolio Portfolio Portfolio ------------ ---------------- ------------- COMMON STOCK Aerospace............... $3,727,399 (1.0%) $ 4,229,684 2.2%) $ 1,879,388 (1.7%) Automotive.............. 2,564,169 (1.4%) Banking................. 9,622,934 (2.6%) 4,461,345 (2.4%) 4,198,216 (3.7%) Biotechnology........... 11,305,260 (3.0%) 1,266,294 (0.7%) 1,453,650 (1.3%) Broadcasting............ 56,634,368 (15.2%) 8,249,688 (4.4%) 5,551,477 (4.9%) Building & 2,130,563 (1.1%) Construction........... Business Services....... 28,673,398 (7.7%) 20,708,402 (11.0%) 1,494,872 (1.3%) Chemicals............... 1,736,627 (0.9%) 7,465,971 (6.6%) Computer Equipment & 24,005,995 (6.5%) 13,056,117 (6.9%) Service................ Construction Materials.. 1,041,569 (0.6%) 804,892 (0.7%) Construction & Mining 1,196,531 (0.6%) Equipment.............. Consumer Products....... 810,937 (0.4%) 1,847,336 (1.6%) Consumer Services....... 314,036 (0.3%) Drugs & Health Care..... 29,539,775 (8.0%) 15,080,999 (8.0%) 4,157,539 (3.7%) Education............... 49,914,109 (13.4%) 2,946,847 (1.6%) Electrical Equipment.... 1,206,631 (0.6%) 1,451,842 (1.3%) Electronics............. 31,345,472 (8.5%) 15,441,078 (8.2%) 2,655,535 (2.3%) Entertainment & 3,353,212 (0.9%) 4,214,784 (2.2%) Leisure................ Financial Services...... 18,747,329 (5.0%) 5,415,602 (2.9%) 645,360 (0.6%) Food & Beverages........ 2,135,359 (1.1%) 2,954,732 (2.6%) Forest Products & 55,000 (0.0%) 319,973 (0.3%) Paper.................. General Business........ 3,927,964 (1.1%) Healthcare Services..... 4,612,719 (2.4%) Hospital Management..... 638,575 (0.3%) Hotel & Motel........... 340,747 (0.2%) Household Appliances & 403,925 (0.2%) Home Furnishings....... Insurance............... 3,745,319 (2.0%) 11,857,700 (10.4%) Machinery............... 669,592 (0.6%) Medical Equipment & 4,249,506 (2.2%) 1,516,833 (1.3%) Supply................. Metals--Gold............ 2,892,048 (2.5%) Metals--Non-Ferrous..... 215,600 (0.1%) 2,869,241 (2.5%) Metals--Steel & Iron.... 1,047,581 (0.9%) Mining.................. 876,832 (0.8%) Miscellaneous........... 1,838,275 (1.0%) Multi-Industry.......... 3,295,292 (0.9%) 3,397,089 (3.0%) Newspapers.............. 1,033,000 (0.5%) Office & Business 4,521,756 (2.4%) 3,408,501 (3.0%) Equipment.............. Oil & Gas Exploration... 697,450 (0.4%) 1,039,598 (0.9%) Oil..................... 213,875 (0.2%) Oil--Domestic........... 1,949,213 (1.7%) Oil--International...... 1,961,332 (1.7%) Oil--Services........... 1,409,228 (0.7%) 904,951 (0.8%) Photography............. 450,056 (0.2%) Pollution Control....... 923,737 (0.5%) Printing & Publishing... 1,210,744 (0.6%) 1,014,244 (0.9%) Real Estate............. 1,252,440 (0.7%) 1,934,002 (1.7%) Restaurant.............. 19,240,018 (5.2%) 3,582,490 (1.9%) Retail Grocery.......... 1,872,900 (1.0%) Retail Trade............ 13,958,932 (3.8%) 16,684,107 (8.8%) Shipbuilding............ 717,072 (0.4%) Software................ 13,719,159 (3.7%) 14,046,833 (7.4%) 3,141,600 (2.8%) Telecommunications 27,154,008 (7.3%) 10,619,403 (5.6%) 1,177,250 (1.0%) Equipment & Services... Textiles & Apparel...... 1,837,403 (1.0%) Transportation-- 6,419,241 (1.7%) 1,762,225 (0.9%) 2,026,000 (1.8%) Airlines............... Transportation-- 883,047 (0.5%) 1,918,670 (1.7%) Railroad............... Transportation-- 1,206,775 (0.6%) Trucking............... Utilities--Electric..... 7,631,561 (6.7%) Utilities--Gas 2,852,129 (2.5%) Distribution & Pipelines.............. Utilities--Telephone.... 103,469 (0.1%) 2,664,242 (2.3%) ------------ ------------ ------------ Total Common Stock...... 354,583,865 (95.5%) 188,807,027 (99.8%) 96,158,903 (84.6%) ------------ ------------ ------------ PREFERRED STOCK Food & Beverages........ 227,228 (0.2%) Metals--Steel & Iron.... 327,140 (0.3%) Oil--International...... 244,426 (0.2%) Software................ 1,099,328 (1.0%) ------------ ------------ ------------ Total Preferred Stock... -- -- 1,898,122 (1.7%) ------------ ------------ ------------ Total Equity 354,583,865 (95.5%) 188,807,027 (99.8%) 98,057,025 (86.3%) Securities............. ------------ ------------ ------------ LONG-TERM DEBT SECURITIES Federal Treasury 7,775,488 (6.8%) Obligations............ Foreign Obligations..... 2,113,840 (1.9%) ------------ Total Long-Term Debt 9,889,328 (8.7%) Securities............. ------------ SHORT-TERM OBLIGATIONS Commercial Paper........ 14,593,552 (3.9%) 1,170,561 (0.6%) Federal Agency 7,884,076 (4.2%) Obligations............ Repurchase Agreements... 6,398,000 (5.6%) ------------ ------------ ------------ Total Short-Term 14,593,552 (3.9%) 9,054,637 (4.8%) 6,398,000 (5.6%) Obligations............ ------------ ------------ ------------ TOTAL INVESTMENTS....... 369,177,417 (99.4%) 197,861,664 (104.6%) 114,344,353 (100.6%) Other Assets Less 2,326,494 (0.6%) (8,729,698) (-4.6%) (629,356) (-0.6%) Liabilities............ ------------ ------------ ------------ NET ASSETS.............. $371,503,911 (100.0%) $189,131,966 (100.0%) $113,714,997 (100.0%) ============ ============ ============
15 NOTES TO FINANCIAL STATEMENTS--(Concluded) 5. SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1998--(CONCLUDED) The value of the investments of the Fund's portfolios are determined using the following valuation techniques. Portfolio securities that are traded on domestic stock exchanges are valued at the last price as of the close of business on the day the securities are being valued, or, lacking any sales, at the mean between closing bid and asked prices (except for the Loomis Sayles High Yield Bond Portfolio, which in the latter case would value such securities at the last bid price). Securities trading primarily on non- domestic exchanges are valued at the preceding closing price on the exchange where it primarily trades (or, in the case of the Loomis Sayles High Yield Bond and Scudder Global Equity Portfolios, the last sale). A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for that security by the Board of Directors or its delegates. If no closing price is available, then such securities are valued by using the mean between the last current bid and asked prices or, second, by using the last available closing price (except for the Scudder Global Equity Portfolio which second values such securities at the last current bid, and third by using the last available price). Domestic securities traded in the over-the-counter market are valued at the mean between the bid and asked prices or yield equivalent as obtained from two or more dealers that make markets in the securities (except for the Loomis Sayles High Yield Bond Portfolio, which, in the latter case, would value such security at the last bid price; or the Scudder Global Equity Portfolio which would value such security first at the last sale, and second at the bid price). All non-U.S. securities traded in the over-the-counter securities market are valued at the last sale quote, if market quotations are available, or the last closing bid price, if there is no active trading in a particular security for a given day. Where market quotations are not readily available such non-domestic over-the-counter securities, then such securities will be valued in good faith by a method that the Board of Directors, or it delegates, believe accurately reflects fair value. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market, and it is expected that for debt securities this ordinarily will be the over-the-counter market. Securities and assets for which market quotations are not readily available (e.g. certain long-term bonds and notes) are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund, including valuations furnished by a pricing service retained for this purpose and typically utilized by other institutional-sized trading organizations. Forward foreign currency exchange contracts are valued based on the closing prices of the forward currency contract rates in the London foreign exchange markets on a daily basis as provided by a reliable bank or dealer. Short-term instruments with a remaining maturity of sixty days or less are valued utilizing the amortized cost, method of valuation. If for any reason the fair value of any security is not fairly reflected by such method, such security will be valued by the same methods as securities having a maturity of more than sixty days. Options, whether on securities, indices, or futures contracts, are valued at the last sales price available as of the close of business on the day of valuation or, if no sale, at the mean between the bid and asked prices. Options on currencies are valued at the spot price each day. As a general matter, futures contracts are marked-to-market daily. The value of futures contracts will be the sum of the margin deposit plus or minus the difference between the value of the futures contract on each day the net asset value is calculated and the value on the date the futures contract originated, value being that established on a recognized commodity exchange, or by reference to other customary sources, with gain or loss being realized when the futures contract closes or expires. 16 Metropolitan Life Insurance Company Consolidated Financial Statements as of December 31, 1998 and 1997 and for the Years Ended December 31, 1998, 1997 and 1996 and Independent Auditors' Report Independent Auditors' Report The Board of Directors and Policyholders of Metropolitan Life Insurance Company: We have audited the accompanying consolidated balance sheets of Metropolitan Life Insurance Company and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, equity and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Metropolitan Life Insurance Company and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1997 the Company changed the method of accounting for investment income on certain structured securities. DELOITTE & TOUCHE LLP New York, New York February 4, 1999 2 Metropolitan Life Insurance Company CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1998, 1997 and 1996 (In millions)
1998 1997 1996 ------- ------- ------- REVENUES Premiums............................................... $11,503 $11,278 $11,345 Universal life and investment-type product policy fees. 1,360 1,418 1,243 Net investment income.................................. 10,228 9,491 8,978 Other revenues......................................... 1,965 1,491 1,246 Net realized investment gains.......................... 2,021 787 231 ------- ------- ------- 27,077 24,465 23,043 ------- ------- ------- EXPENSES Policyholder benefits and claims....................... 12,488 12,234 12,286 Interest credited to policyholder account balances..... 2,731 2,884 2,868 Policyholder dividends................................. 1,653 1,742 1,728 Other expenses......................................... 8,118 5,934 4,755 ------- ------- ------- 24,990 22,794 21,637 ------- ------- ------- Income before provision for income taxes, discontinued operations and extraordinary item..................... 2,087 1,671 1,406 Provision for income taxes............................. 740 468 482 ------- ------- ------- Income before discontinued operations and extraordinary item.................................................. 1,347 1,203 924 Loss from discontinued operations...................... -- -- 71 ------- ------- ------- Income before extraordinary item....................... 1,347 1,203 853 Extraordinary item--demutualization expense............ 4 -- -- ------- ------- ------- Net income............................................. $ 1,343 $ 1,203 $ 853 ======= ======= =======
See accompanying notes to consolidated financial statements. 3 Metropolitan Life Insurance Company CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (In millions)
1998 1997 -------- -------- ASSETS Investments: Fixed maturities available-for-sale, at fair value......... $100,767 $ 92,630 Equity securities, at fair value........................... 2,340 4,250 Mortgage loans on real estate.............................. 16,827 20,193 Real estate and real estate joint ventures................. 6,287 7,080 Policy loans............................................... 5,600 5,846 Other limited partnership interests........................ 964 855 Short-term investments..................................... 1,369 679 Other invested assets...................................... 1,567 4,456 -------- -------- 135,721 135,989 Cash and cash equivalents.................................... 3,301 2,911 Accrued investment income.................................... 1,994 1,860 Premiums and other receivables............................... 5,972 3,319 Deferred policy acquisition costs............................ 6,560 6,436 Other........................................................ 3,448 3,641 Separate account assets...................................... 58,350 48,620 -------- -------- $215,346 $202,776 ======== ======== LIABILITIES AND EQUITY Liabilities: Future policy benefits....................................... $ 72,701 $ 73,848 Policyholder account balances................................ 46,494 48,543 Other policyholder funds..................................... 4,061 3,998 Policyholder dividends payable............................... 947 969 Short-term debt.............................................. 3,585 4,587 Long-term debt............................................... 2,903 2,884 Income taxes payable, current and deferred................... 948 952 Other........................................................ 10,772 4,650 Separate account liabilities................................. 58,068 48,338 -------- -------- 200,479 188,769 -------- -------- Commitments and contingencies (Note 9) Equity: Retained earnings............................................ 13,483 12,140 Accumulated other comprehensive income....................... 1,384 1,867 -------- -------- 14,867 14,007 -------- -------- $215,346 $202,776 ======== ========
See accompanying notes to consolidated financial statements. 4 Metropolitan Life Insurance Company CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED) For the Years Ended December 31, 1998, 1997 and 1996 (In millions)
Accumulated Other Comprehensive Income ---------------------------------------------- Net Foreign Minimum Unrealized Currency Pension Comprehensive Retained Investment Translation Liability Total Income Earnings Gains Adjustment Adjustment ------- ------------- -------- ------------- ------------- ------------ Balance at January 1, 1996................... $11,754 $10,084 $ 1,646 $ 24 $ -- Comprehensive income: Net income............. 853 $ 853 853 ------ Other comprehensive loss: Unrealized investment losses, net of related offsets, reclassification adjustments and income taxes........ (618) (618) Foreign currency translation adjustments......... (6) (6) ------ Other comprehensive loss.................. (624) (624) ------ Comprehensive income. $ 229 ------- ====== ------- ------------- ------------ ------------ Balance at December 31, 1996................... 11,983 10,937 1,028 18 -- Comprehensive income: Net income............. 1,203 $1,203 1,203 ------ Other comprehensive income: Unrealized investment gains, net of related offsets, reclassification adjustments and income taxes........ 870 870 Foreign currency translation adjustments......... (49) (49) ------ Other comprehensive income................ 821 821 ------ Comprehensive income. $2,024 ------- ====== ------- ------------- ------------ ------------ Balance at December 31, 1997................... 14,007 12,140 1,898 (31) -- Comprehensive income: Net income............. 1,343 $1,343 1,343 Other comprehensive loss: Unrealized investment losses, net of related offsets, reclassification adjustments and income taxes........ (358) (358) Foreign currency translation adjustments......... (113) (113) Minimum pension liability adjustment.......... (12) (12) ------ Other comprehensive loss.................. (483) (483) ------- ------ Comprehensive income. $ 860 ------- ------- ------------- ------------ ------------ ====== Balance at December 31, 1998................... $14,867 $13,483 $ 1,540 $ (144) $ (12) ======= ======= ============= ============ ============
