497 1 d497.txt METROPOLITAN LIFE SEPARATE ACCOUNT - METFLEX METROPOLITAN LIFE INSURANCE COMPANY METROPOLITAN LIFE SEPARATE ACCOUNT UL METFLEX SUPPLEMENT DATED OCTOBER 31, 2008 TO THE PROSPECTUS DATED APRIL 28, 2008 This supplement updates certain information in the April 28, 2008 prospectus for your MetFlex Flexible Premium Variable Life Insurance Policy. The following new Portfolios will be added to your MetFlex policy, effective November 10, 2008: ALLIANCEBERNSTEIN VARIABLE PRODUCTS SERIES FUND, INC. (CLASS A) --------------------------------------------------------------- International Value Portfolio THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (CLASS I) ------------------------------------------------- Emerging Markets Debt Portfolio Emerging Markets Equity Portfolio The following new Portfolios will be added to your MetFlex policy at a later date: ROYCE CAPITAL FUND (INVESTMENT CLASS) ------------------------------------- Royce Micro-Cap Portfolio Royce Small-Cap Portfolio Each of the foregoing Portfolios is considered to be a Monitored Portfolio for purposes of applying our market timing procedures. The investment objective, adviser and sub-adviser for each of the Portfolios are as follows:
ALLIANCEBERNSTEIN VARIABLE PRODUCTS SERIES FUND, INC. ADVISER: ALLIANCEBERNSTEIN L.P. ---------------------------------------------------------------------------------------------------------------------- PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE ---------------------------------------------------------------------------------------------------------------------- International Value Portfolio N/A Long-term growth of capital. ---------------------------------------------------------------------------------------------------------------------- ROYCE CAPITAL FUND ADVISER: ROYCE & ASSOCIATES, LLC ---------------------------------------------------------------------------------------------------------------------- PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE ---------------------------------------------------------------------------------------------------------------------- Royce Micro-Cap Portfolio N/A Long-term growth of capital. ---------------------------------------------------------------------------------------------------------------------- Royce Small-Cap Portfolio N/A Long-term growth of capital. ---------------------------------------------------------------------------------------------------------------------- THE UNIVERSAL INSTITUTIONAL FUNDS, INC. ADVISER: MORGAN STANLEY INVESTMENT MANAGEMENT INC. ---------------------------------------------------------------------------------------------------------------------- PORTFOLIO SUB-ADVISER INVESTMENT OBJECTIVE ---------------------------------------------------------------------------------------------------------------------- Emerging Markets Debt Portfolio N/A High total return by investing primarily in fixed income securities of government and government-related issuers, and, to a lesser extent, of corporate issuers in emerging market countries. ---------------------------------------------------------------------------------------------------------------------- Emerging Markets Equity Portfolio N/A Long-term capital appreciation by investing primarily in growth-oriented equity securities of issuers in emerging market countries. ----------------------------------------------------------------------------------------------------------------------
The annual operating expenses of the Portfolios for the year ended December 31, 2007 are as follows:
FEE WAIVERS ACQUIRED GROSS AND NET FUND TOTAL EXPENSE TOTAL MANAGEMENT OTHER 12B-1 FEES AND ANNUAL REIMBURSE- ANNUAL FEES EXPENSES FEES EXPENSES EXPENSES MENTS EXPENSES ---------------------------------------------------------------------------------------------- ALLIANCEBERNSTEIN VARIABLE PRODUCTS SERIES FUND, INC. (CLASS A) ---------------------------------------------------------------------------------------------- International Value Portfolio .75% .06% .00% .00% .81% .00% .81% ---------------------------------------------------------------------------------------------- ROYCE CAPITAL FUND (INVESTMENT CLASS) ---------------------------------------------------------------------------------------------- Royce Micro-Cap Portfolio 1.25% .06% .00% .00% 1.31% .00% 1.31% ---------------------------------------------------------------------------------------------- Royce Small-Cap Portfolio 1.00% .08% .00% .00% 1.08% .00% 1.08% ---------------------------------------------------------------------------------------------- THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (CLASS I) ---------------------------------------------------------------------------------------------- Emerging Markets Debt Portfolio .75% .31% .00% .00% 1.06% .00% 1.06% ---------------------------------------------------------------------------------------------- Emerging Markets Equity Portfolio 1.21% .37% .00% .02% 1.60% .00% 1.60%
Effective November 10, 2008, the following Portfolio will no longer accept allocations of premiums or transfers of cash value: GOLDMAN SACHS VARIABLE INSURANCE TRUST (INSTITUTIONAL SHARES) ------------------------------------------------------------- Mid Cap Value Fund METFLEX A FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE POLICY METROPOLITAN LIFE SEPARATE ACCOUNT UL ISSUED BY METROPOLITAN LIFE INSURANCE COMPANY STATEMENT OF ADDITIONAL INFORMATION APRIL 28, 2008, AS REVISED NOVEMBER 10, 2008 This Statement of Additional Information is not a prospectus. This Statement of Additional Information relates to the prospectus dated April 28, 2008 for MetFlex--A Flexible Premium Variable Universal Life Policy. A copy of that prospectus may be obtained by writing to MetLife--SBR, 485-B Route One South, 4th Floor, Iselin, NJ 08830. B-1 TABLE OF CONTENTS The Company and the Separate Account....................... 3 Additional Information about the Operation of the Policies. 3 Limits to MetLife's Right to Challenge the Policy......... 3 Misstatement of Age or Sex................................ 3 Dividends................................................. 3 Payment and Deferment..................................... 3 Additional Information about Voting........................ 4 Additional Information about Sales of Policies............. 4 Independent Registered Public Accounting Firm.............. 5 Financial Statements....................................... 5
B-2 THE COMPANY AND THE SEPARATE ACCOUNT Metropolitan Life Insurance Company ("MetLife") is a wholly-owned subsidiary of MetLife, Inc., a publicly traded company. Our main office is located at 200 Park Avenue, New York, New York 10166. MetLife was formed under the laws of New York State in 1868. MetLife, Inc. is a leading provider of insurance and other financial services to millions of individual and group customers throughout the United States. Through its subsidiaries and affiliates, MetLife, Inc. offers life insurance, annuities, automobile and homeowner's insurance and retail banking services to individuals, as well as group insurance, reinsurance and retirement and savings products and services to corporations and other institutions. Outside the U.S., the MetLife companies have direct insurance operations in Asia Pacific, Latin America and Europe. We established the Separate Account under New York law on December 13, 1988. The Separate Account receives premium payments from the Policies described in the 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"). For more information about MetLife, please visit our website at www.metlife.com --------------- ADDITIONAL INFORMATION ABOUT THE OPERATION OF THE POLICIES LIMITS TO METLIFE'S RIGHT TO CHALLENGE THE POLICY We will not contest: . Your Policy after two Policy years from issue or reinstatement (excluding riders added later). . An increase in a death benefit after it has been in effect for two years. MISSTATEMENT OF AGE OR SEX We will adjust benefits to reflect the correct age and sex of the insured, if this information isn't correct in the Policy application. DIVIDENDS The Policy is "nonparticipating," which means it is not eligible for dividends from us and does not share in any distributions of our surplus. PAYMENT AND DEFERMENT We can delay transfers, withdrawals, surrender and payment of Policy loans from the Fixed Account for up to six months. 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 a Policy. . The Securities and Exchange determines that an emergency exists. . The Securities and Exchange Commission by order permits us to do so for the protection of Policy owners (provided that the delay is permitted under New York State insurance law and regulations). . With respect to the insurance proceeds, if 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 3% per year (or higher if state law requires) from the date of death until the date we pay the benefit. B-3 ADDITIONAL INFORMATION ABOUT VOTING 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 Policy 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 Policy's 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 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. ADDITIONAL INFORMATION ABOUT SALES OF POLICIES Information about the distribution of the Policies is contained in the prospectus. (See "Sales of Policies.") Additional information is provided below. The Policies are offered to the public on a continuous basis. We anticipate continuing to offer the Policies, but reserve the right to discontinue the offering. MetLife Investors Distribution Company ("MLIDC") serves as principal underwriter for the Policies. MLIDC is a Missouri corporation and its principal office is located at 5 Park Plaza, Suite 1900, Irvine, California 92614. MLIDC is an indirect wholly-owned subsidiary of MetLife, Inc. MLIDC is registered as a broker-dealer with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and is a member of FINRA. MLIDC is not a member of the Securities Investor Protection Corporation. MLIDC has entered into selling agreements with other broker-dealers and compensates them for their services. MLIDC received sales compensation with respect to the Policies in the following amounts during 2007:
AGGREGATE AMOUNT OF AGGREGATE AMOUNT OF COMMISSIONS COMMISSION PAID TO RETAINED BY DISTRIBUTOR AFTER FISCAL YEAR DISTRIBUTOR* PAYMENTS TO SELLING FIRMS ----------- ------------------- ------------------------------- 2007..... $1,368,740 $0
-------- * Prior to May 1, 2007, we served as principal underwriter and distributor of the Policies. As such, we paid commissions in the following amounts $1,777,790, $2,695,297 and $1,887,800 in 2007 (1/1/07- 4/30/07), 2006 and 2005, respectively. B-4 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The financial statements of Metropolitan Life Insurance Company (the "Company") included in this Statement of Additional Information have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein (which report expresses an unqualified opinion and includes an explanatory paragraph referring to the fact that the Company changed its method of accounting for deferred acquisition costs, and for income taxes, as required by accounting guidance adopted on January 1, 2007, and changed its method of accounting for defined benefit pension and other postretirement plans, as required by accounting guidance adopted on December 31, 2006), and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The principal address of Deloitte & Touche LLP is 201 East Kennedy Boulevard, Suite 1200, Tampa, Florida 33602-5827. FINANCIAL STATEMENTS The financial statements of MetLife are attached to the Statement of Additional Information. Our financial statements should be considered only as bearing upon our ability to meet our obligations under the Policy. B-5 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholder 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, 2007 and 2006, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial position of Metropolitan Life Insurance Company and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, the Company changed its method of accounting for deferred acquisition costs and for income taxes as required by accounting guidance adopted on January 1, 2007, and changed its method of accounting for defined benefit pension and other postretirement plans as required by accounting guidance adopted on December 31, 2006. /s/ DELOITTE & TOUCHE LLP New York, New York April 3, 2008 (October 30, 2008 as to Note 23) F-1 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2007 AND 2006 (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
2007 2006 -------- -------- ASSETS Investments: Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $157,779 and $157,673, respectively)............................................ $161,664 $162,385 Equity securities available-for-sale, at estimated fair value (cost: $4,053 and $3,000, respectively)............ 4,304 3,487 Trading securities, at estimated fair value (cost: $456 and $548, respectively)...................................... 457 563 Mortgage and consumer loans................................. 40,012 35,939 Policy loans................................................ 8,736 8,587 Real estate and real estate joint ventures held-for- investment............................................... 5,351 4,308 Real estate held-for-sale................................... 172 177 Other limited partnership interests......................... 4,945 3,670 Short-term investments...................................... 678 1,244 Other invested assets....................................... 8,975 6,960 -------- -------- Total investments........................................ 235,294 227,320 Cash and cash equivalents..................................... 2,331 1,455 Accrued investment income..................................... 2,529 2,328 Premiums and other receivables................................ 25,351 9,707 Deferred policy acquisition costs and value of business acquired.................................................... 12,141 12,043 Other assets.................................................. 6,548 6,240 Separate account assets....................................... 89,720 80,965 -------- -------- Total assets............................................. $373,914 $340,058 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Future policy benefits...................................... $ 99,840 $ 96,599 Policyholder account balances............................... 87,660 80,498 Other policyholder funds.................................... 7,743 7,372 Policyholder dividends payable.............................. 991 957 Policyholder dividend obligation............................ 789 1,063 Short-term debt............................................. 357 833 Long-term debt.............................................. 3,215 2,369 Collateral financing arrangements........................... 850 850 Junior subordinated debt securities......................... 399 399 Shares subject to mandatory redemption...................... 159 278 Current income tax payable.................................. 392 781 Deferred income tax liability............................... 1,926 2,453 Payables for collateral under securities loaned and other transactions............................................. 28,952 32,119 Other liabilities........................................... 29,620 13,330 Separate account liabilities................................ 89,720 80,965 -------- -------- Total liabilities........................................ 352,613 320,866 -------- -------- CONTINGENCIES, COMMITMENTS AND GUARANTEES (NOTE 15) STOCKHOLDER'S EQUITY: Common stock, par value $0.01 per share; 1,000,000,000 shares authorized; 494,466,664 shares issued and outstanding at December 31, 2007 and 2006.................................. 5 5 Additional paid-in capital.................................... 14,426 14,343 Retained earnings............................................. 5,529 3,812 Accumulated other comprehensive income........................ 1,341 1,032 -------- -------- Total stockholder's equity............................... 21,301 19,192 -------- -------- Total liabilities and stockholder's equity............... $373,914 $340,058 ======== ========
See accompanying notes to consolidated financial statements. F-2 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (IN MILLIONS)
2007 2006 2005 ------- ------- ------- REVENUES Premiums............................................... $21,345 $20,284 $19,256 Universal life and investment-type product policy fees................................................. 2,246 2,183 1,948 Net investment income.................................. 13,486 12,297 11,718 Other revenues......................................... 1,002 890 820 Net investment gains (losses).......................... (464) (827) 179 ------- ------- ------- Total revenues.................................. 37,615 34,827 33,921 ------- ------- ------- EXPENSES Policyholder benefits and claims....................... 22,264 21,137 20,445 Interest credited to policyholder account balances..... 3,777 3,247 2,596 Policyholder dividends................................. 1,687 1,671 1,647 Other expenses......................................... 6,344 6,314 5,717 ------- ------- ------- Total expenses.................................. 34,072 32,369 30,405 ------- ------- ------- Income from continuing operations before provision for income tax........................................... 3,543 2,458 3,516 Provision for income tax............................... 1,138 636 1,093 ------- ------- ------- Income from continuing operations...................... 2,405 1,822 2,423 Income from discontinued operations, net of income tax.................................................. 27 104 830 ------- ------- ------- Net income............................................. $ 2,432 $ 1,926 $ 3,253 ======= ======= =======
See accompanying notes to consolidated financial statements. F-3 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (IN MILLIONS)
ACCUMULATED OTHER COMPREHENSIVE INCOME ----------------------------------------- NET FOREIGN DEFINED ADDITIONAL UNREALIZED CURRENCY BENEFIT COMMON PAID-IN RETAINED INVESTMENT TRANSLATION PLANS STOCK CAPITAL EARNINGS GAINS (LOSSES) ADJUSTMENTS ADJUSTMENT TOTAL ------- ---------- -------- -------------- ----------- ---------- ------- Balance at January 1, 2005............. $ 5 $ 13,827 $ 2,696 $ 2,408 $ 186 $ (130) $18,992 Treasury stock transactions, net -- by subsidiary........................... (15) (15) Issuance of stock options -- by subsidiary........................... (4) (4) Dividends on common stock.............. (3,200) (3,200) Comprehensive income: Net income........................... 3,253 3,253 Other comprehensive income (loss): Unrealized gains (losses) on derivative instruments, net of income tax...................... 184 184 Unrealized investment gains (losses), net of related offsets and income tax.................. (783) (783) Foreign currency translation adjustments, net of income tax.. (49) (49) Additional minimum pension liability adjustment, net of income tax...................... 89 89 ------- Other comprehensive income (loss).......................... (559) ------- Comprehensive income................. 2,694 ------- -------- ------- ----------- ---------- -------- ------- Balance at December 31, 2005........... 5 13,808 2,749 1,809 137 (41) 18,467 Treasury stock transactions, net -- by subsidiary........................... 12 12 Excess tax benefits related to stock- based compensation................... 34 34 Capital contribution from Holding Company -- (Notes 2 and 17).......... 489 489 Dividends on common stock.............. (863) (863) Comprehensive income: Net income........................... 1,926 1,926 Other comprehensive income (loss): Unrealized gains (losses) on derivative instruments, net of income tax...................... (20) (20) Unrealized investment gains (losses), net of related offsets and income tax.................. (93) (93) Foreign currency translation adjustments, net of income tax.. 7 7 Additional minimum pension liability adjustment, net of income tax...................... (18) (18) ------- Other comprehensive income (loss).......................... (124) ------- Comprehensive income................. 1,802 ------- Adoption of SFAS 158, net of income tax...................... (749) (749) ------- -------- ------- ----------- ---------- -------- ------- Balance at December 31, 2006........... 5 14,343 3,812 1,696 144 (808) 19,192 Cumulative effect of changes in accounting principles, net of income tax (Note 1)......................... (215) (215) ------- -------- ------- ----------- ---------- -------- ------- Balance at January 1, 2007............. 5 14,343 3,597 1,696 144 (808) 18,977 Treasury stock transactions, net -- by subsidiary........................... 10 10 Capital contribution from Holding Company -- (Notes 10 and 17)......... 7 7 Excess proceeds received on sale of interests in affiliate -- (Note 17).. 30 30 Excess tax benefits related to stock- based compensation................... 36 36 Dividends on common stock.............. (500) (500) Comprehensive income: Net income........................... 2,432 2,432 Other comprehensive income (loss): Unrealized gains (losses) on derivative instruments, net of income tax...................... (15) (15) Unrealized investment gains (losses), net of related offsets and income tax.................. (339) (339) Foreign currency translation adjustments, net of income tax.. 139 139 Defined benefit plans adjustment, net of income tax............... 524 524 ------- Other comprehensive income........ 309 ------- Comprehensive income................. 2,741 ------- -------- ------- ----------- ---------- -------- ------- Balance at December 31, 2007........... $5 $14,426 $ 5,529 $1,342 $283 $(284) $21,301 ======= ======== ======= =========== ========== ======== =======
See accompanying notes to consolidated financial statements. F-4 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (IN MILLIONS)
2007 2006 2005 -------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................... $ 2,432 $ 1,926 $ 3,253 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expenses.......... 368 308 299 Amortization of premiums and accretion of discounts associated with investments, net.... (592) (467) (203) (Gains) losses from sales of investments and businesses, net............................... 420 687 (1,379) Undistributed equity earnings of real estate joint ventures and other limited partnership interests..................................... (433) (376) (399) Interest credited to policyholder account balances...................................... 3,777 3,247 2,596 Universal life and investment-type product policy fees................................... (2,246) (2,183) (1,948) Change in accrued investment income............. (201) (295) (24) Change in premiums and other receivables........ 228 (3,565) (734) Change in deferred policy acquisition costs, net........................................... (598) (672) (504) Change in insurance-related liabilities......... 4,022 3,743 3,794 Change in trading securities.................... 188 (196) (375) Change in income tax payable.................... 715 144 147 Change in other assets.......................... (232) 772 (236) Change in other liabilities..................... (1,309) 1,109 1,878 Other, net...................................... 51 (37) 24 -------- -------- --------- Net cash provided by operating activities............ 6,590 4,145 6,189 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Sales, maturities and repayments of: Fixed maturity securities....................... 73,576 73,351 118,459 Equity securities............................... 1,265 858 777 Mortgage and consumer loans..................... 8,085 7,632 7,890 Real estate and real estate joint ventures...... 503 847 1,922 Other limited partnership interests............. 764 1,253 953 Purchases of: Fixed maturity securities....................... (73,375) (90,163) (119,375) Equity securities............................... (2,204) (731) (1,057) Mortgage and consumer loans..................... (11,891) (10,535) (9,473) Real estate and real estate joint ventures...... (1,369) (1,069) (1,323) Other limited partnership interests............. (1,459) (1,551) (1,012) Net change in short-term investments............... 582 (362) 409 Purchases of subsidiaries, net of cash received of $0, $0 and $0, respectively..................... -- (193) -- Proceeds from sales of businesses, net of cash disposed of $0, $0 and $43, respectively........ 25 48 260 Excess proceeds received on sale of interests in affiliate....................................... 30 -- -- Net change in policy loans......................... (149) (176) (156) Net change in other invested assets................ (1,587) (1,084) (598) Net change in property, equipment and leasehold improvements.................................... (88) (109) (114) Other, net......................................... 22 (4) (69) -------- -------- --------- Net cash used in investing activities................ $ (7,270) $(21,988) $ (2,507) -------- -------- ---------