See accompanying notes to consolidated financial statements. 5 Metropolitan Life Insurance Company CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1998, 1997 and 1996 (In millions)
1998 1997 1996 -------- -------- -------- Cash flows from operating activities Net income....................................... $ 1,343 $ 1,203 $ 853 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expenses....... 56 (36) (18) Gains from sales of investments and businesses, net............................. (2,629) (1,018) (428) Change in undistributed income of real estate joint ventures and other limited partnership interests................................... (91) 157 (45) Interest credited to policyholder account balances.................................... 2,731 2,884 2,868 Universal life and investment-type product policy fees................................. (1,360) (1,418) (1,243) Change in accrued investment income.......... (181) (215) 350 Change in premiums and other receivables..... (2,681) (792) (125) Change in deferred policy acquisition costs, net......................................... (188) (159) (391) Change in insurance related liabilities...... 1,493 2,364 2,349 Change in income taxes payable............... 211 (99) (134) Change in other liabilities.................. 2,390 (206) 902 Other, net................................... (253) 207 (1,250) -------- -------- -------- Net cash provided by operating activities........ 841 2,872 3,688 -------- -------- -------- Cash flows from investing activities Sales, maturities and repayments of: Fixed maturities............................. 57,857 75,346 76,117 Equity securities............................ 3,085 1,821 2,069 Mortgage loans on real estate................ 2,296 2,784 2,380 Real estate and real estate joint ventures... 1,122 2,046 2,358 Other limited partnership interests.......... 146 166 178 Purchases of: Fixed maturities............................. (67,543) (76,603) (76,225) Equity securities............................ (854) (2,121) (2,742) Mortgage loans on real estate................ (2,610) (4,119) (4,225) Real estate and real estate joint ventures... (423) (624) (989) Other limited partnership interests.......... (723) (338) (307) Net change in short-term investments........... (761) 63 1,028 Net change in policy loans..................... 133 17 (128) Proceeds from sales of businesses.............. 7,372 274 -- Net change in investment collateral............ 3,769 -- -- Other, net..................................... (183) (378) (438) -------- -------- -------- Net cash provided by (used in) investing activities...................................... 2,683 (1,666) (924) -------- -------- -------- Cash flows from financing activities Policyholder account balances: Deposits..................................... $ 19,361 $ 16,061 $ 17,167 Withdrawals.................................. (21,706) (18,831) (19,321) Short-term debt, net........................... (1,001) 1,265 69 Long-term debt issued.......................... 693 989 -- Long-term debt repaid.......................... (481) (104) (284) -------- -------- -------- Net cash used in financing activities............ (3,134) (620) (2,369) -------- -------- -------- Change in cash and cash equivalents.............. 390 586 395 Cash and cash equivalents, beginning of year..... 2,911 2,325 1,930 -------- -------- -------- Cash and cash equivalents, end of year........... $ 3,301 $ 2,911 $ 2,325 ======== ======== ======== Supplemental disclosures of cash flow information: Interest....................................... $ 367 $ 422 $ 310 ======== ======== ======== Income taxes................................... $ 579 $ 589 $ 497 ======== ======== ========
Cash paid during the year for: See accompanying notes to consolidated financial statements. 6 Metropolitan Life Insurance Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts are in millions unless otherwise stated) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Metropolitan Life Insurance Company ("MetLife") and its subsidiaries (the "Company") is a leading provider of insurance and financial services to a broad section of institutional and individual customers. The Company offers life insurance, annuities and mutual funds to individuals and group insurance and retirement and savings products and services to corporations and other institutions. Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The New York State Insurance Department (the "Department") recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company for determining solvency under the New York Insurance Law. No consideration is given by the Department to financial statements prepared in accordance with GAAP in making such determination. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates include those used in determining deferred policy acquisition costs, investment allowances and the liability for future policyholder benefits. Actual results could differ from those estimates. During 1997, management changed to the retrospective interest method of accounting for investment income on structured notes in accordance with authoritative guidance issued in late 1996. As a result, net investment income increased by $175. The cumulative effect of this accounting change on prior years' income was not material. Principles of Consolidation The accompanying consolidated financial statements include the accounts of MetLife and its subsidiaries, partnerships and joint ventures in which MetLife has a controlling interest. All material intercompany accounts and transactions have been eliminated. The Company accounts for its investments in real estate joint ventures and other limited partnership interests in which it does not have a controlling interest, but more than a minimal interest, under the equity method of accounting. Minority interest relating to consolidated entities included in other liabilities was $274 and $277 at December 31, 1998 and 1997, respectively. Certain amounts in the prior years' consolidated financial statements have been reclassified to conform with the 1998 presentation. Investments The Company's fixed maturity and equity securities are classified as available-for-sale and are reported at their estimated fair value. Unrealized investment gains and losses on securities are recorded as a separate component of other comprehensive income, net of policyholder related amounts and deferred income taxes. The cost of fixed maturity and equity securities is adjusted for impairments in value deemed to be other than temporary. These adjustments are recorded as realized losses on investments. Realized gains and losses on sales of securities are determined on a specific identification basis. All security transactions are recorded on a trade date basis. Mortgage loans on real estate are stated at amortized cost, net of valuation allowances. Valuation allowances are established for the excess carrying value of the mortgage loan over its estimated fair value when it is probable that, based upon current information and events, the Company will be unable to collect all amounts due under the 7 NOTES TO FINANCIAL STATEMENTS--(Continued) contractual terms of the loan agreement. Valuation allowances are based upon the present value of expected future cash flows discounted at the loan's original effective interest rate or the collateral value if the loan is collateral dependent. Interest income earned on impaired loans is accrued on the net carrying value amount of the loan based on the loan's effective interest rate. Real estate, including related improvements, is stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful life of the asset (typically 20 to 40 years). Cost is adjusted for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Impaired real estate is written down to estimated fair value with the impairment loss being included in realized losses on investments. Impairment losses are based upon the estimated fair value of real estate, which is generally computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks. Real estate acquired in satisfaction of debt is recorded at estimated fair value at the date of foreclosure. Valuation allowances on real estate held-for-sale are computed using the lower of depreciated cost or estimated fair value, net of disposition costs. Policy loans are stated at unpaid principal balances. Short-term investments are stated at amortized cost, which approximates fair value. Derivative Instruments The Company uses derivative instruments to manage market risk through one of four principal risk management strategies: the hedging of invested assets, liabilities, portfolios of assets or liabilities and anticipated transactions. The Company's derivative strategy employs a variety of instruments including financial futures, financial forwards, interest rate and foreign currency swaps, floors, foreign exchange contracts, caps and options. The Company's derivative program is monitored by senior management. The Company's risk of loss is typically limited to the fair value of its derivative instruments and not to the notional or contractual amounts of these derivatives. Risk arises from changes in the fair value of the underlying instruments and, with respect to over-the-counter transactions, from the possible inability of counterparties to meet the terms of the contracts. The Company has strict policies regarding the financial stability and credit standing of its major counterparties. The Company's derivative instruments are designated as hedges and are highly correlated to the underlying risk at contract inception. The Company monitors the effectiveness of its hedges throughout the contract term using an offset ratio of 80 to 125 percent as its minimum acceptable threshold for hedge effectiveness. Derivative instruments that lose their effectiveness are marked to market through net investment income. Gains or losses on financial futures contracts entered into in anticipation of investment transactions are deferred and, at the time of the ultimate investment purchase or disposition, recorded as an adjustment to the basis of the purchased assets or to the proceeds on disposition. Gains or losses on financial futures used in asset risk management are deferred and amortized into net investment income over the remaining term of the investment. Gains or losses on financial futures used in portfolio risk management are deferred and amortized into net investment income or policyholder benefits over the remaining life of the hedged sector of the underlying portfolio. Financial forward contracts that are entered into to purchase securities are marked to fair value through other comprehensive income, similar to the accounting for the investment security. Such contracts are accounted for at settlement by recording the purchase of the specified securities at fair value. Gains or losses resulting from the termination of forward contracts are recognized immediately as a component of net investment income. Interest rate and certain foreign currency swaps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net receipts or payments are accrued and recognized over the term of the swap agreement as an adjustment to net investment income or other expense. Gains or losses resulting from swap terminations are amortized over the remaining term of the underlying asset or liability. Gains and losses on swaps and certain foreign forward exchange contracts entered into in anticipation of investment transactions are deferred and, at the time of the ultimate investment purchase or disposition, reflected as an adjustment to the basis of the purchased 8 NOTES TO FINANCIAL STATEMENTS--(Continued) assets or to the proceeds of disposition. In the event the asset or liability underlying a swap is disposed of, the swap position is closed immediately and any gain or loss is recorded as an adjustment to the proceeds from disposition. The Company periodically enters into collars, which consist of purchased put and written call options, to lock in unrealized gains on equity securities. Collars are marked to market through other comprehensive income, similar to the accounting for the underlying equity securities. Purchased interest rate caps and floors are used to offset the risk of interest rate changes related to insurance liabilities. Premiums paid on floors, caps and options are split into two components, time value and intrinsic value. Time value is amortized over the life of the applicable derivative instrument. The intrinsic value and any gains or losses relating to these derivative instruments adjust the basis of the underlying asset or liability and are recognized as a component of net investment income over the term of the underlying asset or liability being hedged as an adjustment to the yield. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Property, Equipment and Leasehold Improvements Property, equipment and leasehold improvements, which are included in other assets, are stated at cost, less accumulated depreciation and amortization. Depreciation is determined using either the straight-line or sum-of-the-years- digits method over the estimated useful lives of the assets. Estimated lives range from 20 to 40 years for real estate and 5 to 15 years for all other property and equipment. Accumulated depreciation on property and equipment and accumulated amortization of leasehold improvements was $1,048 at both December 31, 1998 and 1997. Related depreciation and amortization expense was $95, $103 and $78 for the years ended December 31, 1998, 1997 and 1996, respectively. Deferred Policy Acquisition Costs The costs of acquiring new insurance business that vary with, and are primarily related to, the production of new business are deferred. Such costs, which consist principally of commissions, agency and policy issue expenses, are amortized over the expected life of the contract for participating traditional life, universal life and investment-type products. Generally, deferred policy acquisition costs are amortized in proportion to the present value of estimated gross margins or profits from investment, mortality, expense margins and surrender charges. Actual gross margins or profits can vary from management's estimates resulting in increases or decreases in the rate of amortization. Management periodically updates these estimates and evaluates the recoverability of deferred policy acquisition costs. When appropriate, management revises its assumptions of the estimated gross margins or profits of these contracts, and the cumulative amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. Deferred policy acquisition costs for non-participating traditional life, non-medical health and annuity policies with life contingencies are amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are made at the date of policy issuance and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in operations when they occur. For these contracts, the amortization period is typically the estimated life of the policy. Deferred policy acquisition costs for property and liability insurance contracts, which are primarily comprised of commissions and certain underwriting expenses, are deferred and amortized on a pro rata basis over the applicable contract term or reinsurance treaty. Other Intangible Assets The excess of cost over the fair value of net assets acquired ("goodwill") and the value of business acquired are included in other assets. Goodwill is amortized on a straight-line basis over a period ranging from 10 to 30 years. The Company continually reviews goodwill to assess recoverability from future operations using undiscounted cash flows. 9 NOTES TO FINANCIAL STATEMENTS--(Continued) Impairments are recognized in operating results if a permanent diminution in value is deemed to have occurred. The value of business acquired is amortized over the expected policy or contract duration in relation to the present value of estimated gross profits from such policies and contracts.
Value of Business Acquired Goodwill -------------------------- ---------------- Years Ended December 31 1998 1997 1996 1998 1997 1996 - ----------------------- -------- -------- -------- ---- ---- ---- Net Balance at January 1........ $ 498 $ 358 $ 381 $884 $544 $377 Acquisitions.................... 32 176 7 80 387 197 Amortization.................... (55) (36) (30) (59) (47) (30) -------- -------- -------- ---- ---- ---- Net Balance at December 31...... $ 475 $ 498 $ 358 $905 $884 $544 ======== ======== ======== ==== ==== ==== December 31 1998 1997 1998 1997 - ----------- -------- -------- ---- ---- Accumulated Amortization........ $ 142 $ 87 $207 $148 ======== ======== ==== ====
Future Policy Benefits and Policyholder Account Balances Future policy benefit liabilities for participating traditional life insurance policies are equal to the aggregate of (a) net level premium reserves for death and endowment policy benefits (calculated based upon the nonforfeiture interest rate, ranging from 2% to 7%, and mortality rates guaranteed in calculating the cash surrender values described in such contracts), (b) the liability for terminal dividends, and (c) premium deficiency reserves, which are established when the liabilities for future policy benefits plus the present value of expected future gross premiums are insufficient to provide for expected future policy benefits and expenses after deferred policy acquisition costs are written off. Future policy benefit liabilities for traditional annuities are equal to accumulated contractholder fund balances during the accumulation period and the present value of expected future payments after annuitization. Interest rates used in establishing such liabilities range from 5% to 8%. Future policy benefit liabilities for non-medical health insurance are calculated using the net level premium method and assumptions as to future morbidity, withdrawals and interest, which provide a margin for adverse deviation. Interest rates used in establishing such liabilities range from 4% to 7%. Future policy benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest. Interest rates used in establishing such liabilities range from 4% to 8%. Policyholder account balances for universal life and investment-type contracts are equal to the policy account values, which consist of an accumulation of gross premium payments plus credited interest, ranging from 3% to 17%, less expenses, mortality charges and withdrawals. The liability for unpaid claims and claim expenses for property and casualty insurance represents the amount estimated for claims that have been reported but not settled and claims incurred but not reported. Liabilities for unpaid claims are estimated based upon the Company's historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs. Revisions of these estimates are reflected in operations in the year such refinements are made. Recognition of Insurance Revenue and Related Benefits Premiums related to traditional life and annuity policies with life contingencies are recognized as revenues when due. Benefits and expenses are provided against such revenues to recognize profits over the estimated lives of the policies. When premiums are due over a significantly shorter period than the period over which benefits are provided, any excess profit is deferred and recognized into operations in a constant relationship to insurance in-force or, for annuities, the amount of expected future policy benefit payments. 10 NOTES TO FINANCIAL STATEMENTS--(Continued) Premiums related to non-medical health contracts are recognized on a pro rata basis over the applicable contract term. Premiums related to universal life and investment-type contracts are credited to policyholder account balances. Revenues from such contracts consist of amounts assessed against policyholder account balances for mortality, policy administration and surrender charges. Amounts that are charged to operations include interest credited and benefit claims incurred in excess of related policyholder account balances. Premiums related to property and casualty contracts are recognized as revenue on a pro rata basis over the applicable contract term. Unearned premiums are included in other liabilities. Dividends to Policyholders Dividends to policyholders are determined annually by the Board of Directors. The aggregate amount of policyholders' dividends is related to actual interest, mortality, morbidity and expense experience for the year, as well as management's judgment as to the appropriate level of statutory surplus to be retained by the Company. Participating Business Participating business represented approximately 21% and 22% of the Company's life insurance in-force, and 81% and 87% of the number of life insurance policies in-force, at December 31, 1998 and 1997, respectively. Participating policies represented approximately 39% and 40%, 41% and 41%, and 40% and 44% of gross and net life insurance premiums for the years ended December 31, 1998, 1997 and 1996, respectively. Income Taxes MetLife and its includable life insurance and non-life insurance subsidiaries file a consolidated U.S. Federal income tax return in accordance with the provisions of the Internal Revenue Code, as amended ("the Code"). Under the Code, the amount of Federal income tax expense incurred by mutual life insurance companies includes an equity tax calculated based upon a prescribed formula that incorporates a differential earnings rate between stock and mutual life insurance companies. The future tax consequences of temporary differences between financial reporting and tax bases of assets and liabilities are measured as of the balance sheet dates and are recorded as deferred income tax assets and liabilities. Reinsurance The Company has reinsured certain of its life insurance and property and casualty insurance contracts with other insurance companies under various agreements. Amounts due from reinsurers are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Policy and contract liabilities are reported gross of reinsurance credits. Separate Accounts Separate accounts are established in conformity with insurance laws and are generally not chargeable with liabilities that arise from any other business of the Company. Separate account assets are subject to general account claims only to the extent the value of such assets exceeds the separate account liabilities. Investments (stated at estimated fair value) and liabilities of the separate accounts are reported separately as assets and liabilities. Deposits to separate accounts, investment income and realized and unrealized gains and losses on the investments of the separate accounts accrue directly to contractholders and, accordingly, are not reflected in the Company's consolidated statements of income and cash flows. Mortality, policy administration and surrender charges to all separate accounts are included in revenues. Foreign Currency Translation Balance sheet accounts of foreign operations are translated at the exchange rates in effect at each year-end and income and expense accounts are translated at the average rates of exchange prevailing during the year. The local currencies of foreign operations are generally the functional currencies. Translation adjustments are charged or 11 NOTES TO FINANCIAL STATEMENTS--(Continued) credited directly to other comprehensive income. Gains and losses from foreign currency transactions are reported in other expenses and were insignificant for all years presented. Extraordinary Item--Demutualization Expense On November 24, 1998, the Board of Directors authorized management to develop a plan to convert from a mutual life insurance company to a stock life insurance company (the "demutualization"). A final plan to convert to a publicly traded stock company is subject to the approval of the Board of Directors, the policyholders and the New York Superintendent of Insurance ("Superintendent"). The Department has not yet reviewed or approved any materials relating to the demutualization. The accompanying consolidated statements of income reflect an extraordinary charge of $4 (net of income taxes of $2) for the year ended December 31, 1998 related to costs associated with the demutualization. Application of Accounting Pronouncements In October 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-7, Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk ("SOP 98-7"). SOP 98-7 provides guidance on the method of accounting for insurance and reinsurance contracts that do not transfer insurance risk, defined in the SOP as the deposit method. SOP 98-7 classifies insurance and reinsurance contracts for which the deposit method is appropriate into those that 1) transfer only significant timing risk, 2) transfer only significant underwriting risk, 3) transfer neither significant timing or underwriting risk and 4) have an indeterminate risk. The Company is required to adopt SOP 98-7 as of January 1, 2000. Adoption of SOP 98-7 is not expected to have a material effect on the Company's consolidated financial statements. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires, among other things, that all derivatives be recognized in the consolidated balance sheets as either assets or liabilities and measured at fair value. The corresponding derivative gains and losses should be reported based upon the hedge relationship, if such a relationship exists. Changes in the fair value of derivatives that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS 133 are required to be reported in income. The Company is required to adopt SFAS 133 as of January 1, 2000. The Company is in the process of quantifying the impact of SFAS 133 on its consolidated financial statements. In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 broadly defines start-up activities. SOP 98- 5 requires costs of start-up activities and organization costs to be expensed as incurred. The Company is required to adopt SOP 98-5 as of January 1, 1999. Adoption of SOP 98-5 is not expected to have a material effect on the Company's consolidated financial statements. In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98- 1 provides guidance for determining when an entity should capitalize or expense external and internal costs of computer software developed or obtained for internal use. The Company is required to adopt SOP 98-1 as of January 1, 1999. Adoption of SOP 98-1 is not expected to have a material effect on the Company's consolidated financial statements. In December 1997, the AICPA issued SOP 97-3, Accounting for Insurance and Other Enterprises for Insurance Related Assessments ("SOP 97-3"). SOP 97-3 provides guidance on accounting by insurance and other enterprises for assessments related to insurance activities including recognition, measurement and disclosure of guaranty fund and other insurance related assessments. The Company is required to adopt SOP 97-3 as of January 1, 1999. Adoption of SOP 97-3 is not expected to have a material effect on the Company's consolidated financial statements. In 1998, the Company adopted SFAS 131, Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes standards for reporting financial information and related disclosures about products and services, geographic areas and major customers relating to operating segments in annual financial statements. Adoption of SFAS 131 had no effect on the Company's consolidated financial statements. 12 NOTES TO FINANCIAL STATEMENTS--(Continued) In 1998, the Company adopted SFAS 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Adoption of SFAS 130 had no effect on the Company's consolidated financial statements. In 1998, the Company adopted the provisions of SFAS 125 which were deferred by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. The deferred provisions provide accounting and reporting standards related to repurchase agreements, dollar rolls, securities lending and similar transactions. Adoption of the provisions had the effect of increasing assets and liabilities by $3,769 at December 31, 1998 and increasing revenues and expenses by $266 for the year ended December 31, 1998. 2. INVESTMENTS The components of net investment income were as follows:
Years ended December 31, --------------------------- 1998 1997 1996 -------- -------- -------- Fixed maturities........................... $ 6,563 $ 6,445 $ 6,042 Equity securities.......................... 78 50 60 Mortgage loans on real estate.............. 1,572 1,684 1,523 Real estate and real estate joint ventures. 1,529 1,718 1,668 Policy loans............................... 387 368 399 Other limited partnership interests........ 196 302 215 Cash, cash equivalents and short-term investments 187 169 214 Other...................................... 841 368 401 -------- ------- -------- 11,353 11,104 10,522 Less: Investment expenses.................. 1,125 1,613 1,544 -------- ------- -------- $10,228 $ 9,491 $ 8,978 ======== ======= ======== Net realized investment gains, including changes in valuation allowances, were as follows: Years ended December 31, --------------------------- 1998 1997 1996 -------- -------- -------- Fixed maturities........................... $ 573 $ 118 $ 234 Equity securities.......................... 994 224 101 Mortgage loans on real estate.............. 23 56 (86) Real estate and real estate joint ventures. 424 446 371 Other limited partnership interests........ 13 12 (129) Sale of subsidiaries....................... 531 139 -- Other...................................... 71 23 (33) -------- ------- -------- 2,629 1,018 458 Amounts allocable to: Future policy benefit loss recognition... (300) (126) (203) Deferred policy acquisition costs........ (240) (70) (4) Participating pension contracts.......... (68) (35) (20) -------- ------- -------- $ 2,021 $ 787 $ 231 ======== ======= ========