See accompanying notes to consolidated financial statements. F-5 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (IN MILLIONS)
2007 2006 2005 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits......................................... $ 39,125 $ 37,411 $ 30,008 Withdrawals...................................... (34,135) (31,366) (26,732) Net change in payables for collateral under securities loaned and other transactions......... (3,167) 11,110 (4,221) Net change in short-term debt....................... (476) 380 (992) Long-term debt issued............................... 1,705 8 1,216 Long-term debt repaid............................... (894) (112) (794) Collateral financing arrangements issued............ -- 850 -- Capital contribution from the Holding Company....... 7 93 -- Shares subject to mandatory redemption.............. (131) -- -- Junior subordinated debt securities issued.......... -- -- 399 Dividends on common stock........................... (500) (863) (3,200) Debt and equity issuance costs...................... (8) (13) -- Other, net.......................................... 30 13 (7) -------- -------- -------- Net cash provided by (used in) financing activities... 1,556 17,511 (4,323) -------- -------- -------- Change in cash and cash equivalents................... 876 (332) (641) Cash and cash equivalents, beginning of year.......... 1,455 1,787 2,428 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR................ $ 2,331 $ 1,455 $ 1,787 ======== ======== ======== Cash and cash equivalents, subsidiaries held-for-sale, beginning of year................................... $ -- $ -- $ 58 ======== ======== ======== CASH AND CASH EQUIVALENTS, SUBSIDIARIES HELD-FOR-SALE, END OF YEAR......................................... $ -- $ -- $ -- ======== ======== ======== Cash and cash equivalents, from continuing operations, beginning of year................................... $ 1,455 $ 1,787 $ 2,370 ======== ======== ======== CASH AND CASH EQUIVALENTS, FROM CONTINUING OPERATIONS, END OF YEAR......................................... $ 2,331 $ 1,455 $ 1,787 ======== ======== ======== Supplemental disclosures of cash flow information: Net cash paid during the year for: Interest......................................... $ 332 $ 256 $ 203 ======== ======== ======== Income tax....................................... $ 1,010 $ 197 $ 1,385 ======== ======== ======== Non-cash transactions during the year: Business dispositions: Assets disposed................................ $ -- $ -- $ 366 Less: liabilities disposed..................... -- -- 269 -------- -------- -------- Net assets disposed............................ -- -- 97 Plus: equity securities received............... -- -- 43 Less: cash disposed............................ -- -- 43 -------- -------- -------- Business disposition, net of cash disposed..... $ -- $ -- $ 97 ======== ======== ======== Contribution of equity securities to MetLife Foundation..................................... $ -- $ -- $ 1 ======== ======== ======== Real estate acquired in satisfaction of debt..... $ -- $ 6 $ 1 ======== ======== ======== Contribution of other intangible assets, net of deferred income tax............................ $ -- $ 377 $ -- ======== ======== ======== Excess of net assets over purchase price for subsidiary..................................... $ -- $ 19 $ -- ======== ======== ========
See accompanying notes to consolidated financial statements. F-6 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Metropolitan Life Insurance Company and its subsidiaries (collectively, the "Company") is a leading provider of insurance and other financial services with operations throughout the United States. The Company offers life insurance and annuities to individuals, as well as group insurance, reinsurance and retirement & savings products and services to corporations and other institutions. The Company is organized into three operating segments: Institutional, Individual and Reinsurance, as well as Corporate & Other. The Reinsurance segment has operations in various international markets. Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc. (the "Holding Company"). BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of (i) Metropolitan Life Insurance Company and its subsidiaries; (ii) partnerships and joint ventures in which the Company has control; and (iii) variable interest entities ("VIEs") for which the Company is deemed to be the primary beneficiary. Closed block assets, liabilities, revenues and expenses are combined on a line- by-line basis with the assets, liabilities, revenues and expenses outside the closed block based on the nature of the particular item. See Note 9. Intercompany accounts and transactions have been eliminated. The Company uses the equity method of accounting for investments in equity securities in which it has more than a 20% interest and for real estate joint ventures and other limited partnership interests in which it has more than a minor equity interest or more than a minor influence over the joint venture's or partnership's operations, but does not have a controlling interest and is not the primary beneficiary. The Company uses the cost method of accounting for investments in real estate joint ventures and other limited partnership interests in which it has a minor equity investment and virtually no influence over the joint venture's or partnership's operations. Minority interest related to consolidated entities included in other liabilities was $1.7 billion and $1.5 billion at December 31, 2007 and 2006, respectively. Certain amounts in the prior year periods' consolidated financial statements have been reclassified to conform with the 2007 presentation. Such reclassifications include $850 million relating to long-term debt reclassified to collateral financing arrangements on the consolidated balance sheet at December 31, 2006 and the consolidated statement of cash flow for the year ended December 31, 2006. See Note 11 for a description of the transaction. See also Note 20 for reclassifications related to discontinued operations. Since the Company is a member of a controlled group of affiliated companies, its results may not be indicative of those of a stand-alone entity. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates include those used in determining: (i) the fair value of investments in the absence of quoted market values; (ii) investment impairments; (iii) the recognition of income on certain investments; (iv) the application of the consolidation rules to certain investments; F-7 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (v) the fair value of and accounting for derivatives; (vi) the capitalization and amortization of deferred policy acquisition costs ("DAC") and the establishment and amortization of value of business acquired ("VOBA"); (vii) the liability for future policyholder benefits; (viii) accounting for income taxes and the valuation of deferred tax assets; (ix) accounting for reinsurance transactions; (x) accounting for employee benefit plans; and (xi) the liability for litigation and regulatory matters. A description of such critical estimates is incorporated within the discussion of the related accounting policies which follow. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company's businesses and operations. Actual results could differ from these estimates. Investments The Company's principal investments are in fixed maturity and equity securities, mortgage and consumer loans, policy loans, real estate, real estate joint ventures and other limited partnerships, short-term investments and other invested assets. The accounting policies related to each are as follows: Fixed Maturity and Equity Securities. The Company's fixed maturity and equity securities are classified as available-for-sale, except for trading securities, and are reported at their estimated fair value. Unrealized investment gains and losses on these securities are recorded as a separate component of other comprehensive income or loss, net of policyholder related amounts and deferred income taxes. All security transactions are recorded on a trade date basis. Investment gains and losses on sales of securities are determined on a specific identification basis. Interest income on fixed maturity securities is recorded when earned using an effective yield method giving effect to amortization of premiums and accretion of discounts. Dividends on equity securities are recorded when declared. These dividends and interest income are recorded as part of net investment income. Included within fixed maturity securities are loan-backed securities including mortgage-backed and asset-backed securities. Amortization of the premium or discount from the purchase of these securities considers the estimated timing and amount of prepayments of the underlying loans. Actual prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. Prepayment assumptions for single class and multi-class mortgage-backed and asset-backed securities are obtained from broker-dealer survey values or internal estimates. For credit-sensitive mortgage-backed and asset-backed securities and certain prepayment-sensitive securities, the effective yield is recalculated on a prospective basis. For all other mortgage-backed and asset-backed securities, the effective yield is recalculated on a retrospective basis. The cost of fixed maturity and equity securities is adjusted for impairments in value deemed to be other-than-temporary in the period in which the determination is made. These impairments are included within net investment gains (losses) and the cost basis of the fixed maturity and equity securities is reduced accordingly. The Company does not change the revised cost basis for subsequent recoveries in value. F-8 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The assessment of whether impairments have occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in fair value. The Company's review of its fixed maturity and equity securities for impairments includes an analysis of the total gross unrealized losses by three categories of securities: (i) securities where the estimated fair value had declined and remained below cost or amortized cost by less than 20%; (ii) securities where the estimated fair value had declined and remained below cost or amortized cost by 20% or more for less than six months; and (iii) securities where the estimated fair value had declined and remained below cost or amortized cost by 20% or more for six months or greater. Additionally, management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the impairment evaluation process include, but are not limited to:(i) the length of time and the extent to which the market value has been below cost or amortized cost; (ii) the potential for impairments of securities when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; (vi) the Company's ability and intent to hold the security for a period of time sufficient to allow for the recovery of its value to an amount equal to or greater than cost or amortized cost (See also Note 3); (vii) unfavorable changes in forecasted cash flows on mortgage-backed and asset-backed securities; and (viii) other subjective factors, including concentrations and information obtained from regulators and rating agencies. The Company purchases and receives beneficial interests in special purpose entities ("SPEs"), which enhance the Company's total return on its investment portfolio principally by providing equity-based returns on debt securities. These investments are generally made through structured notes and similar instruments (collectively, "Structured Investment Transactions"). The Company has not guaranteed the performance, liquidity or obligations of the SPEs and its exposure to loss is limited to its carrying value of the beneficial interests in the SPEs. The Company does not consolidate such SPEs as it has determined it is not the primary beneficiary. These Structured Investment Transactions are included in fixed maturity securities and their income is generally recognized using the retrospective interest method. Impairments of these investments are included in net investment gains (losses). Trading Securities. The Company's trading securities portfolio, principally consisting of fixed maturity and equity securities, supports investment strategies that involve the active and frequent purchase and sale of securities and the execution of short sale agreements and supports asset and liability matching strategies for certain insurance products. Trading securities and short sale agreement liabilities are recorded at fair value with subsequent changes in fair value recognized in net investment income. Related dividends and investment income are also included in net investment income. Securities Lending. Securities loaned transactions are treated as financing arrangements and are recorded at the amount of cash received. The Company obtains collateral in an amount equal to 102% of the fair value of the securities loaned. The Company monitors the market value of the securities loaned on a daily basis with additional collateral obtained as necessary. Substantially all of the Company's securities loaned transactions are with large brokerage firms. Income and expenses associated with securities loaned transactions are reported as investment income and investment expense, respectively, within net investment income. Mortgage and Consumer Loans. Mortgage and consumer loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, net of valuation allowances. F-9 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest income is accrued on the principal amount of the loan based on the loan's contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts, and prepayment fees are reported in net investment income. Loans are considered to be impaired when it is probable that, based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. Valuation allowances are established for the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan's original effective interest rate, the value of the loan's collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or the loan's market value if the loan is being sold. The Company also establishes allowances for loan losses when a loss contingency exists for pools of loans with similar characteristics, such as mortgage loans based on similar property types or loan to value risk factors. A loss contingency exists when the likelihood that a future event will occur is probable based on past events. Interest income earned on impaired loans is accrued on the principal amount of the loan based on the loan's contractual interest rate. However, interest ceases to be accrued for loans on which interest is generally more than 60 days past due and/or where the collection of interest is not considered probable. Cash receipts on such impaired loans are recorded as a reduction of the recorded investment. Gains and losses from the sale of loans and changes in valuation allowances are reported in net investment gains (losses). Policy Loans. Policy loans are stated at unpaid principal balances. Interest income on such loans is recorded as earned using the contractually agreed upon interest rate. Generally, interest is capitalized on the policy's anniversary date. Real Estate. Real estate held-for-investment, including related improvements, is stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful life of the asset (typically 20 to 55 years). Rental income is recognized on a straight-line basis over the term of the respective leases. The Company classifies a property as held-for-sale if it commits to a plan to sell a property within one year and actively markets the property in its current condition for a price that is reasonable in comparison to its fair value. The Company classifies the results of operations and the gain or loss on sale of a property that either has been disposed of or classified as held- for-sale as discontinued operations, if the ongoing operations of the property will be eliminated from the ongoing operations of the Company and if the Company will not have any significant continuing involvement in the operations of the property after the sale. Real estate held-for-sale is stated at the lower of depreciated cost or fair value less expected disposition costs. Real estate is not depreciated while it is classified as held-for-sale. The Company periodically reviews its properties held-for- investment for impairment and tests properties for recoverability whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable and the carrying value of the property exceeds its fair value. Properties whose carrying values are greater than their undiscounted cash flows are written down to their fair value, with the impairment loss included in net investment gains (losses). Impairment losses are based upon the estimated fair value of real estate, which is generally computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks. Real estate acquired upon foreclosure of commercial and agricultural mortgage loans is recorded at the lower of estimated fair value or the carrying value of the mortgage loan at the date of foreclosure. Real Estate Joint Ventures and Other Limited Partnership Interests. The Company uses the equity method of accounting for investments in real estate joint ventures and other limited partnership interests in which it has more than a minor equity interest or more than a minor influence over the joint ventures or partnership's operations, but does not have a controlling interest and is not the primary beneficiary. The Company uses the cost method of accounting for investments in real estate joint ventures and other limited partnership interests in which it has a minor equity investment and virtually no influence over the joint ventures or the partnership's operations. In addition to the investees performing regular evaluations for the impairment of underlying investments, the F-10 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company routinely evaluates its investments in real estate joint ventures and other limited partnerships for impairments. For its cost method investments, the Company follows an impairment analysis which is similar to the process followed for its fixed maturity and equity securities as described previously. For equity method investees, the Company considers financial and other information provided by the investee, other known information and inherent risks in the underlying investments, as well as future capital commitments, in determining whether an impairment has occurred. When an other-than-temporary impairment is deemed to have occurred, the Company records a realized capital loss within net investment gains (losses) to record the investment at its fair value. Short-term Investments. Short-term investments include investments with remaining maturities of one year or less, but greater than three months, at the time of acquisition and are stated at amortized cost, which approximates fair value. Other Invested Assets. Other invested assets consist principally of leveraged leases and funds withheld at interest. Leveraged leases are recorded net of non-recourse debt. The Company participates in lease transactions which are diversified by industry, asset type and geographic area. The Company recognizes income on the leveraged leases by applying the leveraged lease's estimated rate of return to the net investment in the lease. The Company regularly reviews residual values and impairs them to expected values as needed. Funds withheld represent amounts contractually withheld by ceding companies in accordance with reinsurance agreements. For agreements written on a modified coinsurance basis and certain agreements written on a coinsurance basis, assets supporting the reinsured policies, and equal to the net statutory reserves, are withheld and continue to be legally owned by the ceding companies. The Company records a funds withheld receivable rather than the underlying investments. The Company recognizes interest on funds withheld at rates defined by the treaty terms which may be contractually specified or directly related to the investment portfolio and records it in net investment income. Other invested assets also include stand-alone derivatives with positive fair values and the fair value of embedded derivatives related to funds withheld and modified coinsurance contracts. Estimates and Uncertainties. The Company's investments are exposed to three primary sources of risk: credit, interest rate and market valuation. The financial statement risks, stemming from such investment risks, are those associated with the recognition of impairments, the recognition of income on certain investments, and the determination of fair values. The determination of the amount of allowances and impairments, as applicable, are described previously by investment type. The determination of such allowances and impairments is highly subjective and is based upon the Company's periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. The recognition of income on certain investments (e.g. loan-backed securities including mortgage-backed and asset-backed securities, certain investment transactions, trading securities, etc.) is dependent upon market conditions, which could result in prepayments and changes in amounts to be earned. The fair values of publicly held fixed maturity securities and publicly held equity securities are based on quoted market prices or estimates from independent pricing services. However, in cases where quoted market prices are not available, such as for private fixed maturity securities, fair values are estimated using present value or valuation techniques. The determination of fair values is based on: (i) valuation methodologies; (ii) securities the Company deems to be comparable; and (iii) assumptions deemed appropriate given the circumstances. The fair value estimates are made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of F-11 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expected future cash flows and the credit standing of the issuer or counterparty. Factors considered in estimating fair value include: coupon rate, maturity, estimated duration, call provisions, sinking fund requirements, credit rating, industry sector of the issuer, and quoted market prices of comparable securities. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts. Additionally, when the Company enters into certain structured investment transactions, real estate joint ventures and other limited partnerships for which the Company may be deemed to be the primary beneficiary under Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 46(r), Consolidation of Variable Interest Entities -- An Interpretation of ARB No. 51, it may be required to consolidate such investments. The accounting rules for the determination of the primary beneficiary are complex and require evaluation of the contractual rights and obligations associated with each party involved in the entity, an estimate of the entity's expected losses and expected residual returns and the allocation of such estimates to each party. The use of different methodologies and assumptions as to the determination of the fair value of investments, the timing and amount of impairments, the recognition of income, or consolidation of investments may have a material effect on the amounts presented within the consolidated financial statements. Derivative Financial Instruments Derivatives are financial instruments whose values are derived from interest rates, foreign currency exchange rates, or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter market. The Company uses a variety of derivatives, including swaps, forwards, futures and option contracts, to manage the risk associated with variability in cash flows or changes in fair values related to the Company's financial instruments. The Company also uses derivative instruments to hedge its currency exposure associated with net investments in certain foreign operations. To a lesser extent, the Company uses credit derivatives, such as credit default swaps, to synthetically replicate investment risks and returns which are not readily available in the cash market. The Company also purchases certain securities, issues certain insurance policies and investment contracts and engages in certain reinsurance contracts that have embedded derivatives. Freestanding derivatives are carried on the Company's consolidated balance sheet either as assets within other invested assets or as liabilities within other liabilities at fair value as determined by quoted market prices or through the use of pricing models. The determination of fair value, when quoted market values are not available, is based on valuation methodologies and assumptions deemed appropriate under the circumstances. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, market volatility, and liquidity. Values can also be affected by changes in estimates and assumptions used in pricing models. Such assumptions include estimates of volatility, interest rates, foreign currency exchange rates, other financial indices and credit ratings. Essential to the analysis of the fair value is risk of counterparty default. The use of different assumptions may have a material effect on the estimated derivative fair value amounts as well as the amount of reported net income. If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the fair value of the derivative are generally reported in net investment gains (losses) except for those (i) in policyholder benefits and claims for economic hedges of liabilities embedded in certain variable annuity products offered by the Company, and (ii) in net investment income for all derivatives held in relation to the trading portfolios. The fluctuations in fair value of derivatives which have not been designated for hedge accounting can result in significant volatility in net income. To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management objective and strategy for undertaking the hedging transaction, as well as its F-12 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) designation of the hedge as either (i) a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment ("fair value hedge"); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"); or (iii) a hedge of a net investment in a foreign operation. In this documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument's effectiveness and the method which will be used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout the life of the designated hedging relationship. Assessments of hedge effectiveness and measurements of ineffectiveness are also subject to interpretation and estimation and different interpretations or estimates may have a material effect on the amount reported in net income. The accounting for derivatives is complex and interpretations of the primary accounting standards continue to evolve in practice. Judgment is applied in determining the availability and application of hedge accounting designations and the appropriate accounting treatment under these accounting standards. If it was determined that hedge accounting designations were not appropriately applied, reported net income could be materially affected. Differences in judgment as to the availability and application of hedge accounting designations and the appropriate accounting treatment may result in a differing impact on the consolidated financial statements of the Company from that previously reported. Under a fair value hedge, changes in the fair value of the hedging derivative, including amounts measured as ineffectiveness, and changes in the fair value of the hedged item related to the designated risk being hedged, are reported within net investment gains (losses). The fair values of the hedging derivatives are exclusive of any accruals that are separately reported in the consolidated statement of income within interest income or interest expense to match the location of the hedged item. Under a cash flow hedge, changes in the fair value of the hedging derivative measured as effective are reported within other comprehensive income (loss), a separate component of stockholder's equity, and the deferred gains or losses on the derivative are reclassified into the consolidated statement of income when the Company's earnings are affected by the variability in cash flows of the hedged item. Changes in the fair value of the hedging instrument measured as ineffectiveness are reported within net investment gains (losses). The fair values of the hedging derivatives are exclusive of any accruals that are separately reported in the consolidated statement of income within interest income or interest expense to match the location of the hedged item. In a hedge of a net investment in a foreign operation, changes in the fair value of the hedging derivative that are measured as effective are reported within other comprehensive income (loss) consistent with the translation adjustment for the hedged net investment in the foreign operation. Changes in the fair value of the hedging instrument measured as ineffectiveness are reported within net investment gains (losses). The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item; (ii) the derivative expires, is sold, terminated, or exercised; (iii) it is no longer probable that the hedged forecasted transaction will occur; (iv) a hedged firm commitment no longer meets the definition of a firm commitment; or (v) the derivative is de- designated as a hedging instrument. When hedge accounting is discontinued because it is determined that the derivative is not highly effective in offsetting changes in the fair value or cash flows of a hedged item, the derivative continues to be carried on the consolidated balance sheet at its fair value, with changes in fair value recognized currently in net investment gains (losses). The carrying value of the hedged recognized asset or liability under a fair value hedge is no longer adjusted for changes in its fair value due to the hedged risk, and the cumulative adjustment to its carrying value is amortized into income over the remaining life of the hedged item. Provided the hedged forecasted transaction is still probable F-13 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of occurrence, the changes in fair value of derivatives recorded in other comprehensive income (loss) related to discontinued cash flow hedges are released into the consolidated statement of income when the Company's earnings are affected by the variability in cash flows of the hedged item. When hedge accounting is discontinued because it is no longer probable that the forecasted transactions will occur by the end of the specified time period or the hedged item no longer meets the definition of a firm commitment, the derivative continues to be carried on the consolidated balance sheet at its fair value, with changes in fair value recognized currently in net investment gains (losses). Any asset or liability associated with a recognized firm commitment is derecognized from the consolidated balance sheet, and recorded currently in net investment gains (losses). Deferred gains and losses of a derivative recorded in other comprehensive income (loss) pursuant to the cash flow hedge of a forecasted transaction are recognized immediately in net investment gains (losses). In all other situations in which hedge accounting is discontinued, the derivative is carried at its fair value on the consolidated balance sheet, with changes in its fair value recognized in the current period as net investment gains (losses). The Company is also a party to financial instruments that contain terms which are deemed to be embedded derivatives. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated. If the instrument would not be accounted for in its entirety at fair value and it is determined that the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative. Such embedded derivatives are carried on the consolidated balance sheet at fair value with the host contract and changes in their fair value are reported currently in net investment gains (losses). If the Company is unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at fair value, with changes in fair value recognized in the current period in net investment gains (losses). Additionally, the Company may elect to carry an entire contract on the balance sheet at fair value, with changes in fair value recognized in the current period in net investment gains (losses) if that contract contains an embedded derivative that requires bifurcation. There is a risk that embedded derivatives requiring bifurcation may not be identified and reported at fair value in the consolidated financial statements and that their related changes in fair value could materially affect reported net income. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Property, Equipment, Leasehold Improvements and Computer Software Property, equipment and leasehold improvements, which are included in other assets, are stated at cost, less accumulated depreciation and amortization. Depreciation is determined using either the straight-line or sum-of-the-years- digits method over the estimated useful lives of the assets, as appropriate. The estimated life for company occupied real estate property is generally 40 years. Estimated lives generally range from five to ten years for leasehold improvements and three to seven years for all other property and equipment. The cost basis of the property, equipment and leasehold improvements was $1.2 billion and $1.1 billion at December 31, 2007 and 2006, respectively. Accumulated depreciation and amortization of property, equipment and leasehold improvements was $622 million and $538 million at December 31, 2007 and 2006, respectively. Related depreciation and amortization expense was $109 million, $101 million and $94 million for the years ended December 31, 2007, 2006 and 2005, respectively. F-14 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Computer software, which is included in other assets, is stated at cost, less accumulated amortization. Purchased software costs, as well as certain internal and external costs incurred to develop internal-use computer software during the application development stage, are capitalized. Such costs are amortized generally over a four-year period using the straight-line method. The cost basis of computer software was $1.1 billion and $1.0 billion at December 31, 2007 and 2006, respectively. Accumulated amortization of capitalized software was $760 million and $664 million at December 31, 2007 and 2006, respectively. Related amortization expense was $102 million, $93 million and $97 million for the years ended December 31, 2007, 2006 and 2005, respectively. Deferred Policy Acquisition Costs and Value of Business Acquired The Company incurs significant costs in connection with acquiring new and renewal insurance business. Costs that vary with and relate to the production of new business are deferred as DAC. Such costs consist principally of commissions and agency and policy issue expenses. VOBA is an intangible asset that reflects the estimated fair value of in-force contracts in a life insurance company acquisition and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in- force at the acquisition date. VOBA is based on actuarially determined projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment returns and other factors. Actual experience on the purchased business may vary from these projections. The recovery of DAC and VOBA is dependent upon the future profitability of the related business. DAC and VOBA are aggregated in the financial statements for reporting purposes. DAC and VOBA on life insurance or investment-type contracts are amortized in proportion to gross premiums, gross margins or gross profits, depending on the type of contract as described below. The Company amortizes DAC and VOBA related to non-participating and non- dividend-paying traditional contracts (term insurance, non-participating whole life insurance, non-medical health insurance and traditional group life insurance) over the entire premium paying period in proportion to the present value of actual historic and expected future gross premiums. The present value of expected premiums is based upon the premium requirement of each policy and assumptions for mortality, morbidity, persistency, and investment returns at policy issuance, or policy acquisition, as it relates to VOBA, that include provisions for adverse deviation and are consistent with the assumptions used to calculate future policyholder benefit liabilities. These assumptions are not revised after policy issuance or acquisition unless the DAC or VOBA balance is deemed to be unrecoverable from future expected profits. Absent a premium deficiency, variability in amortization after policy issuance or acquisition is caused only by variability in premium volumes. The Company amortizes DAC and VOBA related to participating, dividend- paying traditional contracts over the estimated lives of the contracts in proportion to actual and expected future gross margins. The amortization includes interest based on rates in effect at inception or acquisition of the contracts. The future gross margins are dependent principally on investment returns, policyholder dividend scales, mortality, persistency, expenses to administer the business, creditworthiness of reinsurance counterparties, and certain economic variables, such as inflation. For participating contracts (dividend paying traditional contracts within the closed block) future gross margins are also dependent upon changes in the policyholder dividend obligation. Of these factors, the Company anticipates that investment returns, expenses, persistency, and other factor changes and policyholder dividend scales are reasonably likely to impact significantly the rate of DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross margins with the actual gross margins for that period. When the actual gross margins change from previously estimated gross margins, the cumulative DAC and VOBA amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. When actual gross margins exceed those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the actual gross margins are below the previously estimated gross F-15 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) margins. Each reporting period, the Company also updates the actual amount of business in-force, which impacts expected future gross margins. The Company amortizes DAC and VOBA related to fixed and variable universal life contracts and fixed and variable deferred annuity contracts over the estimated lives of the contracts in proportion to actual and expected future gross profits. The amortization includes interest based on rates in effect at inception or acquisition of the contracts. The amount of future gross profits is dependent principally upon returns in excess of the amounts credited to policyholders, mortality, persistency, interest crediting rates, expenses to administer the business, creditworthiness of reinsurance counterparties, the effect of any hedges used, and certain economic variables, such as inflation. Of these factors, the Company anticipates that investment returns, expenses, and persistency are reasonably likely to impact significantly the rate of DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross profits with the actual gross profits for that period. When the actual gross profits change from previously estimated gross profits, the cumulative DAC and VOBA amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. When actual gross profits exceed those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the actual gross profits are below the previously estimated gross profits. Each reporting period, the Company also updates the actual amount of business remaining in-force, which impacts expected future gross profits. Separate account rates of return on variable universal life contracts and variable deferred annuity contracts affect in-force account balances on such contracts each reporting period. Returns that are higher than the Company's long-term expectation produce higher account balances, which increases the Company's future fee expectations and decreases future benefit payment expectations on minimum death benefit guarantees, resulting in higher expected future gross profits. The opposite result occurs when returns are lower than the Company's long-term expectation. The Company's practice to determine the impact of gross profits resulting from returns on separate accounts assumes that long- term appreciation in equity markets is not changed by short-term market fluctuations, but is only changed when sustained interim deviations are expected. The Company monitors these changes and only changes the assumption when its long-term expectation changes. The Company also reviews periodically other long-term assumptions underlying the projections of estimated gross margins and profits. These include investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency, and expenses to administer business. Management annually updates assumptions used in the calculation of estimated gross margins and profits which may have significantly changed. If the update of assumptions causes expected future gross margins and profits to increase, DAC and VOBA amortization will decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update causes expected future gross margins and profits to decrease. Prior to 2007, DAC related to any internally replaced contract was generally expensed at the date of replacement. As described more fully in "Adoption of New Accounting Pronouncements", effective January 1, 2007, the Company adopted Statement of Position ("SOP") 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts ("SOP 05-1"). Under SOP 05-1, an internal replacement is defined as a modification in product benefits, features, rights or coverages that occur by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by election or coverage within a contract. If the modification substantially changes the contract, the DAC is written off immediately through income and any new deferrable costs associated with the replacement contract are deferred. If the modification does not substantially change the contract, the DAC amortization on the original contract will continue and any acquisition costs associated with the related modification are expensed. F-16 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Sales Inducements The Company has two different types of sales inducements which are included in other assets: (i) the policyholder receives a bonus whereby the policyholder's initial account balance is increased by an amount equal to a specified percentage of the customer's deposit; and (ii) the policyholder receives a higher interest rate using a dollar cost averaging method than would have been received based on the normal general account interest rate credited. The Company defers sales inducements and amortizes them over the life of the policy using the same methodology and assumptions used to amortize DAC. Goodwill Goodwill, which is included in other assets, is the excess of cost over the fair value of net assets acquired. Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. Impairment testing is performed using the fair value approach, which requires the use of estimates and judgment, at the "reporting unit" level. A reporting unit is the operating segment or a business one level below the operating segment, if discrete financial information is prepared and regularly reviewed by management at that level. For purposes of goodwill impairment testing, goodwill within Corporate & Other is allocated to reporting units within the Company's business segments. If the carrying value of a reporting unit's goodwill exceeds its fair value, the excess is recognized as an impairment and recorded as a charge against net income. The fair values of the reporting units are determined using a market multiple, a discounted cash flow model, or a cost approach. The critical estimates necessary in determining fair value are projected earnings, comparative market multiples and the discount rate. Liability for Future Policy Benefits and Policyholder Account Balances The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, traditional annuities and non- medical health insurance. Generally, amounts are payable over an extended period of time and related liabilities are calculated as the present value of future expected benefits to be paid reduced by the present value of future expected premiums. Such liabilities are established based on methods and underlying assumptions in accordance with GAAP and applicable actuarial standards. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, policy lapse, renewal, retirement, disability incidence, disability terminations, investment returns, inflation, expenses and other contingent events as appropriate to the respective product type. Utilizing these assumptions, liabilities are established on a block of business basis. Future policy benefit liabilities for participating traditional life insurance policies are equal to the aggregate of (i) net level premium reserves for death and endowment policy benefits (calculated based upon the non- forfeiture interest rate, ranging from 3% to 7% and mortality rates guaranteed in calculating the cash surrender values described in such contracts); and (ii) the liability for terminal dividends. Future policy benefits for non-participating traditional life insurance policies are equal to the aggregate of the present value of expected future benefit payments and related expenses less the present value of expected future net premiums. Assumptions as to mortality and persistency are based upon the Company's experience when the basis of the liability is established. Interest rates for the aggregate future policy benefit liabilities range from 3% to 10%. Participating business represented approximately 9% of the Company's life insurance in-force, and 76% of the number of life insurance policies in-force, at both December 31, 2007 and 2006. Participating policies represented approximately 36% and 36%, 34% and 33%, and 35% and 34% of gross and net life insurance premiums for the years ended December 31, 2007, 2006 and 2005, respectively. The percentages indicated are calculated excluding the business of the reinsurance segment. F-17 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future policy benefit liabilities for individual and group traditional fixed annuities after annuitization are equal to the present value of expected future payments. Interest rates used in establishing such liabilities range from 3% to 11%. Future policy benefit liabilities for non-medical health insurance are calculated using the net level premium method and assumptions as to future morbidity, withdrawals and interest, which provide a margin for adverse deviation. Interest rates used in establishing such liabilities range from 5% 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 3% to 8%. 