13 NOTES TO FINANCIAL STATEMENTS--(Continued) The components of net unrealized investment gains, included in accumulated other comprehensive income, were as follows:
Years ended December 31, ------------------------- 1998 1997 1996 ------- ------- ------- Fixed maturities............................. $ 4,809 $ 4,766 $ 2,226 Equity securities............................ 832 1,605 563 Other invested assets........................ 125 294 474 ------- ------- ------- 5,766 6,665 3,263 ------- ------- ------- Amounts allocable to: Future policy benefit loss recognition..... (2,248) (2,189) (1,219) Deferred policy acquisition costs.......... (902) (1,147) (420) Participating pension contracts............ (212) (312) (9) Deferred income taxes........................ (864) (1,119) (587) ------- ------- ------- (4,226) (4,767) (2,235) ------- ------- ------- $ 1,540 $ 1,898 $ 1,028 ======= ======= ======= The changes in net unrealized investment gains were as follows: Years ended December 31, ------------------------- 1998 1997 1996 ------- ------- ------- Balance at January 1......................... $ 1,898 $ 1,028 $ 1,646 Unrealized investment gains (losses) during the year.................................... (899) 3,402 (2,493) Unrealized investment (gains) losses relating to: Future policy benefit loss recognition..... (59) (970) 845 Deferred policy acquisition costs.......... 245 (727) 328 Participating pension contracts............ 100 (303) 341 Deferred income taxes........................ 255 (532) 361 ------- ------- ------- Balance at December 31....................... $ 1,540 $ 1,898 $ 1,028 ======= ======= ======= Net change in unrealized investment gains.... $ (358) $ 870 $ (618) ======= ======= =======
14 NOTES TO FINANCIAL STATEMENTS--(Continued) Fixed Maturities and Equity Securities Fixed maturities and equity securities at December 31, 1998 were as follows:
Gross Cost or Unrealized Estimated Amortized ------------ Fair Cost Gain Loss Value --------- ------- ---- --------- Fixed Maturities: Bonds: U.S. Treasury securities and obligations of U.S. government corporations and agencies................................. $ 6,640 $ 1,117 $ 10 $ 7,747 States and political subdivisions......... 597 26 -- 623 Foreign governments....................... 3,435 254 88 3,601 Corporate................................. 46,377 2,471 260 48,588 Mortgage and asset-backed securities 26,456 569 46 26,979 Other..................................... 12,438 1,069 293 13,214 ------- ------- ---- -------- 95,943 5,506 697 100,752 Redeemable preferred stocks............... 15 -- -- 15 ------- ------- ---- -------- $95,958 $ 5,506 $697 $100,767 ======= ======= ==== ======== Equity Securities: Common stocks............................. $ 1,286 $ 923 $ 77 $ 2,132 Nonredeemable preferred stocks............ 222 4 18 208 ------- ------- ---- -------- $ 1,508 $ 927 $ 95 $ 2,340 ======= ======= ==== ======== Fixed maturities and equity securities at December 31, 1997 were as follows: Gross Cost or Unrealized Estimated Amortized ------------ Fair Cost Gain Loss Value --------- ------- ---- --------- Fixed Maturities: Bonds: U.S. Treasury securities and obligations of U. S. government corporations and agencies................ $ 8,708 $ 1,010 $ 2 $ 9,716 States and political subdivisions......... 486 22 -- 508 Foreign governments....................... 3,420 371 52 3,739 Corporate................................. 41,012 2,337 291 43,058 Mortgage and asset-backed securities...... 22,370 579 21 22,928 Other..................................... 11,374 929 134 12,169 ------- ------- ---- -------- 87,370 5,248 500 92,118 Redeemable preferred stocks............... 494 19 1 512 ------- ------- ---- -------- $87,864 $ 5,267 $501 $ 92,630 ======= ======= ==== ======== Equity Securities: Common stocks............................. $ 2,444 $ 1,716 $105 $ 4,055 Nonredeemable preferred stocks............ 201 5 11 195 ------- ------- ---- -------- $ 2,645 $ 1,721 $116 $ 4,250 ======= ======= ==== ========
The Company held foreign currency derivatives with notional amounts of $716 and $408 to hedge the exchange rate risk associated with foreign bonds at December 31, 1998 and 1997, respectively. The Company also held options with fair values of $(11) and $33 to hedge the market value of common stocks at December 31, 1998 and 1997, respectively. 15 NOTES TO FINANCIAL STATEMENTS--(Continued) At December 31, 1998, fixed maturities held by the Company that were below investment grade or not rated by an independent rating agency totaled $8,289. At December 31, 1998, non-income producing fixed maturities were insignificant. The amortized cost and estimated fair value of bonds at December 31, 1998, by contractual maturity date, are shown below:
Estimated Amortized Fair Cost Value --------- --------- Due in one year or less............................... $ 2,380 $ 2,462 Due after one year through five years................. 17,062 17,527 Due after five years through 10 years................. 23,769 24,714 Due after 10 years.................................... 26,276 29,070 -------- -------- 69,487 73,773 Mortgage and asset-backed securities.................. 26,456 26,979 -------- -------- $ 95,943 $100,752 ======== ========
Fixed maturities not due at a single maturity date have been included in the above table in the year of final maturity. Actual maturities may differ from contractual maturities due to the exercise of prepayment options. Sales of fixed maturities and equity securities were as follows:
Years ended December 31, ----------------------- 1998 1997 1996 ------- ------- ------- Fixed maturities classified as available-for- sale: Proceeds..................................... $43,828 $67,454 $67,239 Gross realized gains......................... $ 928 $ 672 $ 1,067 Gross realized losses........................ $ 355 $ 558 $ 842 Fixed maturities classified as held-to- maturity: Proceeds..................................... $ -- $ 352 $ 1,281 Gross realized gains......................... $ -- $ 5 $ 10 Gross realized losses........................ $ -- $ 1 $ 1 Equity securities: Proceeds..................................... $ 3,085 $ 1,821 $ 2,069 Gross realized gains......................... $ 1,125 $ 293 $ 150 Gross realized losses........................ $ 131 $ 69 $ 49
During 1997, fixed maturities with an amortized cost of $11,682 were transferred from held-to-maturity to available-for-sale. Other comprehensive income at the date of reclassification was increased by $198 excluding the effects of deferred income taxes and policyholder related amounts. Excluding investments in U.S. governments and agencies, the Company is not exposed to any significant concentration of credit risk in its fixed maturities portfolio. Securities Lending Program The Company participates in securities lending programs whereby large blocks of securities are loaned to third parties, primarily major brokerage firms. The Company requires a minimum of 102% of the fair value of the loaned securities to be separately maintained as collateral for the loans. Securities with a cost or amortized cost of $4,005 and $6,068 and estimated fair value of $4,552 and $6,653 were on loan under the program at December 31, 1998 and 1997, respectively. The Company is liable for cash collateral of $3,769 at December 31, 1998. This liability is included in other liabilities. Rebates of $266 were paid and accrued on the cash collateral for the year ended 16 NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1998. The rebates paid and accrued during 1998 are included in other operating costs and expenses. Security collateral is returnable on short notice and is not reflected in the consolidated financial statements. Statutory Deposits The Company had investment assets on deposit with regulatory agencies of $466 and $4,695 as of December 31, 1998 and 1997, respectively. Mortgage Loans on Real Estate Mortgage loans were categorized as follows:
December 31, ---------------------------------- 1998 1997 ---------------- ---------------- Amount Percent Amount Percent ------- ------- ------- ------- Commercial mortgage loans.................... $12,503 74% $14,945 73% Agriculture mortgage loans................... 4,256 25% 3,753 18% Residential mortgage loans................... 241 1% 272 1% Other loans.................................. -- -- 1,512 8% ------- ------ ------- ----- 17,000 100% 20,482 100% ====== ===== Less: Valuation allowances................... 173 289 ------- ------- $16,827 $20,193 ======= ======= Mortgage loans on real estate are collateralized by properties primarily located throughout the United States. At December 31, 1998, approximately 15%, 9% and 7% of the properties were located in California, New York and Florida, respectively. Generally, the Company (as the lender) requires that a minimum of one-fourth of the purchase price of the underlying real estate be paid by the borrower. Certain of the Company's real estate joint ventures have mortgage loans with the Company. The carrying values of such mortgages were $606 and $725 at December 31, 1998 and 1997, respectively. Changes in mortgage loan valuation allowances were as follows: Years ended December 31, ------------------------- 1998 1997 1996 ------- ------- ------- Balance at January 1......................... $ 289 $ 469 $ 491 Additions.................................... 40 61 144 Deductions for writedowns and dispositions... (130) (241) (166) Deductions for disposition of affiliates..... (26) -- -- ------- ------ ------- Balance at December 31....................... $ 173 $ 289 $ 469 ======= ====== ======= A portion of the Company's mortgage loans on real estate was impaired and consisted of the following: December 31, ---------------- 1998 1997 ------- ------- Impaired mortgage loans with valuation allowances.................................. $ 823 $1,231 Impaired mortgage loans without valuation allowances.................................. 375 306 ------- ------ 1,198 1,537 Less: Valuation allowances................... 149 250 ------- ------ $ 1,049 $1,287 ======= ======
17 NOTES TO FINANCIAL STATEMENTS--(Continued) The average recorded investment in impaired mortgage loans on real estate was $1,282, $1,680 and $2,113 for the years ended December 31, 1998, 1997 and 1996, respectively. Interest income on impaired mortgages was $109, $110 and $119 for the years ended December 31, 1998, 1997 and 1996, respectively. Restructured mortgage loans on real estate were $1,036 and $1,207 at December 31, 1998 and 1997, respectively. Interest income of $74, $91 and $135 was recognized on restructured loans for the years ended December 31, 1998, 1997 and 1996, respectively. Gross interest income that would have been recorded in accordance with the original terms of such loans amounted to $87, $116 and $198 for the years ended December 31, 1998, 1997 and 1996, respectively. Mortgage loans on real estate with scheduled payments 60 days (90 days for agriculture mortgages) or more past due or in foreclosure had an amortized cost of $65 and $255 as of December 31, 1998 and 1997, respectively. Real Estate and Real Estate Joint Ventures Real estate and real estate joint ventures consisted of the following:
December 31, --------------- 1998 1997 ------- ------ Real estate and real estate joint ventures held-for- investment............................................ $ 6,301 $6,731 Impairments............................................ (408) (407) ------- ------ 5,893 6,324 ------- ------ Real estate and real estate joint ventures held-for- sale.................................................. 546 915 Impairments............................................ (119) (49) Valuation allowance.................................... (33) (110) ------- ------ 394 756 ------- ------ $ 6,287 $7,080 ======= ======
Accumulated depreciation on real estate was $2,065 and $2,030 at December 31, 1998 and 1997, respectively. Related depreciation expense was $282, $338 and $348 for the years ended December 31, 1998, 1997 and 1996, respectively. Real estate and real estate joint ventures were categorized as follows:
December 31, ------------------------------ 1998 1997 --------------- -------------- Amount Percent Amount Percent ------- ------- ------ ------- Office..................................... $ 4,265 68% $4,730 67% Retail..................................... 640 10% 804 11% Apartments................................. 418 7% 406 6% Land....................................... 313 5% 346 5% Agriculture................................ 195 3% 214 3% Other...................................... 456 7% 580 8% ------- --- ------ --- $ 6,287 100% $7,080 100% ======= === ====== ===
The Company's real estate holdings are primarily located throughout the United States. At December 31, 1998, approximately 23%, 23% and 12% of the Company's real estate holdings were located in New York, California and Texas, respectively. Changes in real estate and real estate joint ventures held-for-sale valuation allowance were as follows:
Years ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- Balance at January 1.... $ 110 $ 661 $ 924 Additions charged (credited) to operations............. (5) (76) 127 Deductions for writedowns and dispositions........... (72) (475) (390) -------- -------- -------- Balance at December 31.. $ 33 $ 110 $ 661 ======== ======== ========
18 NOTES TO FINANCIAL STATEMENTS--(Continued) Investment income (expense) relating to impaired real estate and real estate joint ventures held-for-investment was $105, $28 and $(10) for the years ended December 31, 1998, 1997 and 1996, respectively. Investment income relating to real estate and real estate joint ventures held-for-sale was $3, $11 and $70 for the years ended December 31, 1998, 1997 and 1996, respectively. The carrying value of non-income producing real estate and real estate joint ventures was insignificant at December 31, 1998 and 1997, respectively. The Company owned real estate acquired in satisfaction of debt of $154 and $218 at December 31, 1998 and 1997, respectively. Direct Financing and Leveraged Leases Direct financing and leveraged leases, included in other invested assets, consisted of the following:
December 31, ------------------------------------------------- Direct Financing Leveraged Leases Leases Total ----------------- -------------- -------------- 1998 1997 1998 1997 1998 1997 ----------------- ------ ------ ------ ------ Investment................... $ -- $ 1,137 $1,067 $ 851 $1,067 $1,988 Estimated residual values.... -- 183 607 641 607 824 ------- --------- ------ ------ ------ ------ -- 1,320 1,674 1,492 1,674 2,812 Unearned income.............. -- (261) (471) (428) (471) (689) ------- --------- ------ ------ ------ ------ Net investment............... $ -- $ 1,059 $1,203 $1,064 $1,203 $2,123 ======= ========= ====== ====== ====== ======
The investment amounts set forth above are generally due in monthly installments. The payment periods generally range from three to eight years, but in certain circumstances are as long as 20 years. Average yields range from 7% to 12%. These receivables are generally collateralized by the related property. 3. DERIVATIVE INSTRUMENTS The table below provides a summary of the carrying value, notional amount and current market or fair value of derivative financial instruments (other than equity options) held at December 31, 1998 and 1997:
1998 1997 ------------------------------------- ------------------------------------- Current Market or Current Market or Fair Value Fair Value ------------------ ------------------ Carrying Notional Carrying Notional Value Amount Assets Liabilities Value Amount Assets Liabilities -------- -------- ------ ----------- -------- -------- ------ ----------- Financial futures....... $ 3 $ 2,190 $ 8 $ 6 $ 10 $ 2,262 $ 17 $ 7 Foreign exchange contracts.............. -- 136 -- 2 -- 150 2 -- Interest rate swaps..... (9) 1,621 17 50 (11) 1,464 9 28 Foreign currency swaps.. (1) 580 3 62 -- 258 3 30 Caps.................... -- 8,391 -- -- -- 1,545 13 -- Options (fixed income).. -- -- -- -- 2 275 -- 2 -------- -------- ------ ----------- -------- -------- ------ ----------- Total contractual commitments............ $ (7) $ 12,918 $ 28 $ 120 $ 1 $ 5,954 $ 44 $ 67 ======== ======== ====== =========== ======== ======== ====== ===========
19 NOTES TO FINANCIAL STATEMENTS--(Continued) The following is a reconciliation of the notional amounts by derivative type and strategy as of December 31, 1998 and 1997:
December 31, 1997 Terminations/ December 31, 1998 Notional Amount Additions Maturities Notional Amount ----------------- --------- ------------- ----------------- BY DERIVATIVE TYPE Financial futures....... $2,262 $25,073 $(25,145) $ 2,190 Foreign exchange contracts.............. 150 1,231 (1,245) 136 Interest rate swaps..... 1,464 788 (631) 1,621 Foreign currency swaps.. 258 386 (64) 580 Caps.................... 1,545 8,250 (1,404) 8,391 Options (fixed income).. 275 -- (275) -- ------ ------- -------- ------- Total contractual commitments............ $5,954 $35,728 $(28,764) $12,918 ====== ======= ======== ======= BY STRATEGY Liability hedging....... $1,860 $ 8,419 $ (1,538) $ 8,741 Invested asset hedging.. 817 1,666 (1,619) 864 Portfolio hedging....... 2,787 25,643 (25,600) 2,830 Anticipated transaction hedging................ 490 -- (7) 483 ------ ------- -------- ------- Total contractual commitments............ $5,954 $35,728 $(28,764) $12,918 ====== ======= ======== =======
The following table presents the notional amounts of derivative financial instruments by maturity at December 31, 1998:
Remaining Life --------------------------------------- After Five After One Years After One Year Year Through Through Ten Ten or Less Five Years Years Years Total -------- ------------ ----------- ----- ------- Financial futures.............. $2,190 $ -- $ -- $ -- $ 2,190 Foreign exchange contracts..... 136 -- -- -- 136 Interest rate swaps............ 470 774 162 215 1,621 Foreign currency swaps......... 39 182 343 16 580 Caps........................... 1,875 6,496 20 -- 8,391 -------- ------------ ----------- ----- ------- Total contractual commitments.. $4,710 $ 7,452 $ 525 $ 231 $12,918 ======== ============ =========== ===== =======
In addition to the derivative instruments above, the Company uses equity option contracts as invested asset hedges. There were 92 thousand and 7 million equity option contracts outstanding with carrying values of $(11) and $27 and market values of $(11) and $33, as of December 31, 1998 and 1997, respectively. The outstanding contracts have a remaining life of one year or less as of December 31, 1998. 4. REINSURANCE The Company assumes and cedes insurance with other insurance companies. The Company continually evaluates the financial condition of its reinsurers and monitors concentration of credit risk in an effort to minimize its exposure to significant losses from reinsurer insolvencies. The Company is contingently liable with respect to ceded reinsurance should any reinsurer be unable to meet its obligations under these agreements. The amounts in the consolidated statements of income are presented net of reinsurance ceded. The Company has exposure to catastrophes, which are an inherent risk of the property and casualty insurance business and could contribute to material fluctuations in the Company's results of operations. The Company uses excess of loss and quota share reinsurance arrangements to diversify its risk portfolio. 20 NOTES TO FINANCIAL STATEMENTS--(Continued) The effects of reinsurance were as follows:
Years ended December 31, ------------------------- 1998 1997 1996 ------- ------- ------- Direct premiums............................... $12,763 $12,728 $12,452 Reinsurance assumed........................... 409 360 508 Reinsurance ceded............................. (1,669) (1,810) (1,615) ------- ------- ------- Net premiums.................................. $11,503 $11,278 $11,345 ======= ======= ======= Reinsurance recoveries netted against policyholder benefits........................ $ 1,751 $ 1,648 $ 1,667 ======= ======= =======
Reinsurance recoverables, included in other receivables, were $2,956 and $1,511 at December 31, 1998 and 1997, respectively. Reinsurance and ceded commissions payables, included in other liabilities, were $105 and $158 at December 31, 1998 and 1997, respectively. The following provides an analysis of the activity in the liability for benefits relating to property and casualty and group accident and non-medical health policies and contracts:
Years ended December 31, ------------------------- 1998 1997 1996 ------- ------- ------- Balance at January 1........................... $ 3,655 $ 3,345 $ 3,296 Reinsurance recoverables..................... (229) (215) (214) ------- ------- ------- Net balance at January 1....................... 3,426 3,130 3,082 ------- ------- ------- Incurred related to: Current year................................. 2,726 2,855 2,951 Prior years.................................. (245) 88 (114) ------- ------- ------- 2,481 2,943 2,837 ------- ------- ------- Paid related to: Current year................................. (1,967) (1,832) (1,998) Prior years.................................. (853) (815) (791) ------- ------- ------- (2,820) (2,647) (2,789) ------- ------- ------- Balance at December 31......................... 3,087 3,426 3,130 Add: Reinsurance recoverables................ 233 229 215 ------- ------- ------- Balance at December 31......................... $ 3,320 $ 3,655 $ 3,345 ======= ======= =======
5. INCOME TAXES The provision for income taxes was as follows:
Years ended December 31, ------------------ 1998 1997 1996 ------ ---- ---- Current: Federal............................................. $ 821 $424 $346 State and local..................................... 60 10 25 Foreign............................................. 99 26 27 ------ ---- ---- 980 460 398 ------ ---- ---- Deferred: Federal............................................. (178) (26) 66 State and local..................................... (8) 9 6 Foreign............................................. (54) 25 12 ------ ---- ---- (240) 8 84 ------ ---- ---- Provision for income taxes............................ $ 740 $468 $482 ====== ==== ====
21 NOTES TO FINANCIAL STATEMENTS--(Continued) Reconciliations of the income tax provision at the U.S. statutory rate to the provision for income taxes as reported were as follows:
Years ended December 31, -------------------- 1998 1997 1996 ------ ------ ---- Tax provision at U.S. statutory rate................ $ 730 $ 585 $492 Tax effect of: Tax exempt investment income...................... (40) (30) (18) Goodwill.......................................... 5 9 -- Surplus tax....................................... 18 (40) 38 State and local income taxes...................... 31 15 23 Foreign operations................................ 12 7 (7) Tax credits....................................... (25) (15) (15) Prior year taxes.................................. 4 (2) (46) Sale of subsidiaries.............................. (19) (41) -- Other, net........................................ 24 (20) 15 ------ ------ ---- Provision for income taxes.......................... $ 740 $ 468 $482 ====== ====== ==== Deferred income taxes represent the tax effect of the differences between the book and tax basis of assets and liabilities. Net deferred income tax liabilities consisted of the following: December 31, -------------- 1998 1997 ------ ------ Deferred income tax assets: Policyholder liabilities and receivables.......... $3,239 $3,174 Net operating losses.............................. 22 33 Employee benefits................................. 174 187 Non-deductible liabilities........................ 441 162 Other, net........................................ 158 223 ------ ------ 4,034 3,779 Less: Valuation allowance......................... 21 24 ------ ------ 4,013 3,755 ------ ------ Deferred income tax liabilities: Investments....................................... 1,417 1,118 Deferred policy acquisition costs................. 1,774 1,890 Net unrealized investment gains................... 864 1,119 Other, net........................................ 18 100 ------ ------ 4,073 4,227 ------ ------ Net deferred income tax liability................... $ (60) $ (472) ====== ======
Foreign net operating loss carryforwards generated a deferred income tax benefit of $21. The Company has recorded a valuation allowance related to these tax benefits. The valuation allowance reflects management's assessment, based on available information, that it is more likely than not that the deferred income tax asset for foreign net operating loss carryforwards will not be realized. The benefit will be recognized at such time management believes that it is more likely than not that the portion of the deferred income tax asset is realizable. 22 NOTES TO FINANCIAL STATEMENTS--(Continued) The sources of deferred income tax expense (benefit) and their tax effects were as follows:
Years ended December 31, ----------------- 1998 1997 1996 ----- ---- ---- Policyholder liabilities and receivables............... $ (65) $(93) $ 27 Net operating losses................................... 11 5 (19) Investments............................................ 230 245 (6) Deferred policy acquisition costs...................... (116) (51) 55 Employee benefits...................................... 13 (40) (4) Non-deductible liabilities............................. (279) (66) (24) Change in valuation allowances......................... (3) 10 4 Other, net............................................. (31) (2) 51 ----- ---- ---- $(240) $ 8 $ 84 ===== ==== ====
The Company has been audited by the Internal Revenue Service for the years through and including 1993. The Company is being audited for the years 1994, 1995 and 1996. The Company believes that any adjustments that might be required for open years will not have a material effect on the Company's consolidated financial statements. 23 NOTES TO FINANCIAL STATEMENTS--(Continued) 6. EMPLOYEE BENEFIT PLANS Pension Benefit and Other Benefit Plans The Company is both the sponsor and administrator of defined benefit pension plans covering all eligible employees and sales representatives of MetLife and certain of its subsidiaries. Retirement benefits are based upon years of credited service and final average earnings history. The Company also provides certain postretirement health care and life insurance benefits for retired employees through insurance contracts. Substantially all of the Company's employees may, in accordance with the plans applicable to such benefits, become eligible for these benefits if they attain retirement age, with sufficient service, while working for the Company.