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. The effects of changes in such estimated liabilities are included in the results of operations in the period in which the changes occur. The Company establishes future policy benefit liabilities for minimum death and income benefit guarantees relating to certain annuity contracts and secondary and paid-up guarantees relating to certain life policies as follows: - Annuity guaranteed minimum death benefit ("GMDB") liabilities are determined by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used in estimating the GMDB liabilities are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk. The assumptions of investment performance and volatility are consistent with the historical experience of the Standard & Poor's 500 Index ("S&P"). The benefits used in calculating the liabilities are based on the average benefits payable over a range of scenarios. - Guaranteed minimum income benefit ("GMIB") liabilities are determined by estimating the expected value of the income benefits in excess of the projected account balance at any future date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used for estimating the GMIB liabilities are consistent with those used for estimating the GMDB liabilities. In addition, the calculation of guaranteed annuitization benefit liabilities incorporates an assumption for the percentage of the potential annuitizations that may be elected by the contractholder. Liabilities for universal and variable life secondary guarantees and paid- up guarantees are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balances, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used in estimating the secondary and paid-up guarantee liabilities are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk. The assumptions of investment performance and volatility for variable products are consistent with historical S&P experience. The benefits used in calculating the liabilities are based on the average benefits payable over a range of scenarios. F-18 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company establishes policyholder account balances for guaranteed minimum benefit riders relating to certain variable annuity products as follows: - Guaranteed minimum withdrawal benefit riders ("GMWB") guarantee the contractholder a return of their purchase payment via partial withdrawals, even if the account value is reduced to zero, provided that the contractholder's cumulative withdrawals in a contract year do not exceed a certain limit. The initial guaranteed withdrawal amount is equal to the initial benefit base as defined in the contract (typically, the initial purchase payments plus applicable bonus amounts). The GMWB is an embedded derivative, which is measured at fair value separately from the host variable annuity product. - Guaranteed minimum accumulation benefit riders ("GMAB") provide the contractholder, after a specified period of time determined at the time of issuance of the variable annuity contract, with a minimum accumulation of their purchase payments even if the account value is reduced to zero. The initial guaranteed accumulation amount is equal to the initial benefit base as defined in the contract (typically, the initial purchase payments plus applicable bonus amounts). The GMAB is also an embedded derivative, which is measured at fair value separately from the host variable annuity product. - For both GMWB and GMAB, the initial benefit base is increased by additional purchase payments made within a certain time period and decreases by benefits paid and/or withdrawal amounts. After a specified period of time, the benefit base may also increase as a result of an optional reset as defined in the contract. The fair values of the GMWB and GMAB riders are calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behavior. In measuring the fair value of GMWBs and GMABs, the Company attributes a portion of the fees collected from the policyholder equal to the present value of expected future guaranteed minimum withdrawal and accumulation benefits (at inception). The changes in fair value are reported in net investment gains (losses). Any additional fees represent "excess" fees and are reported in universal life and investment-type product policy fees. These riders may be more costly than expected in volatile or declining markets, causing an increase in liabilities for future policy benefits, negatively affecting net income. The Company periodically reviews its estimates of actuarial liabilities for future policy benefits and compares them with its actual experience. Differences between actual experience and the assumptions used in pricing these policies, guarantees and riders and in the establishment of the related liabilities result in variances in profit and could result in losses. The effects of changes in such estimated liabilities are included in the results of operations in the period in which the changes occur. Policyholder account balances relate to investment-type contracts and universal life-type policies. Investment-type contracts principally include traditional individual fixed annuities in the accumulation phase and non- variable group annuity contracts. Policyholder account balances are equal to (i) policy account values, which consist of an accumulation of gross premium payments; (ii) credited interest, ranging from 2% to 17%, less expenses, mortality charges, and withdrawals; and (iii) fair value adjustments relating to business combinations. Other Policyholder Funds Other policyholder funds include policy and contract claims, unearned revenue liabilities, premiums received in advance, policyholder dividends due and unpaid, and policyholder dividends left on deposit. The liability for policy and contract claims generally relates to incurred but not reported death, disability, long-term care and dental claims as well as claims which have been reported but not yet settled. The liability for these claims is based on the Company's estimated ultimate cost of settling all claims. The Company derives estimates for the development of incurred but not reported claims principally from actuarial analyses of historical patterns of claims and claims development for each line of business. The methods used to determine these estimates F-19 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) are continually reviewed. Adjustments resulting from this continuous review process and differences between estimates and payments for claims are recognized in policyholder benefits and claims expense in the period in which the estimates are changed or payments are made. The unearned revenue liability relates to universal life-type and investment-type products and represents policy charges for services to be provided in future periods. The charges are deferred as unearned revenue and amortized using the product's estimated gross profits and margins, similar to DAC. Such amortization is recorded in universal life and investment-type product policy fees. The Company accounts for the prepayment of premiums on its individual life, group life and health contracts as premium received in advance and applies the cash received to premiums when due. Also included in other policyholder funds are policyholder dividends due and unpaid on participating policies and policyholder dividends left on deposit. Such liabilities are presented at amounts contractually due to policyholders. Recognition of Insurance Revenue and Related Benefits Premiums related to traditional life and annuity policies with life contingencies are recognized as revenues when due from policyholders. Policyholder benefits and expenses are provided against such revenues to recognize profits over the estimated lives of the policies. When premiums are due over a significantly shorter period than the period over which benefits are provided, any excess profit is deferred and recognized into operations in a constant relationship to insurance in-force or, for annuities, the amount of expected future policy benefit payments. Premiums related to non-medical health and disability contracts are recognized on a pro rata basis over the applicable contract term. Deposits related to universal life-type and investment-type products are credited to policyholder account balances. Revenues from such contracts consist of amounts assessed against policyholder account balances for mortality, policy administration and surrender charges and are recorded in universal life and investment-type product policy fees in the period in which services are provided. Amounts that are charged to operations include interest credited and benefit claims incurred in excess of related policyholder account balances. Premiums, policy fees, policyholder benefits and expenses are presented net of reinsurance. Other Revenues Other revenues include advisory fees, broker-dealer commissions and fees and administrative service fees. Such fees and commissions are recognized in the period in which services are performed. Other revenues also include changes in account value relating to corporate-owned life insurance ("COLI"). Under certain COLI contracts, if the Company reports certain unlikely adverse results in its consolidated financial statements, withdrawals would not be immediately available and would be subject to market value adjustment, which could result in a reduction of the account value. Policyholder Dividends Policyholder dividends are approved annually by Metropolitan Life Insurance Company and its insurance subsidiaries' boards of directors. The aggregate amount of policyholder dividends is related to actual interest, mortality, morbidity and expense experience for the year, as well as management's judgment as to the appropriate level of statutory surplus to be retained by the insurance subsidiaries. F-20 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income Taxes The Company joins with the Holding Company and its includable life insurance and non-life insurance subsidiaries in filing a consolidated U.S. federal income tax return in accordance with the provisions of the Internal Revenue Code of 1986, as amended (the "Code"). The Company participates in a tax sharing agreement with the Holding Company. Under the agreement, current income tax expense (benefit) is computed on a separate return basis and provides that members shall make payments (receive reimbursement) to (from) the Holding Company to the extent that their incomes (losses and other credits) contribute to (reduce) the consolidated income tax expense. The consolidating companies are reimbursed for net operating losses or other tax attributes they have generated when utilized in the consolidated return. The Company's accounting for income taxes represents management's best estimate of various events and transactions. Deferred tax assets and liabilities resulting from temporary differences between the financial reporting and tax bases of assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation allowances should be established as well as the amount of such allowances. When making such determination, consideration is given to, among other things, the following: (i) future taxable income exclusive of reversing temporary differences and carryforwards; (ii) future reversals of existing taxable temporary differences; (iii) taxable income in prior carryback years; and (iv) tax planning strategies. The Company may be required to change its provision for income taxes in certain circumstances. Examples of such circumstances include when the ultimate deductibility of certain items is challenged by taxing authorities (See also Note 14) or when estimates used in determining valuation allowances on deferred tax assets significantly change or when receipt of new information indicates the need for adjustment in valuation allowances. Additionally, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in the consolidated financial statements in the year these changes occur. As described more fully in "Adoption of New Accounting Pronouncements", the Company adopted FIN No. 48, Accounting for Uncertainty in Income Taxes -- An Interpretation of FASB Statement No. 109 ("FIN 48") effective January 1, 2007. Under FIN 48, the Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Unrecognized tax benefits due to tax uncertainties that do not meet the threshold are included within other liabilities and are charged to earnings in the period that such determination is made. The Company classifies interest recognized as interest expense and penalties recognized as a component of income tax. F-21 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reinsurance The Company enters into reinsurance transactions as both a provider and a purchaser of reinsurance for its life insurance products. For each of its reinsurance contracts, the Company determines if the contract provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. The Company reviews all contractual features, particularly those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference, if any, between the amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered the net cost of reinsurance at the inception of the contract. The net cost of reinsurance is recorded as an adjustment to DAC and recognized as a component of other expenses on a basis consistent with the way the acquisition costs on the underlying reinsured contracts would be recognized. Subsequent amounts paid (received) on the reinsurance of in-force blocks, as well as amounts paid (received) related to new business, are recorded as ceded (assumed) premiums and ceded (assumed) future policy benefit liabilities are established. For prospective reinsurance of short-duration contracts that meet the criteria for reinsurance accounting, amounts paid (received) are recorded as ceded (assumed) premiums and ceded (assumed) unearned premiums and are reflected as a component of premiums and other receivables (future policy benefits). Such amounts are amortized through earned premiums over the remaining contract period in proportion to the amount of protection provided. For retroactive reinsurance of short-duration contracts that meet the criteria of reinsurance accounting, amounts paid (received) in excess of (which do not exceed) the related insurance liabilities ceded (assumed) are recognized immediately as a loss. Any gains on such retroactive contracts are deferred and recorded in other liabilities. The gains are amortized primarily using the recovery method. The assumptions used to account for both long and short-duration reinsurance contracts are consistent with those used for the underlying contracts. Ceded policyholder and contract related liabilities, other than those currently due, are reported gross on the balance sheet. Amounts currently recoverable under reinsurance contracts are included in premiums and other receivables and amounts currently payable are included in other liabilities. Such assets and liabilities relating to reinsurance contracts with the same reinsurer may be recorded net on the balance sheet, if a right of offset exists within the reinsurance contract. Premiums, fees and policyholder benefits and claims include amounts assumed under reinsurance contracts and are net of reinsurance ceded. If the Company determines that a reinsurance contract does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the contract using the deposit method of accounting. Deposits received are included in other liabilities and deposits made are included within other assets. As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other revenues or other expenses, as appropriate. Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other revenues or other expenses, as appropriate. Amounts received from reinsurers for policy administration are reported in other revenues. Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risks. The Company periodically reviews actual and anticipated experience compared to the aforementioned assumptions used to F-22 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) establish assets and liabilities relating to ceded and assumed reinsurance and evaluates the financial strength of counterparties to its reinsurance agreements using criteria similar to that evaluated in the security impairment process discussed previously. 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. The Company reports separately, as assets and liabilities, investments held in separate accounts and liabilities of the separate accounts if (i) such separate accounts are legally recognized; (ii) assets supporting the contract liabilities are legally insulated from the Company's general account liabilities; (iii) investments are directed by the contractholder; and (iv) all investment performance, net of contract fees and assessments, is passed through to the contractholder. The Company reports separate account assets meeting such criteria at their fair value. Investment performance (including investment income, net investment gains (losses) and changes in unrealized gains (losses)) and the corresponding amounts credited to contractholders of such separate accounts are offset within the same line in the consolidated statements of income. The Company's revenues reflect fees charged to the separate accounts, including mortality charges, risk charges, policy administration fees, investment management fees and surrender charges. Separate accounts not meeting the above criteria are combined on a line-by-line basis with the Company's general account assets, liabilities, revenues and expenses. Employee Benefit Plans The Company sponsors and administers various qualified and non-qualified defined benefit pension plans and other postretirement employee benefit plans covering eligible employees and sales representatives who meet specified eligibility requirements of the sponsor and its participating affiliates. A December 31 measurement date is used for all of the Company's defined benefit pension and other postretirement benefit plans. Pension benefits are provided utilizing either a traditional formula or cash balance formula. The traditional formula provides benefits based upon years of credited service and either final average or career average earnings. The cash balance formula utilizes hypothetical or notional accounts which credit participants with benefits equal to a percentage of eligible pay as well as earnings credits, determined annually based upon the average annual rate of interest on 30-year Treasury securities, for each account balance. As of December 31, 2007, virtually all the obligations are calculated using the traditional formula. The Company also provides certain postemployment benefits and certain postretirement medical and life insurance benefits for retired participants. Participants that were hired prior to 2003 (or, in certain cases, rehired during or after 2003) and meet age and service criteria while working for the Company, may become eligible for these other postretirement benefits, at various levels, in accordance with the applicable plans. Virtually all retirees, or their beneficiaries, contribute a portion of the total cost of postretirement medical benefits. Participants hired after 2003 are not eligible for any employer subsidy for postretirement medical benefits. SFAS No. 87, Employers' Accounting for Pensions ("SFAS 87"), as amended, established the accounting for pension plan obligations. Under SFAS 87, the projected pension benefit obligation ("PBO") is defined as the actuarially calculated present value of vested and non-vested pension benefits accrued based on future salary levels. The accumulated pension benefit obligation ("ABO") is the actuarial present value of vested and non-vested pension benefits accrued based on current salary levels. Obligations, both PBO and ABO, of the defined benefit pension plans are determined using a variety of actuarial assumptions, from which actual results may vary, as described below. F-23 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SFAS No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions ("SFAS 106"), as amended, established the accounting for expected postretirement plan benefit obligations ("EPBO") which represents the actuarial present value of all other postretirement benefits expected to be paid after retirement to employees and their dependents. Unlike for pensions, the EPBO is not recorded in the financial statements but is used in measuring the periodic expense. The accumulated postretirement plan benefit obligations ("APBO") represents the actuarial present value of future other postretirement benefits attributed to employee services rendered through a particular date and is the valuation basis upon which liabilities are established. The APBO is determined using a variety of actuarial assumptions, from which actual results may vary, as described below. Prior to December 31, 2006, the funded status of the pension and other postretirement plans, which is the difference between the fair value of plan assets and the PBO for pension plans and the APBO for other postretirement plans (collectively, the "Benefit Obligations"), were offset by the unrecognized actuarial gains or losses, prior service cost and transition obligations to determine prepaid or accrued benefit cost, as applicable. The net amount was recorded as a prepaid or accrued benefit cost, as applicable. Further, for pension plans, if the ABO exceeded the fair value of the plan assets, that excess was recorded as an additional minimum pension liability with a corresponding intangible asset. Recognition of the intangible asset was limited to the amount of any unrecognized prior service cost. Any additional minimum pension liability in excess of the allowable intangible asset was charged, net of income tax, to accumulated other comprehensive income. As described more fully in "Adoption of New Accounting Pronouncements", effective December 31, 2006, the Company adopted SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans -- an amendment of FASB Statements No. 87, 88, 106, and SFAS No. 132(r) ("SFAS 158"). Effective with the adoption of SFAS 158 on December 31, 2006, the Company recognizes the funded status of the Benefit Obligations for each of its plans on the consolidated balance sheet. The actuarial gains or losses, prior service costs and credits, and the remaining net transition asset or obligation that had not yet been included in net periodic benefit costs as of December 31, 2006 are now charged, net of income tax, to accumulated other comprehensive income. Additionally, these changes eliminated the additional minimum pension liability provisions of SFAS 87. Net periodic benefit cost is determined using management estimates and actuarial assumptions to derive service