December 31, ------------------------------------ Pension Benefits Other Benefits ------------------ ---------------- 1998 1997 1998 1997 -------- -------- ------- ------- Change in projected benefit obligation: Projected benefit obligation at beginning of year................................. $ 3,523 $ 3,268 $ 1,763 $ 1,773 Service cost............................. 88 73 31 30 Interest cost............................ 254 244 114 122 Actuarial gain........................... 205 160 (74) (57) Divestitures, curtailments and terminations............................ 24 (9) (13) 2 Change in benefits....................... 12 6 -- (2) Benefits paid............................ (245) (219) (113) (105) -------- -------- ------- ------- Projected benefit obligation at end of year.................................... 3,861 3,523 1,708 1,763 -------- -------- ------- ------- Change in plan assets: Contract value of plan assets at beginning of year....................... 3,982 3,628 1,004 897 Actual return on plan assets............. 671 566 171 128 Employer contribution.................... 15 7 61 84 Benefits paid............................ (245) (219) (113) (105) Other payments........................... (100) -- -- -- -------- -------- ------- ------- Contract value of plan assets at end of year.................................... 4,323 3,982 1,123 1,004 -------- -------- ------- ------- Over (under) funded...................... 462 459 (585) (759) Unrecognized net asset at transition..... (95) (140) -- -- Unrecognized net actuarial gains......... (81) (109) (322) (171) Unrecognized prior service cost.......... 144 150 (3) (2) -------- -------- ------- ------- Prepaid (accrued) benefit cost........... $ 430 $ 360 $ (910) $ (932) ======== ======== ======= ======= Qualified plan prepaid pension cost...... $ 546 $ 516 $ -- $ -- Non-qualified plan accrued pension cost.. (116) (156) -- -- -------- -------- ------- ------- Prepaid benefit cost..................... $ 430 $ 360 $ -- $ -- ======== ======== ======= =======
The aggregate projected benefit obligation and aggregate contract value of plan assets for the pension plans were as follows:
Qualified Plan Non-Qualified Plan Total --------------- ------------------ ------------- 1998 1997 1998 1997 1998 1997 ------- ------- --------- --------- ------ ------ Aggregate projected benefit obligation................ $ 3,638 $ 3,170 $ 223 $ 353 $3,861 $3,523 Aggregate contract value of plan assets (principally Company contracts)........ 4,323 3,831 -- 151 4,323 3,982 ------- ------- --------- --------- ------ ------ Over (under) funded........ $ 685 $ 661 $ (223) $ (202) $ 462 $ 459 ======= ======= ========= ========= ====== ======
24 NOTES TO FINANCIAL STATEMENTS--(Continued) The assumptions used in determining the aggregate projected benefit obligation and aggregate contract value for the pension and other benefits were as follows:
Pension Benefits Other Benefits --------------------- -------------------- Weighted average assumptions as of December 31, 1998 1997 1998 1997 - ---------------------------------- --------- ----------- -------- ----------- Discount rate...................... 7%-7.25% 7.25%-7.75% 7% 7.25%-7.75% Expected return on plan assets..... 8.5% 8.75% 7.25%-9% 8.75% Rate of compensation increase...... 4.5%-8.5% 4.5%-8.5% n/a n/a
The assumed health care cost trend rate used in measuring the accumulated nonpension postretirement benefit obligation was 6.5% per year for pre- Medicare eligible claims and 6% for Medicare eligible claims in 1998. The assumed health care cost trend rate used in measuring the accumulated nonpension postretirement benefit obligation was generally 9% in 1997, gradually decreasing to 5.25% over 5 years. Assumed health care cost trend rates may have a significant effect on the amounts reported for health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:
One One Percent Percent Increase Decrease -------- -------- Effect on total of service and interest cost components........................................... $ 16 $ 18 Effect on accumulated postretirement benefit obligation........................................... $124 $183
The components of periodic benefit costs were as follows:
Pension Benefits Other Benefits ------------------- ---------------- 1998 1997 1996 1998 1997 1996 ----- ----- ----- ---- ---- ---- Service cost............................ $ 88 $ 73 $ 77 $ 31 $ 30 $ 41 Interest cost........................... 254 244 232 114 122 127 Expected return on plan assets.......... (330) (318) (273) (79) (66) (58) Amortization of prior actuarial (gain) loss................................... (11) (5) (12) (12) (4) 2 Curtailment (credit) cost............... (10) -- -- 4 -- -- ----- ----- ----- ---- ---- ---- Net periodic benefit cost (credit)...... $ (9) $ (6) $ 24 $ 58 $ 82 $112 ===== ===== ===== ==== ==== ====
Savings and Investment Plans The Company sponsors savings and investment plans for substantially all employees under which the Company matches a portion of employee contributions. The Company contributed $43, $44 and $42 for the years ended December 31, 1998, 1997 and 1996, respectively. 7. LEASES In accordance with industry practice, certain of the Company's income from lease agreements with retail tenants is contingent upon the level of the tenants' sales revenues. Additionally, the Company, as lessee, has entered into various lease and sublease agreements for office space, data processing and other equipment. Future minimum rental and subrental income, and minimum gross rental payments relating to these lease agreements were as follows:
Gross Rental Sublease Rental Income Income Payments ------ -------- -------- 1999...................................... $1,213 $10 $126 2000...................................... 1,150 11 109 2001...................................... 1,052 11 94 2002...................................... 942 10 72 2003...................................... 787 9 51 Thereafter................................ 2,636 35 242
25 NOTES TO FINANCIAL STATEMENTS--(Continued) 8. DEBT Debt consisted of the following:
December 31, -------------- 1998 1997 ------- ------ MetLife: 6.300% surplus notes due 2003.................................. $ 397 $ 397 7.000% surplus notes due 2005.................................. 249 249 7.700% surplus notes due 2015.................................. 198 198 7.450% surplus notes due 2023.................................. 296 296 7.875% surplus notes due 2024.................................. 148 148 7.800% surplus notes due 2025.................................. 248 248 Other.......................................................... 207 436 ------- ------ 1,743 1,972 ------- ------ Investment Related: Exchangeable subordinated debt, interest based on LIBOR plus factors, due 1999........................................... 212 374 Exchangeable subordinated debt, interest rates ranging from 4.90% to 6.18%, due 2001 and 2002.................................................... 371 -- ------- ------ 583 374 ------- ------ Total MetLife.................................................... 2,326 2,346 ------- ------ Nvest: 7.060% senior notes due 2003................................... 110 110 7.290% senior notes due 2007................................... 160 160 ------- ------ 270 270 ------- ------ Other Companies: Fixed rate notes, interest rates ranging from 6.96% to 8.51%, maturity dates ranging from 1999 to 2008 179 -- Floating rate notes, interest based on LIBOR plus factors...... -- 146 Other.......................................................... 128 122 ------- ------ 307 268 ------- ------ Total long-term debt............................................. 2,903 2,884 Total short-term debt............................................ 3,585 4,587 ------- ------ $ 6,488 $7,471 ======= ======
Short-term debt consisted of commercial paper with a weighted average interest rate of 5.31% and 5.75% and a weighted average maturity of 44 and 71 days as of December 31, 1998 and 1997, respectively. The Company maintains an unsecured credit facility of $2,000 under which bank loans and other short-term debt are drawn. This facility is maintained for general corporate purposes and to provide additional support to the Company's commercial paper program. At December 31, 1998 there were no outstanding borrowings under the facility. Payments of interest and principal on the surplus notes, subordinated to all other indebtedness, may be made only with the prior approval of the Superintendent. Subject to the prior approval of the Superintendent, the 7.45% surplus notes may be redeemed, in whole or in part, at the election of the Company at any time on or after November 1, 2003. The exchangeable subordinated debt is payable in cash or by the delivery of the underlying common stock collateral owned by the Company. The value ascribed to the common stock at the date of delivery is the greater of the market value at the date of the debt issuance or date of delivery. The debt provides for additional interest if the market value of the common stock appreciates above certain levels at the date of delivery as compared with the market value at the date of issuance. 26 NOTES TO FINANCIAL STATEMENTS--(Continued) The aggregate maturities of long-term debt are $413 in 1999, $45 in 2000, $191 in 2001, $221 in 2002, $527 in 2003 and $1,518 thereafter. Interest expense related to the Company's outstanding indebtedness was $333, $344 and $311, for the years ended December 31, 1998, 1997 and 1996, respectively. 9. COMMITMENTS AND CONTINGENCIES Litigation The Company and certain of its subsidiaries are currently defendants in approximately 400 lawsuits, including over 40 putative or certified class action lawsuits, raising allegations of improper marketing and sales of individual life insurance or annuities (hereafter "sales practices claims"). Two of these putative class actions are filed in Canada and the remainder are filed in the United States. These cases are brought by or on behalf of policyholders and others and allege, among other claims, that individual life insurance policies were improperly sold in replacement transactions or with inadequate or inaccurate disclosure concerning the period for which premiums would be payable, or were misleadingly sold as savings or retirement plans. The classes proposed in the pending class actions are defined broadly enough, in the aggregate, to include a substantial number of active and lapsed policyholders who purchased individual life insurance policies from the Company during the 1980's and 1990's. In California, Ohio and West Virginia, courts have certified or deemed certifiable classes on behalf of policyholders in those states who allegedly did not receive proper notice of replacement. A Federal Court in Massachusetts has certified a mandatory class involving certain former policyholders of New England Mutual Life Insurance Company which merged into the Company in 1996. The United States Court of Appeals remanded the case to the trial court for further consideration. A number of the sales practices claims pending in federal courts have been consolidated as a multidistrict proceeding for pre-trial purposes in the United States District Court for the Western District of Pennsylvania and, as to former New England Mutual Life Insurance Company policyholders, in the United States District Court in Massachusetts. In another case, a New York federal court has certified or conditionally certified some subclasses of purchasers of the Company's policies and annuity contracts outside the United States. While most of these cases are in the early stages of litigation, they seek substantial damages, including in some cases punitive and treble damages and attorneys' fees. Additional litigation relating to the Company's marketing and sale of individual life insurance may be commenced in the future. Regulatory authorities in a small number of states, including both insurance departments and attorneys general, have ongoing investigations of the Company's sales of individual life insurance or annuities, including investigations of alleged improper replacement transactions and alleged improper sales of insurance with inaccurate or inadequate disclosures as to the period for which premiums would be payable. Over the past several years, a number of investigations by other regulatory authorities have been resolved by the Company for monetary payments and certain other relief. The Company is also a defendant in numerous lawsuits seeking compensatory and punitive damages for personal injuries allegedly caused by exposure to asbestos or asbestos-containing products. The Company has never engaged in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products. Rather, these lawsuits, currently numbering in the thousands, have principally been based upon allegations relating to certain research, publication and other activities of one or more of the Company's employees during the period from the 1920's through approximately the 1950's and alleging that the Company learned or should have learned of certain health risks posed by asbestos and, among other things, improperly publicized or failed to disclose those health risks. Legal theories asserted against the Company have included negligence, intentional tort claims and conspiracy claims concerning the health risks associated with asbestos. While the Company believes it has meritorious defenses to these claims, and has not suffered any adverse judgments in respect thereof, most of the cases have been resolved by settlements. The Company intends to continue to exercise its best judgment regarding settlement or defense of such cases. The number of such cases that may be brought or the aggregate amount of any liability that may ultimately be incurred by the Company is uncertain. Significant portions of amounts paid in settlement of such cases have been funded with proceeds from a previously resolved dispute with its primary, umbrella and first level excess liability insurance carriers. The Company is presently in litigation with several of its excess liability insurers regarding amounts payable under the Company's policies with respect to coverage for these claims. 27 NOTES TO FINANCIAL STATEMENTS--(Continued) The Company believes that the claims and the amount of damages asserted in the aforementioned sales practices and asbestos personal injury litigations are without merit, and it intends to continue to defend its interests vigorously. During 1998, the Company obtained certain excess reinsurance and insurance policies providing coverage for risks associated primarily with sales practices claims and claims for personal injuries caused by exposure to asbestos or asbestos-containing products. In 1998, the Company recorded a charge of $1,715, included in other expenses, for related insurance and reinsurance premiums and for potential liabilities related to certain of these claims. Various litigation, claims and assessments against the Company, in addition to the aforementioned and those otherwise provided for in the Company's consolidated financial statements, have arisen in the course of the Company's business, including in connection with its activities as an insurer, employer, investor and taxpayer. Further, state insurance regulatory authorities and other authorities regularly make inquiries and conduct investigations concerning the Company's compliance with applicable insurance and other laws and regulations. In certain of the matters referred to above, very large and/or indeterminate amounts, including punitive and treble damages, are sought. While it is not feasible to predict or determine the ultimate outcome of all pending investigations and legal proceedings, it is the opinion of the Company's management that their outcomes, after consideration of available insurance and reinsurance and the provisions made in the Company's consolidated financial statements, are not likely to have a material adverse effect on the Company's financial position. However, given the large and/or indeterminable amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's operating results in particular quarterly or annual periods. Year 2000 The Year 2000 issue is the result of the widespread use of computer programs written using two digits (rather than four) to define the applicable year. Such programming was a common industry practice designed to avoid the significant costs associated with additional mainframe capacity necessary to accommodate a four-digit year field. As a result, any of the Company's computer systems that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major system failures or miscalculations. The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the Year 2000 issue and has developed and implemented a plan to resolve the issue. The Company currently believes that, with modifications to existing software and converting to new software, the Year 2000 issue will not pose significant operational problems for the Company's computer systems. However, if such modifications and conversions are not completed on a timely basis, the Year 2000 issue may have a material impact on the operations of the Company. Furthermore, even if the Company completes such modifications and conversions on a timely basis, there can be no assurance that the failure by vendors or other third parties to solve the Year 2000 issue will not have a material impact on the operations of the Company. The Company estimates the total cost to resolve its Year 2000 problem to be approximately $210 (unaudited) of which approximately $149 has been incurred through December 31, 1998. Guaranty Funds Under insurance guaranty fund laws in each state, the District of Columbia and Puerto Rico, insurers licensed to do business can be assessed by state insurance guaranty associations for certain obligations of insolvent insurance companies to policyholders and claimants. Recent regulatory actions against certain large life insurers encountering financial difficulty have prompted various state insurance guaranty associations to begin assessing life insurance companies for the deemed losses. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's solvency and further provide annual limits on such assessments. A large part of the assessments paid by the Company pursuant to these laws may be used as credits for a portion of the Company's premium taxes. The Company paid guaranty fund assessments of $35, $23 and $25 in 1998, 1997 and 1996, respectively, of which $24, $20 and $19 were estimated to be credited against future premium taxes. 28 NOTES TO FINANCIAL STATEMENTS--(Continued) 10. OTHER EXPENSES Other expenses were comprised of the following:
Years ended December 31, ------------------------ 1998 1997 1996 ------- ------ ------- Compensation.................................. $ 2,478 $2,072 $ 1,813 Commissions................................... 902 766 722 Interest and debt issue costs................. 379 453 311 Amortization of policy acquisition costs...... 587 771 633 Capitalization of policy acquisition costs.... (1,025) (1,000) (1,028) Rent, net of sublease......................... 155 179 183 Minority interest............................. 67 56 30 Restructuring charge.......................... 81 -- -- Other......................................... 4,494 2,637 2,091 ------- ------ ------- $ 8,118 $5,934 $ 4,755 ======= ====== =======
11. DISCONTINUED OPERATIONS The 1996 loss from discontinued operations resulted from the finalization of the transfer of certain group medical contracts in connection with the Company's disposal of its group medical benefits business during 1995. The components of discontinued operations for the year ended December 31, 1996 were as follows: Loss from discontinued operations, net of income tax benefit of $18........................................ $ 52 Loss on disposal of discontinued operations, net of income tax benefit of $11........................................ 19 ---- Loss from discontinued operations................................. $ 71 ====
12. CONSOLIDATED CASH FLOW INFORMATION During 1998, the Company sold MetLife Capital Holdings, Inc. (a commercial financing company) and substantially all of its Canadian and Mexican insurance operations, which resulted in realized investment gains of $531. During 1997, the Company sold its United Kingdom insurance operations, which resulted in a realized investment gain of $139. Such sales caused a reduction in assets by $10,663 and $4,342 and liabilities by $3,691 and $4,207 in 1998 and 1997, respectively. In 1997, the Company also acquired assets of $3,777 and assumed liabilities of $3,347, through the acquisition of certain insurance and noninsurance companies. The aggregate purchase prices were allocated to the assets and liabilities acquired based upon their estimated fair values. Real estate of $69, $151 and $189 was acquired in satisfaction of debt for the years ended December 31, 1998, 1997 and 1996, respectively. 13. FAIR VALUE INFORMATION The estimated fair values of financial instruments have been determined by using available market information and the valuation methodologies described below. Considerable judgment is often required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein may not necessarily be indicative of amounts that could be realized in a current market exchange. The use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. 29 NOTES TO FINANCIAL STATEMENTS--(Continued) Amounts related to the Company's financial instruments were as follows:
Estimated Notional Carrying Fair Amount Value Value December 31, 1998 -------- -------- --------- Assets: Fixed maturities.................................. $ $100,767 $100,767 Equity securities................................. 2,340 2,340 Mortgage loans on real estate..................... 16,827 17,793 Policy loans...................................... 5,600 6,143 Short-term investments............................ 1,369 1,369 Cash and cash equivalents......................... 3,301 3,301 Mortgage loan commitments......................... 472 -- 14 Liabilities: Policyholder account balances..................... 37,088 37,304 Short-term debt................................... 3,585 3,585 Long-term debt.................................... 2,903 2,995 Estimated Notional Carrying Fair Amount Value Value December 31, 1997 -------- -------- --------- Assets: Fixed maturities.................................. $ $ 92,630 $ 92,630 Equity securities................................. 4,250 4,250 Mortgage loans on real estate..................... 20,193 21,084 Policy loans...................................... 5,846 6,110 Short-term investments............................ 679 679 Cash and cash equivalents......................... 2,911 2,911 Mortgage loan commitments......................... 334 -- 4 Liabilities: Policyholder account balances..................... 37,034 37,265 Short-term debt................................... 4,587 4,587 Long-term debt.................................... 2,884 2,939
The methods and assumptions used to estimate the fair values of financial instruments are summarized as follows: Fixed Maturities and Equity Securities The fair value of fixed maturities and equity securities are based upon quotations published by applicable stock exchanges or received from other reliable sources. For securities in which the market values were not readily available, fair values were estimated using quoted market prices of comparable investments. Mortgage Loans on Real Estate and Mortgage Loan Commitments Fair values for mortgage loans on real estate and mortgage loan commitments are estimated by discounting expected future cash flows using current interest rates for similar loans with similar credit risk. Policy Loans Fair values for policy loans are estimated by discounting expected future cash flows using U.S. treasury rates to approximate interest rates and the Company's past experiences to project patterns of loan accrual and repayment characteristics. 30 NOTES TO FINANCIAL STATEMENTS--(Continued) Cash and Cash Equivalents and Short-term Investments The carrying values for cash and cash equivalents and short-term investments approximated fair market values due to the short-term maturities of these instruments. Policyholder Account Balances The fair value of policyholder account balances are estimated by discounting expected future cash flows, based upon interest rates currently being offered for similar contracts with maturities consistent with those remaining for the agreements being valued. Short-term and Long-term Debt The fair values of short-term and long-term debt are determined by discounting expected future cash flows, using risk rates currently available for debt with similar terms and remaining maturities. Derivative Instruments The fair value of derivative instruments, including financial futures, financial forwards, interest rate and foreign currency swaps, floors, foreign exchange contracts, caps and options are based upon quotations obtained from dealers or other reliable sources. See Note 3 for derivative fair value disclosures. 14. STATUTORY FINANCIAL INFORMATION The reconciliation of MetLife's statutory surplus and net change in statutory surplus, determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities, with equity and net income determined in conformity with generally accepted accounting principles were as follows:
December 31, ---------------- 1998 1997 ------- ------- Statutory surplus..................................... $ 7,388 $ 7,378 GAAP adjustments for: Future policy benefits and policyholder account balances........................................... (6,830) (6,807) Deferred policy acquisition costs................... 6,560 6,438 Deferred income taxes............................... 295 (242) Valuation of investments............................ 3,981 3,474 Statutory asset valuation reserves.................. 3,381 3,854 Statutory interest maintenance reserve.............. 1,486 1,261 Surplus notes....................................... (1,595) (1,555) Other, net.......................................... 201 206 ------- ------- Equity................................................ $14,867 $14,007 ======= ======= Years ended December 31, ----------------------- 1998 1997 1996 ------- ------- ----- Net change in statutory surplus....................... $ 10 $ 227 $ 366 GAAP adjustments for: Future policy benefits and policyholder account balances........................................... 127 (38) (165) Deferred policy acquisition costs................... 224 149 391 Deferred income taxes............................... 234 62 (74) Valuation of investments............................ 1,158 (387) (84) Statutory asset valuation reserves.................. (461) 1,136 599 Statutory interest maintenance reserve.............. 312 53 19 Other, net.......................................... (261) 1 (199) ------- ------- ----- Net income............................................ $ 1,343 $ 1,203 $ 853 ======= ======= =====
31 NOTES TO FINANCIAL STATEMENTS--(Continued) 15. SEPARATE ACCOUNTS Separate accounts reflect two categories of risk assumption: non-guaranteed separate accounts totaling $39,490 and $32,893 at December 31, 1998 and 1997, respectively, in which the policyholder assumes the investment risk, and guaranteed separate accounts totaling $18,578 and $15,445 at December 31, 1998 and 1997, respectively, in which MetLife contractually guarantees either a minimum return or account value to the policyholder. Fees charged to the separate accounts by the Company (including mortality charges, policy administration fees and surrender charges) are reflected in the Company's revenues as universal life and investment-type product policy fees and totaled $413, $287 and $216 in 1998, 1997 and 1996, respectively. Guaranteed separate accounts consisted primarily of Met Managed Guaranteed Interest Contracts and participating close out contracts. The average interest rate credited on these contracts was 7% at December 31, 1998. The assets that support these liabilities were comprised of $16,639 in fixed maturities as of December 31, 1998. The portfolios are segregated from other investments and are managed to minimize liquidity and interest rate risk. In order to minimize the risk of disintermediation associated with early withdrawals, these investment products carry a graded surrender charge as well as a market value adjustment. 16. OTHER COMPREHENSIVE INCOME The following tables set forth the reclassification adjustments required for the years ended December 31, 1998, 1997 and 1996 to avoid double-counting in comprehensive income items that are included as part of net income for the current year that have been reported as a part of other comprehensive income in the current or prior year:
1998 1997 1996 ------- ------- ------- Holding gains (losses) on investments arising during the year........................................... $ 1,556 $ 4,479 $(1,494) Income tax effect of holding gains or losses........ (646) (1,698) 550 Transfer of securities from held-to-maturity to available-for-sale: Holding gains on investments...................... -- 198 -- Income tax effect................................. -- (75) -- Reclassification adjustments: Realized holding gains included in current year net income....................................... (2,043) (868) (367) Amortization of premium and discount on investments...................................... (411) (406) (631) Realized holding gains (losses) allocated to other policyholder amounts............................. 608 231 227 Income tax effect................................. 766 394 285 Allocation of holding (gains) losses on investments relating to other policyholder amounts............................... (322) (2,231) 1,286 Income tax effect of allocation of holding gains and losses to other policyholder amounts............................... 134 846 (474) ------- ------- ------- Net unrealized investment (losses) gains............ (358) 870 (618) ------- ------- ------- Foreign currency translation adjustments arising during the year.................................... (115) (46) (6) Reclassification adjustment for sale of investment in foreign operation............................... 2 (3) -- ------- ------- ------- Foreign currency translation adjustment............. (113) (49) (6) ------- ------- ------- Minimum pension liability adjustment................ (12) -- -- ------- ------- ------- Other comprehensive (loss) income................... $ (483) $ 821 $ (624) ======= ======= =======
32 NOTES TO FINANCIAL STATEMENTS--(Continued) 17. RESTRUCTURING During 1998, the Company restructured headquarters operations and consolidated certain agencies and other operations. The impacts of these actions on a segment basis are as follows:
Severance and Related Facility Number of Termination Consolidation Positions Costs Costs Total --------- ----------- ------------- ----- Individual............................ 488 $15 $16 $31 Institutional......................... 320 8 2 10 Auto & Home........................... 357 4 -- 4 Corporate and Other................... 1,102 30 6 36 ----- --- --- --- 2,267 $57 $24 $81 ===== === === ===
These programs are expected to be completed by the third quarter of 1999. As of December 31, 1998, $28 of these restructuring costs had been paid and the unpaid balance was $53. 18. BUSINESS SEGMENT INFORMATION The Company provides insurance and financial services to customers in the United States, Canada, Central America, South America, Europe and Asia. The Company's business is divided into six segments: Individual, Institutional, Auto & Home, International, Asset Management and Corporate. These segments are managed separately because they either provide different products and services, require different strategies or have different technology requirements. Individual offers a wide variety of individual insurance and investment products, including life insurance, annuities and mutual funds. Institutional offers a broad range of group insurance and retirement and savings products and services, including group life insurance, non-medical health insurance such as short and long-term disability, long-term care and dental insurance and other insurance products and services. Auto & Home provides insurance coverages including private passenger automobile, homeowners and personnel excess liability insurance. International provides life insurance, accident and health insurance, annuities and retirement and savings products to both individuals and groups, and auto and homeowners coverage to individuals. Asset Management provides a broad variety of asset management products and services to individuals and institutions such as mutual funds for savings and retirement needs, commercial real estate advisory and management services, and institutional and retail investment management. Through its Corporate segment, the Company reports items that are not allocated to any of the business segments. Set forth in the tables below is certain financial information with respect to the Company's operating segments for the years ended December 31, 1998, 1997 and 1996. The accounting policies of the segments are the same as those described in the summary of significant accounting policies, except for the method of capital allocation. The Company allocates capital to each segment based upon an internal capital allocation system that allows the Company to more effectively manage its capital. The Company has divested operations that did not meet targeted rates of return, including its medical insurance operations, commercial leasing business, and insurance operations in the United Kingdom and substantially all of its Canadian operations. The Company evaluates the performance of each operating segment based upon income or loss from operations before provision for income taxes and non-recurring items (e.g. items of unusual or infrequent nature). The Company allocates non- recurring items to the Corporate segment. 33 NOTES TO FINANCIAL STATEMENTS--(Continued)
Auto At or for the year ended & Asset Consolidation/ December 31, 1998 Individual Institutional Home International Management Corporate Elimination Total - ------------------------ ---------- ------------- ------ ------------- ---------- --------- -------------- ------- Premiums................ $ 4,381 $ 5,101 $1,403 $ 618 $ -- $ -- $ -- $11,503 Universal life and investment-type product policy fees 817 475 -- 68 -- -- -- 1,360 Net investment income... 5,501 3,864 81 343 76 808 (445) 10,228 Other revenues.......... 523 574 36 33 814 35 (50) 1,965 Net realized investment gains.................. 663 552 122 117 -- 683 (116) 2,021 Policyholder benefits and claims............. 4,659 6,373 869 597 -- (10) -- 12,488 Interest credited to policyholder account balances............... 1,443 1,199 -- 89 -- -- -- 2,731 Policyholder dividends.. 1,447 142 -- 64 -- -- -- 1,653 Other expenses.......... 2,609 1,592 546 352 799 2,632 (412) 8,118 Income before provision for income taxes....... 1,727 1,260 227 77 91 (1,096) (199) 2,087 Income after provision for income taxes....... 1,091 833 161 56 47 (675) (166) 1,347 Total assets............ 103,974 88,356 2,771 3,432 1,165 20,652 (5,004) 215,346 Deferred policy acquisition costs...... 6,255 43 57 205 -- -- -- 6,560 Separate account assets. 23,038 35,286 -- 26 -- -- -- 58,350 Policyholder liabilities............ 71,989 49,045 1,477 2,043 -- 1 (352) 124,203 Separate account liabilities............ $23,013 $35,029 $ -- $ 26 $ -- $ -- $ -- $58,068
Auto At or for the year ended & Asset Consolidation/ December 31, 1997 Individual Institutional Home International Management Corporate Elimination Total - ------------------------ ---------- ------------- ------ ------------- ---------- --------- -------------- ------- Premiums................ $ 4,327 $ 4,689 $1,354 $ 908 $ -- $ -- $ -- $11,278 Universal life and investment-type product policy fees............ 855 426 -- 137 -- -- -- 1,418 Net investment income... 4,754 3,754 71 504 87 895 (574) 9,491 Other revenues.......... 338 357 25 54 682 19 16 1,491 Net realized investment gains.................. 356 45 9 142 -- 326 (91) 787 Policyholder benefits and claims............. 4,597 5,934 834 869 -- -- -- 12,234 Interest credited to policyholder account balances............... 1,428 1,319 -- 137 -- -- -- 2,884 Policyholder dividends.. 1,340 305 -- 97 -- -- -- 1,742 Other expenses.......... 2,384 1,178 520 497 679 1,118 (442) 5,934 Income before provision for income taxes....... 881 535 105 145 90 122 (207) 1,671 Income after provision for income taxes....... 603 339 74 126 52 210 (201) 1,203 Total assets............ 95,990 83,481 2,542 7,412 1,147 18,494 (6,290) 202,776 Deferred policy acquisition costs...... 5,912 40 56 428 -- -- -- 6,436 Separate account assets. 17,368 30,732 -- 520 -- -- -- 48,620 Policyholder liabilities............ 70,686 49,550 1,509 5,615 -- 1 (3) 127,358 Separate account liabilities............ $17,345 $30,473 $ -- $ 520 $ -- $ -- $ -- $48,338
34 NOTES TO FINANCIAL STATEMENTS--(Continued)
Auto At or for the year ended & Asset Consolidation/ December 31, 1996 Individual Institutional Home International Management Corporate Elimination Total - ------------------------ ---------- ------------- ------ ------------- ---------- --------- -------------- ------- Premiums................ $ 4,559 $ 4,676 $1,316 $ 794 $-- $ -- $ -- $11,345 Universal life and investment-type product policy fees............ 729 375 -- 139 -- -- -- 1,243 Net investment income... 4,604 3,446 71 523 60 761 (487) 8,978 Other revenues.......... 74 475 26 37 495 89 50 1,246 Net realized investment gains (losses) ....... 282 28 24 13 -- (112) (4) 231 Policyholder benefits and claims............. 4,690 6,006 891 700 -- (1) -- 12,286 Interest credited to policyholder account balances 1,354 1,358 -- 156 -- -- -- 2,868 Policyholder dividends.. 1,333 284 -- 111 -- -- -- 1,728 Other expenses.......... 2,019 1,008 490 418 498 706 (384) 4,755 Income before provision for income taxes....... 852 344 56 121 57 33 (57) 1,406 Income after provision for income taxes....... 511 217 34 86 47 85 (56) 924 Total assets............ 86,042 75,872 2,801 11,714 901 18,900 (6,954) 189,276 Deferred policy acquisition costs...... 6,495 29 56 647 -- -- -- 7,227 Separate account assets. 12,403 27,715 -- 3,645 -- -- -- 43,763 Policyholder liabilities............ 67,220 48,253 1,562 6,045 -- 1 (55) 123,026 Separate account liabilities............ $12,386 $27,368 $ -- $3,645 $-- $ -- $ -- $43,399
The individual segment includes an equity ownership interest in Nvest Companies, L.P. ("Nvest") under the equity method of accounting. Nvest has been included within the asset management segment due to the types of products and strategies employed by the entity. The individual segment's equity in earnings of Nvest, which is included in net investment income, was $49, $45 and $43 for the years ended December 31, 1998, 1997 and 1996, respectively. The investment in Nvest was $252, $216 and $152 at December 31, 1998, 1997 and 1996, respectively. Net investment income and net realized investment gains are based upon the actual results of each segment's specifically identifiable asset portfolio. Other costs and operating costs were allocated to each of the segments based upon: (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. The consolidation/elimination column includes the elimination of all intersegment amounts and the individual segment's ownership interest in Nvest. The principal component of the intersegment amounts related to intersegment loans, which bore interest at rates commensurate with related borrowings. Revenues derived from any customer did not exceed 10% of consolidated revenues. Revenues from U.S. operations were $25,643, $22,664 and $21,762 for the years ended December 31, 1998, 1997 and 1996, respectively, which represented 96%, 93% and 94%, respectively, of consolidated revenues. 35 MetLife(R) Metropolitan Life Insurance Company 18000217971(1099) printed in U.S.A. One Madison Avenue, New York, NY 10010 99032X4N(exp0500)MCLIC LD
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