cost, interest cost, and expected return on plan assets for a particular year. Net periodic benefit cost also includes the applicable amortization of any prior service cost (credit) arising from the increase (decrease) in prior years' benefit costs due to plan amendments or initiation of new plans. These costs are amortized into net periodic benefit cost over the expected service years of employees whose benefits are affected by such plan amendments. Actual experience related to plan assets and/or the benefit obligations may differ from that originally assumed when determining net periodic benefit cost for a particular period, resulting in gains or losses. To the extent such aggregate gains or losses exceed 10 percent of the greater of the benefit obligations or the market-related asset value of the plans, they are amortized into net periodic benefit cost over the expected service years of employees expected to receive benefits under the plans. The obligations and expenses associated with these plans require an extensive use of assumptions such as the discount rate, expected rate of return on plan assets, rate of future compensation increases, healthcare cost trend rates, as well as assumptions regarding participant demographics such as rate and age of retirements, withdrawal rates and mortality. Management, in consultation with its external consulting actuarial firm, determines these assumptions based upon a variety of factors such as historical performance of the plan and its assets, currently available market and industry data, and expected benefit payout streams. The assumptions used may differ materially from actual results due to, among other factors, changing market and economic conditions and changes in participant demographics. These differences may have a significant effect on the Company's consolidated financial statements and liquidity. The Company also sponsors defined contribution savings and investment plans ("SIP") for substantially all employees under which a portion of participant contributions are matched. Applicable matching contributions are F-24 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) made each payroll period. Accordingly, the Company recognizes compensation cost for current matching contributions. As all contributions are transferred currently as earned to the SIP trust, no liability for matching contributions is recognized in the consolidated balance sheets. Stock-Based Compensation Stock-based compensation recognized in the Company's consolidated results of operations is allocated from the Holding Company. The accounting policies described below represent those that the Holding Company applies in determining such allocated expense. Stock-based compensation grants prior to January 1, 2003 were accounted for using the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related interpretations. Compensation expense, if any, was recorded based upon the excess of the quoted market price at grant date over the amount the employee was required to pay to acquire the stock. Under the provisions of APB 25, there was no compensation expense resulting from the issuance of stock options as the exercise price was equivalent to the fair market value at the date of grant. Compensation expense was recognized under the Long-Term Performance Compensation Plan ("LTPCP"), as described more fully in Note 17. Stock-based awards granted after December 31, 2002 but prior to January 1, 2006 were accounted for on a prospective basis using the fair value accounting method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), as amended by SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure ("SFAS 148"). The fair value method of SFAS 123 required compensation expense to be measured based on the fair value of the equity instrument at the grant or award date. Stock-based compensation was accrued over the vesting period of the grant or award, including grants or awards to retirement-eligible employees. As required by SFAS 148, the Company discloses the pro forma impact as if the stock options granted prior to January 1, 2003 had been accounted for using the fair value provisions of SFAS 123 rather than the intrinsic value method prescribed by APB 25. See Note 17. Effective January 1, 2006, the Holding Company adopted, using the modified prospective transition method, SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123(r)"), which replaces SFAS 123 and supersedes APB 25. The adoption of SFAS 123(r) did not have a significant impact on the Company's financial position or results of operations. SFAS 123(r) requires that the cost of all stock-based transactions be measured at fair value and recognized over the period during which a grantee is required to provide goods or services in exchange for the award. Although the terms of the Holding Company's stock-based plans do not accelerate vesting upon retirement, or the attainment of retirement eligibility, the requisite service period subsequent to attaining such eligibility is considered nonsubstantive. Accordingly, the Company recognizes compensation expense related to stock-based awards over the shorter of the requisite service period or the period to attainment of retirement eligibility. SFAS 123(r) also requires an estimation of future forfeitures of stock-based awards to be incorporated into the determination of compensation expense when recognizing expense over the requisite service period. Foreign Currency Balance sheet accounts of foreign operations are translated at the exchange rates in effect at each year-end and income and expense accounts are translated at the average rates of exchange prevailing during the year. The local currencies of foreign operations generally are the functional currencies unless the local economy is highly inflationary. Translation adjustments are charged or credited directly to other comprehensive income or loss. Gains and losses from foreign currency transactions are reported as net investment gains (losses) in the period in which they occur. Discontinued Operations The results of operations of a component of the Company that either has been disposed of or is classified as held-for-sale are reported in discontinued operations if the operations and cash flows of the component have been or F-25 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) will be eliminated from the ongoing operations of the Company as a result of the disposal transaction and the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction. Litigation Contingencies The Company is a party to a number of legal actions and is involved in a number of regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on the Company's financial position. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. On a quarterly and annual basis, the Company reviews relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected in the Company's consolidated financial statements. It is possible that an adverse outcome in certain of the Company's litigation and regulatory investigations, or the use of different assumptions in the determination of amounts recorded could have a material effect upon the Company's consolidated net income or cash flows in particular quarterly or annual periods. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS Income Taxes Effective January 1, 2007, the Company adopted FIN 48. FIN 48 clarifies the accounting for uncertainty in income tax recognized in a company's financial statements. FIN 48 requires companies to determine whether it is "more likely than not" that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. Previously recorded income tax benefits that no longer meet this standard are required to be charged to earnings in the period that such determination is made. As a result of the implementation of FIN 48, the Company recognized a $35 million increase in the liability for unrecognized tax benefits, an $11 million decrease in the interest liability for unrecognized tax benefits, and a corresponding reduction to the January 1, 2007 balance of retained earnings of $13 million, net of $11 million of minority interest. See also Note 14. Insurance Contracts Effective January 1, 2007, the Company adopted SOP 05-1 which provides guidance on accounting by insurance enterprises for DAC on internal replacements of insurance and investment contracts other than those specifically described in SFAS 97, Accounting and Reporting by Insurance Enterprises for Certain Long- Duration Contracts and for Realized Gains and Losses from the Sale of Investments. SOP 05-1 defines an internal replacement and is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. In addition, in February 2007, the American Institute of Certified Public Accountants ("AICPA") issued related Technical Practice Aids ("TPAs") to provide further clarification of SOP 05-1. The TPAs became effective concurrently with the adoption of SOP 05-1. As a result of the adoption of SOP 05-1 and the related TPAs, if an internal replacement modification substantially changes a contract, then the DAC is written off immediately through income and any new deferrable costs associated with the new replacement are deferred. If a contract modification does not substantially change the contract, the DAC amortization on the original contract will continue and any acquisition costs associated with the related modification are immediately expensed. The adoption of SOP 05-1 and the related TPAs resulted in a reduction to DAC and VOBA on January 1, 2007 and an acceleration of the amortization period relating primarily to the Company's group life and health insurance F-26 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) contracts that contain certain rate reset provisions. Prior to the adoption of SOP 05-1, DAC on such contracts was amortized over the expected renewable life of the contract. Upon adoption of SOP 05-1, DAC on such contracts is to be amortized over the rate reset period. The impact as of January 1, 2007 was a cumulative effect adjustment of $202 million, net of income tax of $116 million, which was recorded as a reduction to retained earnings. Defined Benefit and Other Postretirement Plans Effective December 31, 2006, the Holding Company adopted SFAS 158. The pronouncement revises financial reporting standards for defined benefit pension and other postretirement plans by requiring the: (i) recognition in the statement of financial position of the funded status of defined benefit plans measured as the difference between the fair value of plan assets and the benefit obligation, which is the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for other postretirement plans; (ii) recognition as an adjustment to accumulated other comprehensive income (loss), net of income tax, those amounts of actuarial gains and losses, prior service costs and credits, and net asset or obligation at transition that have not yet been included in net periodic benefit costs as of the end of the year of adoption; (iii) recognition of subsequent changes in funded status as a component of other comprehensive income; (iv) measurement of benefit plan assets and obligations as of the date of the statement of financial position; and (v) disclosure of additional information about the effects on the employer's statement of financial position. The adoption of SFAS 158 resulted in a reduction of $749 million, net of income tax, to accumulated other comprehensive income, which is included as a component of total consolidated stockholder's equity. As the Company's measurement date for its pension and other postretirement benefit plans is already December 31 there was no impact of adoption due to changes in measurement date. See also Summary of "Significant Accounting Policies and Critical Accounting Estimates" and Note 16. Stock Compensation Plans As described previously, effective January 1, 2006, the Holding Company adopted SFAS 123(r) including supplemental application guidance issued by the U.S. Securities and Exchange Commission ("SEC") in Staff Accounting Bulletin ("SAB") No. 107, Share-Based Payment ("SAB 107") -- using the modified prospective transition method. In accordance with the modified prospective transition method, results for prior periods have not been restated. SFAS 123(r) requires that the cost of all stock-based transactions be measured at fair value and recognized over the period during which a grantee is required to provide goods or services in exchange for the award. The Holding Company had previously adopted the fair value method of accounting for stock-based awards as prescribed by SFAS 123 on a prospective basis effective January 1, 2003, and prior to January 1, 2003, accounted for its stock-based awards to employees under the intrinsic value method prescribed by APB 25. The Holding Company did not modify the substantive terms of any existing awards prior to adoption of SFAS 123(r). Under the modified prospective transition method, compensation expense recognized during the year ended December 31, 2006 includes: (a) compensation expense for all stock-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all stock- based awards granted beginning January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(r). F-27 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The adoption of SFAS 123(r) did not have a significant impact on the Company's financial position or results of operations as all stock-based awards accounted for under the intrinsic value method prescribed by APB 25 had vested prior to the adoption date and the Company, in conjunction with the Holding Company, had adopted the fair value recognition provisions of SFAS 123 on January 1, 2003. As required by SFAS 148, and carried forward in the provisions of SFAS 123(r), the Company discloses the pro forma impact as if stock-based awards accounted for under APB 25 had been accounted for under the fair value method in Note 17. SFAS 123 allowed forfeitures of stock-based awards to be recognized as a reduction of compensation expense in the period in which the forfeiture occurred. Upon adoption of SFAS 123(r), the Holding Company changed its policy and now incorporates an estimate of future forfeitures into the determination of compensation expense when recognizing expense over the requisite service period. The impact of this change in accounting policy was not significant to the Company's financial position or results of operations as of the date of adoption. Additionally, for awards granted after adoption, the Holding Company changed its policy from recognizing expense for stock-based awards over the requisite service period to recognizing such expense over the shorter of the requisite service period or the period to attainment of retirement-eligibility. The pro forma impact of this change in expense recognition policy for stock- based compensation is detailed in Note 17. Prior to the adoption of SFAS 123(r), the Company presented tax benefits of deductions resulting from the exercise of stock options within operating cash flows in the consolidated statements of cash flows. SFAS 123(r) requires tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options be classified and reported as a financing cash inflow upon adoption of SFAS 123(r). Derivative Financial Instruments The Company has adopted guidance relating to derivative financial instruments as follows: - Effective January 1, 2006, the Company adopted prospectively SFAS No. 155, Accounting for Certain Hybrid Instruments ("SFAS 155"). SFAS 155 amends SFAS 133, Accounting for Derivative Instruments and Hedging ("SFAS 133") and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140"). SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole, eliminating the need to bifurcate the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. In addition, among other changes, SFAS 155: (i) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133; (ii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (iii) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (iv) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity ("QSPE") from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial interest. The adoption of SFAS 155 did not have a material impact on the Company's consolidated financial statements. - Effective October 1, 2006, the Company adopted SFAS 133 Implementation Issue No. B40, Embedded Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets ("Issue B40"). Issue B40 clarifies that a securitized interest in prepayable financial assets is not subject to the F-28 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) conditions in paragraph 13(b) of SFAS 133, if it meets both of the following criteria: (i) the right to accelerate the settlement if the securitized interest cannot be controlled by the investor; and (ii) the securitized interest itself does not contain an embedded derivative (including an interest rate-related derivative) for which bifurcation would be required other than an embedded derivative that results solely from the embedded call options in the underlying financial assets. The adoption of Issue B40 did not have a material impact on the Company's consolidated financial statements. - Effective January 1, 2006, the Company adopted prospectively SFAS 133 Implementation Issue No. B38, Embedded Derivatives: Evaluation of Net Settlement with Respect to the Settlement of a Debt Instrument through Exercise of an Embedded Put Option or Call Option ("Issue B38") and SFAS 133 Implementation Issue No. B39, Embedded Derivatives: Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor ("Issue B39"). Issue B38 clarifies that the potential settlement of a debtor's obligation to a creditor occurring upon exercise of a put or call option meets the net settlement criteria of SFAS 133. Issue B39 clarifies that an embedded call option, in which the underlying is an interest rate or interest rate index, that can accelerate the settlement of a debt host financial instrument should not be bifurcated and fair valued if the right to accelerate the settlement can be exercised only by the debtor (issuer/borrower) and the investor will recover substantially all of its initial net investment. The adoption of Issues B38 and B39 did not have a material impact on the Company's consolidated financial statements. Other Effective January 1, 2007, the Company adopted FASB Staff Position ("FSP") No. FAS 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction ("FSP 13-2"). FSP 13-2 amends SFAS No. 13, Accounting for Leases, to require that a lessor review the projected timing of income tax cash flows generated by a leveraged lease annually or more frequently if events or circumstances indicate that a change in timing has occurred or is projected to occur. In addition, FSP 13-2 requires that the change in the net investment balance resulting from the recalculation be recognized as a gain or loss from continuing operations in the same line item in which leveraged lease income is recognized in the year in which the assumption is changed. The adoption of FSP 13-2 did not have a material impact on the Company's consolidated financial statements. Effective January 1, 2007, the Company adopted SFAS No. 156, Accounting for Servicing of Financial Assets -- an amendment of FASB Statement No. 140 ("SFAS 156"). Among other requirements, SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations. The adoption of SFAS 156 did not have an impact on the Company's consolidated financial statements. Effective November 15, 2006, the Company adopted SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in current year financial statements for purposes of assessing materiality. SAB 108 requires that registrants quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when relevant quantitative and qualitative factors are considered, is material. SAB 108 permits companies to initially apply its provisions by either restating prior financial statements or recording a cumulative effect adjustment to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment to retained earnings for errors that were previously deemed immaterial but are material under the guidance in SAB 108. The adoption of SAB 108 did not have a material impact on the Company's consolidated financial statements. Effective January 1, 2006, the Company adopted prospectively Emerging Issues Task Force ("EITF") Issue No. 05-7, Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues F-29 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ("EITF 05-7"). EITF 05-7 provides guidance on whether a modification of conversion options embedded in debt results in an extinguishment of that debt. In certain situations, companies may change the terms of an embedded conversion option as part of a debt modification. The EITF concluded that the change in the fair value of an embedded conversion option upon modification should be included in the analysis of EITF Issue No. 96-19, Debtor's Accounting for a Modification or Exchange of Debt Instruments, to determine whether a modification or extinguishment has occurred and that a change in the fair value of a conversion option should be recognized upon the modification as a discount (or premium) associated with the debt, and an increase (or decrease) in additional paid-in capital. The adoption of EITF 05-7 did not have a material impact on the Company's consolidated financial statements. Effective January 1, 2006, the Company adopted EITF Issue No. 05-8, Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature ("EITF 05-8"). EITF 05-8 concludes that: (i) the issuance of convertible debt with a beneficial conversion feature results in a basis difference that should be accounted for as a temporary difference; and (ii) the establishment of the deferred tax liability for the basis difference should result in an adjustment to additional paid-in capital. EITF 05-8 was applied retrospectively for all instruments with a beneficial conversion feature accounted for in accordance with EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments. The adoption of EITF 05-8 did not have a material impact on the Company's consolidated financial statements. Effective January 1, 2006, the Company adopted SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"). SFAS 154 requires retrospective application to prior periods' financial statements for a voluntary change in accounting principle unless it is deemed impracticable. It also requires that a change in the method of depreciation, amortization, or depletion for long-lived, non- financial assets be accounted for as a change in accounting estimate rather than a change in accounting principle. The adoption of SFAS 154 did not have a material impact on the Company's consolidated financial statements. In June 2005, the EITF reached consensus on Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights ("EITF 04-5"). EITF 04-5 provides a framework for determining whether a general partner controls and should consolidate a limited partnership or a similar entity in light of certain rights held by the limited partners. The consensus also provides additional guidance on substantive rights. EITF 04-5 was effective after June 29, 2005 for all newly formed partnerships and for any pre- existing limited partnerships that modified their partnership agreements after that date. For all other limited partnerships, EITF 04-5 required adoption by January 1, 2006 through a cumulative effect of a change in accounting principle recorded in opening equity or applied retrospectively by adjusting prior period financial statements. The adoption of the provisions of EITF 04-5 did not have a material impact on the Company's consolidated financial statements. Effective November 9, 2005, the Company prospectively adopted the guidance in FSP No. FAS 140-2, Clarification of the Application of Paragraphs 40(b) and 40(c) of FAS 140 ("FSP 140-2"). FSP 140-2 clarified certain criteria relating to derivatives and beneficial interests when considering whether an entity qualifies as a QSPE. Under FSP 140-2, the criteria must only be met at the date the QSPE issues beneficial interests or when a derivative financial instrument needs to be replaced upon the occurrence of a specified event outside the control of the transferor. The adoption of FSP 140-2 did not have a material impact on the Company's consolidated financial statements. Effective July 1, 2005, the Company adopted SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 ("SFAS 153"). SFAS 153 amended prior guidance to eliminate the exception for nonmonetary exchanges of similar productive assets and replaced it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial F-30 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS 153 were required to be applied prospectively for fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 did not have a material impact on the Company's consolidated financial statements. Effective July 1, 2005, the Company adopted EITF Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements ("EITF 05-6"). EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. As required by EITF 05-6, the Company adopted this guidance on a prospective basis which had no material impact on the Company's consolidated financial statements. In June 2005, the FASB completed its review of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments ("EITF 03-1"). EITF 03-1 provides accounting guidance regarding the determination of when an impairment of debt and marketable equity securities and investments accounted for under the cost method should be considered other-than- temporary and recognized in income. EITF 03-1 also requires certain quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment but has issued FSP Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments ("FSP 115-1"), which nullifies the accounting guidance on the determination of whether an investment is other-than-temporarily impaired as set forth in EITF 03-1. As required by FSP 115-1, the Company adopted this guidance on a prospective basis, which had no material impact on the Company's consolidated financial statements, and has provided the required disclosures. FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS Fair Value In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. Effective January 1, 2008, the Company adopted SFAS 157 and applied the provisions of the statement prospectively to assets and liabilities measured and disclosed at fair value. In addition to new disclosure requirements, the adoption of SFAS 157 changes the valuation of certain freestanding derivatives by moving from a mid to bid pricing convention as well as changing the valuation of embedded derivatives associated with annuity contracts. The change in valuation of embedded derivatives associated with annuity contracts results from the incorporation of risk margins and the Company's own credit standing in their valuation. While the Company does not expect such changes in valuation to have a material impact on the Company's financial statements at January 1, 2008, the addition of risk margins and the Company's own credit spread in the valuation of embedded derivatives associated with annuity contracts may result in significant volatility in the Company's consolidated net income. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS 159"). SFAS 159 permits entities the option to measure most financial instruments and certain other items at fair value at specified election dates and to report related unrealized gains and losses in earnings. The fair value option is generally applied on an instrument-by-instrument basis and is generally an irrevocable election. Effective January 1, 2008, the Company did not elect the fair value option for any instruments. Accordingly, there is no material impact on the Company's retained earnings or equity as of January 1, 2008. In June 2007, the AICPA issued SOP 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies ("SOP 07-1") . Upon adoption of SOP 07-1, the Company must also adopt the provisions of FSP No. FSP FIN 46(r)-7, Application of FASB Interpretation No. 46 to Investment Companies ("FSP FIN 46(r)-7"), F-31 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) which permanently exempts investment companies from applying the provisions of FIN No. 46(r), Consolidation of Variable Interest Entities -- An Interpretation of Accounting Research Bulletin No. 51, and its December 2003 revision ("FIN 46(r)") to investments carried at fair value. SOP 07-1 provides guidance for determining whether an entity falls within the scope of the AICPA Audit and Accounting Guide Investment Companies and whether investment company accounting should be retained by a parent company upon consolidation of an investment company subsidiary or by an equity method investor in an investment company. In certain circumstances, SOP 07-1 precludes retention of specialized accounting for investment companies (i.e., fair value accounting), when similar direct investments exist in the consolidated group and are measured on a basis inconsistent with that applied to investment companies. Additionally, SOP 07-1 precludes retention of specialized accounting for investment companies if the reporting entity does not distinguish through documented policies the nature and type of investments to be held in the investment companies from those made in the consolidated group where other accounting guidance is being applied. In February 2008, the FASB issued FSP No. SOP 7-1-1, Effective Date of AICPA Statement of Position 07-1, which delays indefinitely the effective date of SOP 07-1. The Company is closely monitoring further FASB developments. In May 2007, the FASB issued FSP No. FIN 39-1, Amendment of FASB Interpretation No. 39 ("FSP 39-1"). FSP 39-1 amends FIN No. 39, Offsetting of Amounts Related to Certain Contracts ("FIN 39"), to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in accordance with FIN 39. FSP 39-1 also amends FIN 39 for certain terminology modifications. FSP 39-1 applies to fiscal years beginning after November 15, 2007. FSP 39-1 will be applied retrospectively, unless it is impracticable to do so. Upon adoption of FSP 39-1, the Company is permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements. The adoption of FSP 39-1 will not have an impact on the Company's financial statements. Business Combinations In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations -- A Replacement of FASB Statement No. 141 ("SFAS 141(r)") and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements -- An Amendment of ARB No. 51 ("SFAS 160") which are effective for fiscal years beginning after December 15, 2008. Under SFAS 141(r) and SFAS 160: - All business combinations (whether full, partial, or "step" acquisitions) result in all assets and liabilities of an acquired business being recorded at fair value, with limited exceptions. - Acquisition costs are generally expensed as incurred; restructuring costs associated with a business combination are generally expensed as incurred subsequent to the acquisition date. - The fair value of the purchase price, including the issuance of equity securities, is determined on the acquisition date. - Certain acquired contingent liabilities are recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for nonacquired contingencies. - Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense. - Noncontrolling interests (formerly known as "minority interests") are valued at fair value at the acquisition date and are presented as equity rather than liabilities. F-32 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - When control is attained on previously noncontrolling interests, the previously held equity interests are remeasured at fair value and a gain or loss is recognized. - Purchases or sales of equity interests that do not result in a change in control are accounted for as equity transactions. - When control is lost in a partial disposition, realized gains or losses are recorded on equity ownership sold and the remaining ownership interest is remeasured and holding gains or losses are recognized. The pronouncements are effective for fiscal years beginning on or after December 15, 2008 and apply prospectively to business combinations. Presentation and disclosure requirements related to noncontrolling interests must be retrospectively applied. The Company is currently evaluating the impact of SFAS 141(r) on its accounting for future acquisitions and the impact of SFAS 160 on its consolidated financial statements. Other In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities -- An Amendment of FASB Statement No. 133 ("SFAS 161"). SFAS 161 requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS 161 on its consolidated financial statements. In February 2008, the FASB issued FSP No. FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions ("FSP 140- 3"). FSP 140-3 provides guidance for evaluating whether to account for a transfer of a financial asset and repurchase financing as a single transaction or as two separate transactions. FSP 140-3 is effective prospectively for financial statements issued for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of FSP FAS 140-3 on its consolidated financial statements. In January 2008, the FASB cleared SFAS 133 Implementation Issue E23, Clarification of the Application of the Shortcut Method ("Issue E23"). Issue E23 amends SFAS 133 by permitting interest rate swaps to have a non-zero fair value at inception, as long as the difference between the transaction price (zero) and the fair value (exit price), as defined by SFAS 157, is solely attributable to a bid-ask spread. In addition, entities would not be precluded from assuming no ineffectiveness in a hedging relationship of interest rate risk involving an interest bearing asset or liability in situations where the hedged item is not recognized for accounting purposes until settlement date as long as the period between trade date and settlement date of the hedged item is consistent with generally established conventions in the marketplace. Issue E23 is effective for hedging relationships designated on or after January 1, 2008. The Company does not expect the adoption of Issue E23 to have a material impact on its consolidated financial statements. In December 2007, the FASB ratified as final the consensus on EITF Issue No. 07-6, Accounting for the Sale of Real Estate When the Agreement Includes a Buy-Sell Clause ("EITF 07-6"). EITF 07-6 addresses whether the existence of a buy-sell arrangement would preclude partial sales treatment when real estate is sold to a jointly owned entity. The consensus concludes that the existence of a buy-sell clause does not necessarily preclude partial sale treatment under current guidance. EITF 07-6 applies prospectively to new arrangements entered into and assessments on existing transactions performed in fiscal years beginning after December 15, 2008. The Company does not expect the adoption of EITF 07-6 to have a material impact on its consolidated financial statements. F-33 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. ACQUISITIONS AND DISPOSITIONS On October 20, 2006, the Holding Company sold its subsidiary, Citicorp Life Insurance Company and its subsidiary, First Citicorp Life Insurance Company (collectively, "CLIC") to the Company for $135 million in cash consideration. The net assets of CLIC acquired by the Company were $154 million. The excess of the net assets of CLIC received over the purchase price resulted in an increase of $19 million in additional paid-in capital. In connection with the sale and merger of CLIC with and into Metropolitan Life Insurance Company, the Holding Company contributed $17 million to the Company. See Note 17. On September 30, 2006, the Company acquired MetLife Retirement Services LLC ("MRS") (formerly, CitiStreet Retirement Services LLC), and its subsidiaries from an affiliate, Metropolitan Tower Life Insurance Company ("MTL") for approximately $58 million in cash consideration settled in the fourth quarter of 2006. The assets acquired are principally comprised of $52 million related to the value of customer relationships acquired ("VOCRA"). Further information on VOCRA is described in Note 7. On July 1, 2005, the Holding Company completed the acquisition of The Travelers Insurance Company, excluding certain assets, most significantly, Primerica, from Citigroup Inc. ("Citigroup"), and substantially all of Citigroup's international insurance business (collectively, "Travelers"). On September 30, 2006, the Company received a capital contribution, as described in Note 17, from the Holding Company of $377 million in the form of intangible assets related to the value of distribution agreements ("VODA") of $389 million, net of deferred income tax of $12 million, for which the Company receives the benefit. The VODA originated through the Holding Company's acquisition of Travelers and was transferred at its amortized cost basis. Further information on VODA is described in Note 7. See Note 20 for information on the disposition of P.T. Sejahtera ("MetLife Indonesia") and SSRM Holdings, Inc. ("SSRM"). F-34 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INVESTMENTS FIXED MATURITY AND EQUITY SECURITIES AVAILABLE-FOR-SALE The following tables present the cost or amortized cost, gross unrealized gain and loss, and estimated fair value of the Company's fixed maturity and equity securities, the percentage that each sector represents by the total fixed maturity securities holdings and by the total equity securities holdings at:
DECEMBER 31, 2007 ------------------------------------------------ GROSS COST OR UNREALIZED AMORTIZED --------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL --------- ------ ------ ---------- ----- (IN MILLIONS) U.S. corporate securities............ $ 53,468 $1,518 $1,292 $ 53,694 33.2% Residential mortgage-backed securities......................... 37,187 456 249 37,394 23.1 Foreign corporate securities......... 25,704 1,449 480 26,673 16.5 U.S. Treasury/agency securities...... 14,274 1,297 1 15,570 9.6 Commercial mortgage-backed securities......................... 13,122 213 105 13,230 8.2 Asset-backed securities.............. 7,528 33 340 7,221 4.5 Foreign government securities........ 5,743 1,424 24 7,143 4.4 State and political subdivision securities......................... 519 13 10 522 0.4 Other fixed maturity securities...... 234 12 29 217 0.1 -------- ------ ------ -------- ----- Total fixed maturity securities.... $157,779 $6,415 $2,530 $161,664 100.0% ======== ====== ====== ======== ===== Common stock......................... $ 1,999 $ 540 $ 93 $ 2,446 56.8% Non-redeemable preferred stock....... 2,054 34 230 1,858 43.2 -------- ------ ------ -------- ----- Total equity securities............ $ 4,053 $ 574 $ 323 $ 4,304 100.0% ======== ====== ====== ======== =====
DECEMBER 31, 2006 ------------------------------------------------ GROSS COST OR UNREALIZED AMORTIZED --------------- ESTIMATED % OF COST GAIN LOSS FAIR VALUE TOTAL --------- ------ ------ ---------- ----- (IN MILLIONS) U.S. corporate securities............ $ 51,003 $1,829 $ 492 $ 52,340 32.2% Residential mortgage-backed securities......................... 34,617 312 204 34,725 21.4 Foreign corporate securities......... 23,228 1,381 226 24,383 15.0 U.S. Treasury/agency securities...... 20,662 944 108 21,498 13.2 Commercial mortgage-backed securities......................... 11,794 164 72 11,886 7.3 Asset-backed securities.............. 9,369 55 41 9,383 5.8 Foreign government securities........ 5,024 1,238 12 6,250 3.9 State and political subdivision securities......................... 1,743 27 12 1,758 1.1 Other fixed maturity securities...... 233 6 77 162 0.1 -------- ------ ------ -------- ----- Total fixed maturity securities.... $157,673 $5,956 $1,244 $162,385 100.0% ======== ====== ====== ======== ===== Common stock......................... $ 1,454 $ 457 $ 14 $ 1,897 54.4% Non-redeemable preferred stock....... 1,546 59 15 1,590 45.6 -------- ------ ------ -------- ----- Total equity securities............ $ 3,000 $ 516 $ 29 $ 3,487 100.0% ======== ====== ====== ======== =====
F-35 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company held foreign currency derivatives with notional amounts of $7.8 billion and $7.3 billion to hedge the exchange rate risk associated with foreign denominated fixed maturity securities at December 31, 2007 and 2006, respectively. The Company is not exposed to any significant concentrations of credit risk in its equity securities portfolio. The Company is exposed to concentrations of credit risk related to U.S. Treasury securities and obligations of U.S. government corporations and agencies. Additionally, at December 31, 2007 and 2006, the Company had exposure to fixed maturity securities backed by sub-prime mortgages with estimated fair values of $1.5 billion and $2.0 billion, respectively, and unrealized losses of $139 million and $3 million, respectively. These securities are classified within asset-backed securities in the immediately preceding table. At December 31, 2007, 36% have been guaranteed by financial guarantors, of which 59% was guaranteed by financial guarantors who remain Aaa rated through February 2008. Overall, at December 31, 2007, $3.5 billion of the estimated fair value of the Company's fixed maturity securities were credit enhanced by financial guarantors of which $1.6 billion, $1.4 billion and $479 million at December 31, 2007, are included within corporate securities, asset-backed securities and state and political subdivisions, respectively, and 82% were guaranteed by financial guarantors who remain Aaa rated through February 2008. The Company held fixed maturity securities at estimated fair values that were below investment grade or not rated by an independent rating agency that totaled $11.9 billion and $12.0 billion at December 31, 2007 and 2006, respectively. These securities had net unrealized gains of $87 million and $534 million at December 31, 2007 and 2006, respectively. Non-income producing fixed maturity securities were $12 million and $10 million at December 31, 2007 and 2006, respectively. Net unrealized gains associated with non-income producing fixed maturity securities were $11 million and $3 million at December 31, 2007 and 2006, respectively. The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity date (excluding scheduled sinking funds), are as follows:
DECEMBER 31, ----------------------------------------------- 2007 2006 ---------------------- ---------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- (IN MILLIONS) Due in one year or less................. $ 2,793 $ 2,889 $ 4,531 $ 4,616 Due after one year through five years... 27,817 28,560 28,494 29,095 Due after five years through ten years.. 26,059 26,452 25,535 26,071 Due after ten years..................... 43,273 45,918 43,333 46,609 -------- -------- -------- -------- Subtotal.............................. 99,942 103,819 101,893 106,391 Mortgage-backed and asset-backed securities............................ 57,837 57,845 55,780 55,994 -------- -------- -------- -------- Total fixed maturity securities....... $157,779 $161,664 $157,673 $162,385 ======== ======== ======== ========
Fixed maturity securities not due at a single maturity date have been included in the above table in the year of final contractual maturity. Actual maturities may differ from contractual maturities due to the exercise of prepayment options. F-36 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Sales or disposals of fixed maturity and equity securities classified as available-for-sale are as follows:
YEARS ENDED DECEMBER 31, --------------------------- 2007 2006 2005 ------- ------- ------- (IN MILLIONS) Proceeds......................................... $54,680 $57,861 $97,347 Gross investment gains........................... $ 545 $ 387 $ 623 Gross investment losses.......................... $ (660) $ (855) $ (956)
UNREALIZED LOSS FOR FIXED MATURITY AND EQUITY SECURITIES AVAILABLE-FOR-SALE The following tables present the estimated fair value and gross unrealized loss of the Company's fixed maturity (aggregated by sector) and equity securities in an unrealized loss position, aggregated by length of time that the securities have been in a continuous unrealized loss position at:
DECEMBER 31, 2007 ------------------------------------------------------ EQUAL TO OR LESS THAN 12 GREATER THAN 12 MONTHS MONTHS TOTAL ---------------- ---------------- ---------------- ESTI- GROSS ESTI- GROSS ESTI- GROSS MATED UNREAL- MATED UNREAL- MATED UNREAL- FAIR IZED FAIR IZED FAIR IZED VALUE LOSS VALUE LOSS VALUE LOSS ----- -------- ----- -------- ----- -------- (IN MILLIONS, EXCEPT NUMBER OF SECURITIES) $18,- $6,1- $24,- U.S. corporate securities..... 213 $ 907 21 $385 334 $1,292 Residential mortgage-backed 9,4- 4,0- 13,- securities.................. 16 180 79 69 495 249 6,8- 3,2- 10,- Foreign corporate securities.. 98 306 78 174 176 480 U.S. Treasury/agency securities.................. 125 1 279 -- 404 1 Commercial mortgage-backed 1,7- 2,2- 3,9- securities.................. 23 59 46 46 69 105 4,9- 5,7- Asset-backed securities....... 32 267 808 73 40 340 Foreign government securities.................. 563 16 215 8 778 24 State and political subdivision securities...... 155 7 81 3 236 10 Other fixed maturity securities.................. 74 29 -- -- 74 29 ----- -------- ----- -------- ----- -------- Total fixed maturity $42,- $17,- $59,- securities............... 099 $1,772 107 $758 206 $2,530 ===== ======== ===== ======== ===== ======== $1,8- $2,1- Equity securities............. 68 $ 283 $ 293 $ 40 61 $ 323 ===== ======== ===== ======== ===== ======== Total number of securities in an unrealized loss 3,6- 2,8- position.................... 37 48 ===== =====
F-37 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2006 ------------------------------------------------------------------------------------------ EQUAL TO OR GREATER THAN 12 LESS THAN 12 MONTHS MONTHS TOTAL ---------------------------- ---------------------------- ---------------------------- ESTIMATED GROSS ESTIMATED GROSS ESTIMATED GROSS FAIR VALUE UNREALIZED LOSS FAIR VALUE UNREALIZED LOSS FAIR VALUE UNREALIZED LOSS ---------- --------------- ---------- --------------- ---------- --------------- (IN MILLIONS, EXCEPT NUMBER OF SECURITIES) U.S. corporate securities....... $11,033 $ 152 $ 8,162 $ 340 $19,195 $ 492 Residential mortgage-backed securities.................... 10,108 52 8,329 152 18,437 204 Foreign corporate securities.... 4,319 61 4,411 165 8,730 226 U.S. Treasury/agency securities.................... 9,075 99 377 9 9,452 108 Commercial mortgage-backed securities.................... 3,799 21 2,058 51 5,857 72 Asset-backed securities......... 3,184 27 662 14 3,846 41 Foreign government securities... 409 6 242 6 651 12 State and political subdivision securities.................... 217 9 104 3 321 12 Other fixed maturity securities.................... 122 77 -- -- 122 77 ------- ----------- ------- ----------- ------- ------------- Total fixed maturity securities................. $42,266 $504 $24,345 $740 $66,611 $1,244 ======= =========== ======= =========== ======= ============= Equity securities............... $ 613 $ 17 $ 287 $ 12 $ 900 $ 29 ======= =========== ======= =========== ======= ============= Total number of securities in an unrealized loss position...... 4,134 2,129 ======= =======
AGING OF GROSS UNREALIZED LOSS FOR FIXED MATURITY AND EQUITY SECURITIES AVAILABLE-FOR-SALE The following tables present the cost or amortized cost, gross unrealized loss and number of securities for fixed maturity and equity securities, where the estimated fair value had declined and remained below cost or amortized cost by less than 20%, or 20% or more at:
DECEMBER 31, 2007 ------------------------------------------------------- COST OR AMORTIZED GROSS UNREALIZED NUMBER OF COST LOSS SECURITIES ----------------- ----------------- ----------------- LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR 20% MORE 20% MORE 20% MORE --------- ------ --------- ------ --------- ------ (IN MILLIONS, EXCEPT NUMBER OF SECURITIES) Less than six months........................ $ 28,650 $1,250 $ 896 $ 366 3,213 550 Six months or greater but less than nine months.................................... 9,799 15 484 4 981 10 Nine months or greater but less than twelve months.................................... 6,706 -- 409 -- 628 1 Twelve months or greater.................... 17,790 10 690 4 1,690 6 -------- ------ ------- ----- Total..................................... $62,945 $1,275 $ 2,479 $374 ======== ====== ======= =====
F-38 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2006 -------------------------------------------------------- COST OR AMORTIZED GROSS UNREALIZED NUMBER OF COST LOSS SECURITIES ----------------- ------------------ ----------------- LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR 20% MORE 20% MORE 20% MORE --------- ------ --------- ------- --------- ------ (IN MILLIONS, EXCEPT NUMBER OF SECURITIES) Less than six months......................... $ 32,410 $ 25 $ 346 $ 7 3,112 62 Six months or greater but less than nine months..................................... 1,657 3 28 1 300 1 Nine months or greater but less than twelve months..................................... 9,305 -- 139 -- 659 -- Twelve months or greater..................... 25,356 28 746 6 2,123 6 -------- ----- ------- ------- Total...................................... $68,728 $56 $ 1,259 $14 ======== ===== ======= =======
At December 31, 2007 and 2006, $2.5 billion and $1.3 billion, respectively, of unrealized losses related to securities with an unrealized loss position of less than 20% of cost or amortized cost, which represented 4% and 2%, respectively, of the cost or amortized cost of such securities. At December 31, 2007, $374 million of unrealized losses related to securities with an unrealized loss position of 20% or more of cost or amortized cost, which represented 29% of the cost or amortized cost of such securities. Of such unrealized losses of $374 million, $366 million related to securities that were in an unrealized loss position for a period of less than six months. At December 31, 2006, $14 million of unrealized losses related to securities with an unrealized loss position of 20% or more of cost or amortized cost, which represented 25% of the cost or amortized cost of such securities. Of such unrealized losses of $14 million, $7 million related to securities that were in an unrealized loss position for a period of less than six months. The Company held 16 fixed maturity and equity securities, each with a gross unrealized loss at December 31, 2007 of greater than $10 million. These securities represented 8%, or $224 million in the aggregate, of the gross unrealized loss on fixed maturity and equity securities. The Company held four fixed maturity and equity securities, each with a gross unrealized loss at December 31, 2006 of greater than $10 million. These securities represented 7%, or $95 million in the aggregate, of the gross unrealized loss on fixed maturity and equity securities. At December 31, 2007 and 2006, the Company had $2.9 billion and $1.3 billion, respectively, of gross unrealized losses related to its fixed maturity and equity securities. These securities are concentrated, calculated as a percentage of gross unrealized loss, as follows:
DECEMBER 31, ----------- 2007 2006 ---- ---- SECTOR: U.S. corporate securities.................................. 45% 39% Foreign corporate securities............................... 17 18 Asset-backed securities.................................... 12 3 Residential mortgage-backed securities..................... 9 16 Commercial mortgage-backed securities...................... 4 6 Other...................................................... 13 18 --- --- Total................................................... 100% 100% === ===
F-39 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, ----------- 2007 2006 ---- ---- INDUSTRY: Finance.................................................... 35% 7% Industrial................................................. 18 24 Mortgage-backed............................................ 13 22 Utility.................................................... 9 12 Government................................................. 1 9 Other...................................................... 24 26 --- --- Total................................................... 100% 100% === ===
As described more fully in Note 1, the Company performs a regular evaluation, on a security-by-security basis, of its investment holdings in accordance with its impairment policy in order to evaluate whether such securities are other-than-temporarily impaired. One of the criteria which the Company considers in its other-than-temporary impairment analysis is its intent and ability to hold securities for a period of time sufficient to allow for the recovery of their value to an amount equal to or greater than cost or amortized cost. The Company's intent and ability to hold securities considers broad portfolio management objectives such as asset/liability duration management, issuer and industry segment exposures, interest rate views and the overall total return focus. In following these portfolio management objectives, changes in facts and circumstances that were present in past reporting periods may trigger a decision to sell securities that were held in prior reporting periods. Decisions to sell are based on current conditions or the Company's need to shift the portfolio to maintain its portfolio management objectives including liquidity needs or duration targets on asset/liability managed portfolios. The Company attempts to anticipate these types of changes and if a sale decision has been made on an impaired security and that security is not expected to recover prior to the expected time of sale, the security will be deemed other-than- temporarily impaired in the period that the sale decision was made and an other- than-temporary impairment loss will be recognized. Based upon the Company's current evaluation of the securities in accordance with its impairment policy, the cause of the decline being principally attributable to the general rise in interest rates during the holding period, and the Company's current intent and ability to hold the fixed maturity and equity securities with unrealized losses for a period of time sufficient for them to recover, the Company has concluded that the aforementioned securities are not other-than-temporarily impaired. SECURITIES LENDING The Company participates in a securities lending program whereby blocks of securities, which are included in fixed maturity and equity 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 $26.9 billion and $30.1 billion and an estimated fair value of $27.9 billion and $31.0 billion were on loan under the program at December 31, 2007 and 2006, respectively. Securities loaned under such transactions may be sold or repledged by the transferee. The Company was liable for cash collateral under its control of $28.7 billion and $32.0 billion at December 31, 2007 and 2006, respectively. There was no security collateral on deposit from customers in connection with securities lending transactions at December 31, 2007. Security collateral of $17 million on deposit from customers in connection with the securities lending transactions at December 31, 2006 could not have been sold or repledged and was not reflected in the consolidated financial statements. F-40 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ASSETS ON DEPOSIT AND HELD IN TRUST AND ASSETS PLEDGED AS COLLATERAL The Company had investment assets on deposit with regulatory agencies with a fair market value of $1.7 billion and $1.2 billion at December 31, 2007 and 2006, respectively, consisting primarily of fixed maturity and equity securities. Company securities held in trust to satisfy collateral requirements had a cost or amortized cost of $2.4 billion and $2.3 billion at December 31, 2007 and 2006, respectively, consisting primarily of fixed maturity and equity securities. Certain of the Company's fixed maturity securities are pledged as collateral for various derivative transactions as described in Note 4. Additionally, the Company has pledged certain of its fixed maturity securities and mortgage loans in support of its funding agreements as described in Note 7. MORTGAGE AND CONSUMER LOANS Mortgage and consumer loans are categorized as follows:
DECEMBER 31, ------------------------------------- 2007 2006 ----------------- ----------------- AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------- ------- (IN MILLIONS) Commercial mortgage loans................... $31,145 78% $28,369 78% Agricultural mortgage loans................. 8,985 22 7,527 21 Consumer loans.............................. 63 -- 203 1 ------- ------- ------- ------- Total..................................... 40,193 100% 36,099 100% ======= ======= Less: Valuation allowances.................. 181 160 ------- ------- Mortgage and consumer loans............... $40,012 $35,939 ======= =======
Mortgage loans are collateralized by properties primarily located in the United States. At December 31, 2007, 20%, 7% and 7% of the value of the Company's mortgage and consumer loans were located in California, Texas and Florida, respectively. Generally, the Company, as the lender, only loans up to 75% of the purchase price of the underlying real estate. Certain of the Company's real estate joint ventures have mortgage loans with the Company. The carrying values of such mortgages were $373 million and $372 million at December 31, 2007 and 2006, respectively. Information regarding loan valuation allowances for mortgage and consumer loans is as follows:
YEARS ENDED DECEMBER 31, ------------------ 2007 2006 2005 ---- ---- ---- (IN MILLIONS) Balance at January 1,.................................. $160 $149 $154 Additions.............................................. 70 28 43 Deductions............................................. (49) (17) (48) ---- ---- ---- Balance at December 31,................................ $181 $160 $149 ==== ==== ====
F-41 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A portion of the Company's mortgage and consumer loans was impaired and consisted of the following:
DECEMBER 31, ----------- 2007 2006 ---- ---- (IN MILLIONS) Impaired loans with valuation allowances.................... $552 $371 Impaired loans without valuation allowances................. 8 39 ---- ---- Subtotal.................................................. 560 410 Less: Valuation allowances on impaired loans................ 67 20 ---- ---- Impaired loans............................................ $493 $390 ==== ====
The average investment on impaired loans was $399 million, $145 million and $152 million for the years ended December 31, 2007, 2006 and 2005, respectively. Interest income on impaired loans was $35 million, $1 million and $6 million for the years ended December 31, 2007, 2006 and 2005, respectively. The investment in restructured loans was $2 million and $9 million at December 31, 2007 and 2006, respectively. Interest income of less than $1 million, $1 million and $2 million was recognized on restructured loans for the years ended December 31, 2007, 2006 and 2005, respectively. Gross interest income that would have been recorded in accordance with the original terms of such loans amounted to less than $1 million, $1 million and $3 million for the years ended December 31, 2007, 2006 and 2005, respectively. Mortgage and consumer loans with scheduled payments of 90 days or more past due on which interest is still accruing, had an amortized cost of $1 million and $7 million at December 31, 2007 and 2006, respectively. Mortgage and consumer loans on which interest is no longer accrued had an amortized cost of $18 million and $35 million at December 31, 2007 and 2006, respectively. Mortgage and consumer loans in foreclosure had an amortized cost of $6 million and $30 million at December 31, 2007 and 2006, respectively. REAL ESTATE HOLDINGS Real estate holdings consisted of the following:
DECEMBER 31, ---------------- 2007 2006 ------- ------ (IN MILLIONS) Real estate.............................................. $ 4,124 $3,974 Accumulated depreciation................................. (1,068) (994) ------- ------ Net real estate.......................................... 3,056 2,980 Real estate joint ventures............................... 2,295 1,328 ------- ------ Real estate and real estate joint ventures............. 5,351 4,308 Real estate held-for-sale................................ 172 177 ------- ------ Total real estate holdings............................. $ 5,523 $4,485 ======= ======
Related depreciation expense on real estate was $112 million, $107 million and $103 million for the years ended December 31, 2007, 2006 and 2005, respectively. These amounts include $13 million, $14 million and $30 million of depreciation expense related to discontinued operations for the years ended December 31, 2007, 2006 and 2005, respectively. There were no impairments recognized on real estate held-for-sale for the year ended December 31, 2007. Impairment losses recognized on real estate held- for-sale were $8 million and $5 million for the years ended F-42 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 2006 and 2005, respectively. The carrying value of non-income producing real estate was $8 million at both December 31, 2007 and 2006. The Company did not own real estate acquired in satisfaction of debt at December 31, 2007. The Company owned real estate acquired in satisfaction of debt of less than $1 million at December 31, 2006. Real estate holdings were categorized as follows:
DECEMBER 31, ----------------------------------- 2007 2006 ---------------- ---------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- (IN MILLIONS) Office........................................ $2,417 44% $2,335 52% Apartments.................................... 1,226 22 737 17 Retail........................................ 561 10 534 12 Real estate investment funds.................. 404 7 307 7 Development joint ventures.................... 383 7 169 4 Industrial.................................... 356 7 291 6 Land.......................................... 107 2 50 1 Agriculture................................... 9 -- -- -- Other......................................... 60 1 62 1 ------ ------- ------ ------- Total real estate holdings.................. $5,523 100% $4,485 100% ====== ======= ====== =======
The Company's real estate holdings are primarily located in the United States. At December 31, 2007, 20%, 10%, 10% and 10% of the Company's real estate holdings were located in California, Texas, Florida and New York, respectively. LEVERAGED LEASES Investment in leveraged leases, included in other invested assets, consisted of the following:
DECEMBER 31, ---------------- 2007 2006 ------- ------ (IN MILLIONS) Rental receivables, net.................................. $ 1,483 $1,055 Estimated residual values................................ 1,185 887 ------- ------ Subtotal............................................... 2,668 1,942 Unearned income.......................................... (1,031) (694) ------- ------ Investment in leveraged leases......................... $ 1,637 $1,248 ======= ======
The Company's deferred income tax liability related to leveraged leases was $798 million and $670 million at December 31, 2007 and 2006, respectively. The rental receivables set forth above are generally due in periodic installments. The payment periods range from one to 15 years, but in certain circumstances are as long as 30 years. F-43 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of net income from investment in leveraged leases are as follows:
YEARS ENDED DECEMBER 31, ---------------------- 2007 2006 2005 ---- ---- ---- (IN MILLIONS) Income from investment in leveraged leases (included in net investment income)........................... $ 48 $ 51 $ 54 Less: Income tax expense on leveraged leases.......... (17) (18) (19) ---- ---- ---- Net income from leveraged leases...................... $ 31 $ 33 $ 35 ==== ==== ====
OTHER LIMITED PARTNERSHIP INTERESTS The carrying value of other limited partnership interests (which primarily represent ownership interests in pooled investment funds that make private equity investments in companies in the United States and overseas) was $4.9 billion and $3.7 billion at December 31, 2007 and 2006, respectively. Included within other limited partnership interests at December 31, 2007 and 2006 are $1.2 billion and $848 million, respectively, of hedge funds. For the years ended December 31, 2007, 2006 and 2005, net investment income from other limited partnership interests included $71 million, $67 million and $20 million, respectively, related to hedge funds. FUNDS WITHHELD AT INTEREST Funds withheld at interest, included in other invested assets, were $4.5 billion and $4.0 billion at December 31, 2007 and 2006, respectively. NET INVESTMENT INCOME The components of net investment income are as follows:
YEARS ENDED DECEMBER 31, --------------------------- 2007 2006 2005 ------- ------- ------- (IN MILLIONS) Fixed maturity securities........................ $10,169 $ 9,551 $ 8,588 Equity securities................................ 183 58 53 Mortgage and consumer loans...................... 2,426 2,315 2,246 Policy loans..................................... 523 495 497 Real estate and real estate joint ventures....... 775 708 504 Other limited partnership interests.............. 1,141 705 676 Cash, cash equivalents and short-term investments.................................... 154 201 113 Other............................................ 534 465 381 ------- ------- ------- Total investment income........................ 15,905 14,498 13,058 Less: Investment expenses........................ 2,419 2,201 1,340 ------- ------- ------- Net investment income.......................... $13,486 $12,297 $11,718 ======= ======= =======
For the years ended December 31, 2007, 2006 and 2005, affiliated net investment income of $21 million, $20 million and $16 million, respectively, related to fixed maturity securities; $12 million, less than $1 million and less than $1 million respectively, related to equity securities; and $66 million, $52 million and $3 million, respectively, related to other, are included in the table above. There was no affiliated investment income related to mortgage loans for the year ended December 31, 2007. For the years ended December 31, 2006 and 2005, affiliated investment income related to mortgage loans was $112 million and $189 million, respectively, which included the F-44 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) prepayment fees discussed below. See "-- Related Party Investment Transactions" for discussion of affiliated net investment income related to short-term investments included in the table above. In the fourth quarter of 2006, MTL sold its Peter Cooper Village and Stuyvesant Town properties for $5.4 billion. Upon the closing of the transaction, MTL repaid the mortgage of $770 million, including accrued interest, held by the Company on these properties and paid a prepayment fee of $68 million which was recognized as affiliated investment income related to mortgage loans included in the table above. In the second quarter of 2005, MTL sold its 200 Park Avenue real estate property located in New York City, to a third party for $1.72 billion. Concurrent with the sale, MTL repaid the related $690 million mortgage, including accrued interest, it owed to the Company. Based on the terms of the loan agreement, the Company also received a $120 million prepayment fee from MTL, which was recognized when received as affiliated investment income related to mortgage loans included in the table above. NET INVESTMENT GAINS (LOSSES) The components of net investment gains (losses) are as follows:
YEARS ENDED DECEMBER 31, --------------------- 2007 2006 2005 ----- ----- ----- (IN MILLIONS) Fixed maturity securities............................ $(310) $(572) $(518) Equity securities.................................... 133 67 121 Mortgage and consumer loans.......................... 4 (16) 31 Real estate and real estate joint ventures........... 45 38 7 Other limited partnership interests.................. 35 2 43 Derivatives.......................................... (665) (458) 410 Other................................................ 294 112 85 ----- ----- ----- Net investment gains (losses)...................... $(464) $(827) $ 179 ===== ===== =====
For the years ended December 31, 2007, 2006 and 2005, affiliated net investment gains (losses) of $42 million, ($18) million and ($5) million, respectively, are included in derivatives and ($3) million, ($2) million and $33 million, respectively, are included within other in the table above. The Company periodically disposes of fixed maturity and equity securities at a loss. Generally, such losses are insignificant in amount or in relation to the cost basis of the investment, are attributable to declines in fair value occurring in the period of the disposition or are as a result of management's decision to sell securities based on current conditions or the Company's need to shift the portfolio to maintain its portfolio management objectives. Losses from fixed maturity and equity securities deemed other-than- temporarily impaired, included within net investment gains (losses), were $62 million, $37 million and $64 million for the years ended December 31, 2007, 2006 and 2005, respectively. F-45 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NET UNREALIZED INVESTMENT GAINS (LOSSES) The components of net unrealized investment gains (losses), included in accumulated other comprehensive income, are as follows:
YEARS ENDED DECEMBER 31, --------------------------- 2007 2006 2005 ------- ------- ------- (IN MILLIONS) Fixed maturity securities......................... $ 3,785 $ 4,685 $ 5,972 Equity securities................................. 247 483 225 Derivatives....................................... (262) (238) (207) Minority interest................................. (150) (159) (171) Other............................................. (14) -- (82) ------- ------- ------- Subtotal........................................ 3,606 4,771 5,737 ------- ------- ------- Amounts allocated from: Insurance liability loss recognition............ (366) (806) (1,259) DAC and VOBA.................................... (420) (239) (148) Policyholder dividend obligation................ (789) (1,062) (1,492) ------- ------- ------- Subtotal..................................... (1,575) (2,107) (2,899) ------- ------- ------- Deferred income tax............................... (689) (968) (1,029) ------- ------- ------- Subtotal........................................ (2,264) (3,075) (3,928) ------- ------- ------- Net unrealized investment gains (losses).......... $ 1,342 $ 1,696 $ 1,809 ======= ======= =======
The changes in net unrealized investment gains (losses) are as follows:
YEARS ENDED DECEMBER 31, -------------------------- 2007 2006 2005 ------- ------ ------- (IN MILLIONS) Balance, January 1,................................ $ 1,696 $1,809 $ 2,408 Unrealized investment gains (losses) during the year............................................. (1,165) (966) (2,556) Unrealized investment gains (losses) of subsidiaries at the date of sale................. -- -- 15 Unrealized investment gains (losses) relating to: Insurance liability gain (loss) recognition...... 440 453 694 DAC and VOBA..................................... (181) (91) 259 Policyholder dividend obligation................. 273 430 627 Deferred income tax.............................. 279 61 362 ------- ------ ------- Balance, December 31,.............................. $ 1,342 $1,696 $ 1,809 ======= ====== ======= Net change in unrealized investment gains (losses)......................................... $ (354) $ (113) $ (599) ======= ====== =======
TRADING SECURITIES The Company has a trading securities portfolio to support investment strategies that involve the active and frequent purchase and sale of securities, the execution of short sale agreements and asset and liability matching strategies for certain insurance products. Trading securities and short sale agreement liabilities are recorded at fair value with subsequent changes in fair value recognized in net investment income related to fixed maturity securities. F-46 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 2007 and 2006, trading securities were $457 million and $563 million, respectively, and liabilities associated with the short sale agreements in the trading securities portfolio, which were included in other liabilities, were $107 million and $387 million, respectively. The Company had pledged $407 million and $614 million of its assets, primarily consisting of trading securities, as collateral to secure the liabilities associated with the short sale agreements in the trading securities portfolio at December 31, 2007 and 2006, respectively. During the years ended December 31, 2007, 2006 and 2005, interest and dividends earned on trading securities in addition to the net realized and unrealized gains (losses) recognized on the trading securities and the related short sale agreement liabilities included within net investment income totaled $6 million, $32 million and ($3) million, respectively. Included within unrealized gains (losses) on such trading securities and short sale agreement liabilities, are changes in fair value of ($4) million, $3 million and less than $1 million for the years ended December 31, 2007, 2006 and 2005, respectively. VARIABLE INTEREST ENTITIES The following table presents the total assets of and maximum exposure to loss relating to VIEs for which the Company has concluded that: (i) it is the primary beneficiary and which are consolidated in the Company's consolidated financial statements at December 31, 2007; and (ii) it holds significant variable interests but it is not the primary beneficiary and which have not been consolidated:
DECEMBER 31, 2007 --------------------------------------------------- PRIMARY BENEFICIARY NOT PRIMARY BENEFICIARY ------------------------ ------------------------ MAXIMUM MAXIMUM TOTAL EXPOSURE TO TOTAL EXPOSURE TO ASSETS (1) LOSS (2) ASSETS (1) LOSS (2) ---------- ----------- ---------- ----------- (IN MILLIONS) Asset-backed securitizations........... $ -- $ -- $ 792 $ 100 Real estate joint ventures (3)......... 48 26 155 -- Other limited partnership interests (4).................................. 2 1 36,236 1,942 Trust preferred securities (5)......... -- -- 37,882 2,149 Other investments (6).................. -- -- 358 49 ---------- ----------- ---------- ----------- Total................................ $50 $27 $75,423 $ 4,240 ========== =========== ========== ===========
-------- (1) The assets of the asset-backed securitizations are reflected at fair value. The assets of the real estate joint ventures, other limited partnership interests, trust preferred securities and other investments are reflected at the carrying amounts at which such assets would have been reflected on the Company's consolidated balance sheet had the Company consolidated the VIE from the date of its initial investment in the entity. (2) The maximum exposure to loss relating to the asset-backed securitizations is equal to the carrying amounts of retained interests. In addition, the Company provides collateral management services for certain of these structures for which it collects a management fee. The maximum exposure to loss relating to real estate joint ventures, other limited partnership interests, trust preferred securities and other investments is equal to the carrying amounts plus any unfunded commitments, reduced by amounts guaranteed by other partners. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee. (3) Real estate joint ventures include partnerships and other ventures which engage in the acquisition, development, management and disposal of real estate investments. (4) Other limited partnership interests include partnerships established for the purpose of investing in public and private debt and equity securities. F-47 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) Trust preferred securities are complex, uniquely structured investments which contain features of both equity and debt, may have an extended or no stated maturity, and may be callable at the issuer's option after a defined period of time. (6) Other investments include securities that are not trust preferred securities or asset-backed securitizations. RELATED PARTY INVESTMENT TRANSACTIONS As of December 31, 2007 and 2006, the Company held $162 million and $222 million, respectively, of its total invested assets in the Metropolitan Money Market Pool, an affiliated partnership. These amounts are included in short-term investments. Net investment income from these invested assets was $12 million, $10 million and $6 million for the years ended December 31, 2007, 2006 and 2005, respectively. The MetLife Intermediate Income Pool (the "MIIP") was formed as a New York general partnership consisting solely of U.S. domestic insurance companies owned directly or indirectly by MetLife, Inc. and is managed by Metropolitan Life Insurance Company. Each partner's investment in the MIIP represents such partner's pro rata ownership interest in the pool. The affiliated companies' ownership interests in the pooled money market securities held by the MIIP was $101 million and $210 million as of December 31, 2007 and 2006, respectively. Net investment income allocated to affiliates from the MIIP was $7 million, $8 million, and $7 million for the years ended December 31, 2007, 2006 and 2005, respectively. In the normal course of business, the Company transfers invested assets, primarily consisting of fixed maturity securities, to and from affiliates. Assets transferred to and from affiliates, inclusive of amounts related to reinsurance agreements, are as follows:
YEARS ENDED DECEMBER 31, ------------------ 2007 2006 2005 ---- ---- ---- (IN MILLIONS) Estimated fair value of assets transferred to affiliates........................................... $142 $ 97 $762 Amortized cost of assets transferred to affiliates..... $145 $ 99 $723 Net investment gains (losses) recognized on transfers.. $ (3) $ (2) $ 39 Estimated fair value of assets transferred from affiliates........................................... $778 $307 $691
F-48 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. DERIVATIVE FINANCIAL INSTRUMENTS TYPES OF DERIVATIVE FINANCIAL INSTRUMENTS The following table presents the notional amount and current market or fair value of derivative financial instruments held at:
DECEMBER 31, 2007 DECEMBER 31, 2006 ------------------------------- ------------------------------- CURRENT MARKET CURRENT MARKET OR FAIR VALUE OR FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- (IN MILLIONS) Interest rate swaps................ $ 48,554 $ 416 $ 614 $17,865 $ 207 $ 79 Interest rate floors............... 32,855 420 -- 25,955 193 -- Interest rate caps................. 34,784 44 -- 19,754 119 -- Financial futures.................. 6,127 35 34 6,824 52 19 Foreign currency swaps............. 16,220 639 1,608 14,952 287 1,102 Foreign currency forwards.......... 1,807 41 11 1,204 22 4 Options............................ 1,423 123 -- 1 1 -- Financial forwards................. 3,449 63 1 2,900 12 24 Credit default swaps............... 5,754 52 31 5,023 4 16 Synthetic GICs..................... 3,670 -- -- 3,739 -- -- Other.............................. 250 43 -- 250 56 -- -------- ------ ------ ------- ----- ------- Total............................ $154,893 $1,876 $2,299 $98,467 $ 953 $ 1,244 ======== ====== ====== ======= ===== =======
The above table does not include notional amounts for equity futures and equity variance swaps. At December 31, 2007, the Company owned 171 equity futures. The Company did not own equity futures at December 31, 2006. Fair values of equity futures are included in financial futures in the preceding table. At both December 31, 2007 and 2006, the Company owned 132,000 equity variance swaps. Fair values of equity variance swaps are included in financial forwards in the preceding table. F-49 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents the notional amount of derivative financial instruments by maturity at December 31, 2007:
REMAINING LIFE -------------------------------------------------------------------------------------- AFTER ONE YEAR AFTER FIVE YEARS ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS TOTAL ---------------- ------------------ ----------------- --------------- -------- (IN MILLIONS) Interest rate swaps....... $10,021 $24,746 $ 7,900 $ 5,887 $ 48,554 Interest rate floors...... -- 13,068 19,787 -- 32,855 Interest rate caps........ 21,204 13,580 -- -- 34,784 Financial futures......... 6,127 -- -- -- 6,127 Foreign currency swaps.... 1,612 6,468 6,556 1,584 16,220 Foreign currency forwards................ 1,799 -- -- 8 1,807 Options................... -- -- 1,250 173 1,423 Financial forwards........ -- -- -- 3,449 3,449 Credit default swaps...... 305 3,985 1,215 249 5,754 Synthetic GICs............ 317 -- -- 3,353 3,670 Other..................... -- -- -- 250 250 ---------------- ------------------ ----------------- --------------- -------- Total................... $ 41,385 $ 61,847 $ 36,708 $ 14,953 $154,893 ================ ================== ================= =============== ========
Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). In an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional principal amount. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by the counterparty at each due date. The Company also enters into basis swaps to better match the cash flows from assets and related liabilities. In a basis swap, both legs of the swap are floating with each based on a different index. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. A single net payment is usually made by one counterparty at each due date. Basis swaps are included in interest rate swaps in the preceding table. Interest rate caps and floors are used by the Company primarily to protect its floating rate liabilities against rises in interest rates above a specified level, and against interest rate exposure arising from mismatches between assets and liabilities (duration mismatches), as well as to protect its minimum rate guarantee liabilities against declines in interest rates below a specified level, respectively. In exchange-traded interest rate (Treasury and swap) and equity futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of interest rate and equity securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded interest rate (Treasury and swap) futures are used primarily to hedge mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets, to hedge against changes in value of securities the Company owns or anticipates acquiring and to hedge against changes in interest rates on anticipated liability issuances by replicating Treasury or swap curve performance. The value of interest rate futures is substantially impacted by changes in interest rates and they can be used to modify or hedge existing interest rate risk. F-50 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Exchange-traded equity futures are used primarily to hedge liabilities embedded in certain variable annuity products offered by the Company. Foreign currency derivatives, including foreign currency swaps, foreign currency forwards and currency option contracts, are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. The Company also uses foreign currency forwards and swaps to hedge the foreign currency risk associated with certain of its net investments in foreign operations. In a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate calculated by reference to an agreed upon principal amount. The principal amount of each currency is exchanged at the inception and termination of the currency swap by each party. In a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made in a different currency at the specified future date. The Company enters into currency option contracts that give it the right, but not the obligation, to sell the foreign currency amount in exchange for a functional currency amount within a limited time at a contracted price. The contracts may also be net settled in cash, based on differentials in the foreign exchange rate and the strike price. Currency option contracts are included in options in the preceding table. Swaptions are used by the Company to hedge interest rate risk associated with the Company's long-term liabilities, as well as to sell, or monetize, embedded call options in its fixed rate liabilities. A swaption is an option to enter into a swap with an effective date equal to the exercise date of the embedded call and a maturity date equal to the maturity date of the underlying liability. The Company receives a premium for entering into the swaption. Swaptions are included in options in the preceding table. The Company enters into financial forwards to buy and sell securities. The price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. Equity variance swaps are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. In an equity variance swap, the Company agrees with another party to exchange amounts in the future, based on changes in equity volatility over a defined period. Equity variance swaps are included in financial forwards in the preceding table. Swap spread locks are used by the Company to hedge invested assets on an economic basis against the risk of changes in credit spreads. Swap spread locks are forward starting swaps where the Company agrees to pay a coupon based on a predetermined reference swap spread in exchange for receiving a coupon based on a floating rate. The Company has the option to cash settle with the counterparty in lieu of maintaining the swap after the effective date. Swap spread locks are included in financial forwards in the preceding table. Certain credit default swaps are used by the Company to hedge against credit-related changes in the value of its investments and to diversify its credit risk exposure in certain portfolios. In a credit default swap transaction, the Company agrees with another party, at specified intervals, to pay a premium to insure credit risk. If a credit event, as defined by the contract, occurs, generally the contract will require the swap to be settled gross by the delivery of par quantities of the referenced investment equal to the specified swap notional in exchange for the payment of cash amounts by the counterparty equal to the par value of the investment surrendered. Credit default swaps are also used to synthetically create investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and a cash F-51 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) instrument such as a U.S. Treasury or Agency security. The Company also enters into certain credit default swaps held in relation to trading portfolios. A synthetic guaranteed interest contract ("GIC") is a contract that simulates the performance of a traditional GIC through the use of financial instruments. Under a synthetic GIC, the policyholder owns the underlying assets. The Company guarantees a rate return on those assets for a premium. Total rate of return swaps ("TRRs") are swaps whereby the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of an asset or a market index and LIBOR, calculated by reference to an agreed notional principal amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by the counterparty at each due date. TRRs can be used as hedges or to synthetically create investments and are included in the other classification in the preceding table. HEDGING The following table presents the notional amount and fair value of derivatives by type of hedge designation at:
DECEMBER 31, 2007 DECEMBER 31, 2006 ------------------------------- ------------------------------- FAIR VALUE FAIR VALUE NOTIONAL -------------------- NOTIONAL -------------------- AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES -------- ------ ----------- -------- ------ ----------- (IN MILLIONS) Fair value................... $ 9,301 $ 630 $ 94 $ 7,890 $ 290 $ 84 Cash flow.................... 3,084 23 311 2,656 33 149 Foreign operations........... 686 -- 116 489 -- 39 Non-qualifying............... 141,822 1,223 1,778 87,432 630 972 -------- ------ ------- ------- ----- ------- Total...................... $154,893 $1,876 $ 2,299 $98,467 $953 $ 1,244 ======== ====== ======= ======= ===== =======
The following table presents the settlement payments recorded in income for the:
YEARS ENDED DECEMBER 31, ------------------ 2007 2006 2005 ---- ---- ---- (IN MILLIONS) Qualifying hedges: Net investment income................................ $ 24 $ 48 $ 42 Interest credited to policyholder account balances... (28) (26) 17 Non-qualifying hedges: Net investment income................................ (5) -- -- Net investment gains (losses)........................ 197 225 86 ---- ---- ---- Total............................................. $188 $247 $145 ==== ==== ====
FAIR VALUE HEDGES The Company designates and accounts for the following as fair value hedges when they have met the requirements of SFAS 133: (i) interest rate swaps to convert fixed rate investments to floating rate investments; and (ii) foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated investments and liabilities. F-52 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company recognized net investment gains (losses) representing the ineffective portion of all fair value hedges as follows:
YEARS ENDED DECEMBER 31, --------------------- 2007 2006 2005 ----- ----- ----- (IN MILLIONS) Changes in the fair value of derivatives............. $ 319 $ 278 $(118) Changes in the fair value of the items hedged........ (308) (278) 116 ----- ----- ----- Net ineffectiveness of fair value hedging activities......................................... $ 11 $ -- $ (2) ===== ===== =====
All components of each derivative's gain or loss were included in the assessment of hedge effectiveness. There were no instances in which the Company discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge. CASH FLOW HEDGES The Company designates and accounts for the following as cash flow hedges when they have met the requirements of SFAS 133: (i) interest rate swaps to convert floating rate investments to fixed rate investments; (ii) interest rate swaps to convert floating rate liabilities to fixed rate liabilities; (iii) foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments and liabilities; and (iv) financial forwards to buy and sell securities. For the years ended December 31, 2007 and 2006, the Company did not recognize any net investment gains (losses) which represented the ineffective portion of all cash flow hedges. For the year ended December 31, 2005, the Company recognized net investment gains (losses) of ($21) million which represented the ineffective portion of all cash flow hedges. All components of each derivative's gain or loss were included in the assessment of hedge effectiveness. In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions did not occur on the anticipated date or in the additional time period permitted by SFAS 133. The net amounts reclassified into net investment losses for the years ended December 31, 2007, 2006 and 2005 related to such discontinued cash flow hedges were $3 million, $3 million and $42 million, respectively. There were no hedged forecasted transactions, other than the receipt or payment of variable interest payments for the years ended December 31, 2007, 2006 and 2005. The following table presents the components of other comprehensive income (loss), before income tax, related to cash flow hedges:
YEARS ENDED DECEMBER 31, --------------------- 2007 2006 2005 ----- ----- ----- (IN MILLIONS) Other comprehensive income (loss) balance at January 1,................................................. $(238) $(207) $(447) Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges............................................. (185) (30) 168 Amounts reclassified to net investment gains (losses)........................................... 150 (15) 72 Amounts reclassified to net investment income........ 12 15 2 Amortization of transition adjustment................ (1) (1) (2) ----- ----- ----- Other comprehensive income (loss) balance at December 31,................................................ $(262) $(238) $(207) ===== ===== =====
At December 31, 2007, $91 million of the deferred net loss on derivatives accumulated in other comprehensive income (loss) is expected to be reclassified to earnings during the year ending December 31, 2008. F-53 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS The Company uses forward exchange contracts, foreign currency swaps, options and non-derivative financial instruments to hedge portions of its net investments in foreign operations against adverse movements in exchange rates. The Company measures ineffectiveness on the forward exchange contracts based upon the change in forward rates. There was no ineffectiveness recorded for the years ended December 31, 2007, 2006 and 2005. The Company's consolidated statements of stockholder's equity for the years ended December 31, 2007, 2006 and 2005 include gains (losses) of ($144) million, ($7) million and ($27) million, respectively, related to foreign currency contracts and non-derivative financial instruments used to hedge its net investments in foreign operations. At December 31, 2007 and 2006, the cumulative foreign currency translation loss recorded in accumulated other comprehensive income related to these hedges was $235 million and $91 million, respectively. When net investments in foreign operations are sold or substantially liquidated, the amounts in accumulated other comprehensive income are reclassified to the consolidated statements of income, while a pro rata portion will be reclassified upon partial sale of the net investments in foreign operations. NON-QUALIFYING DERIVATIVES AND DERIVATIVES FOR PURPOSES OTHER THAN HEDGING The Company enters into the following derivatives that do not qualify for hedge accounting under SFAS 133 or for purposes other than hedging: (i) interest rate swaps, purchased caps and floors, and interest rate futures to economically hedge its exposure to interest rate volatility; (ii) foreign currency forwards, swaps and option contracts to economically hedge its exposure to adverse movements in exchange rates; (iii) swaptions to sell embedded call options in fixed rate liabilities; (iv) credit default swaps to economically hedge exposure to adverse movements in credit; (v) equity futures, interest rate futures and equity variance swaps to economically hedge liabilities embedded in certain variable annuity products; (vi) swap spread locks to economically hedge invested assets against the risk of changes in credit spreads; (vii) financial forwards to buy and sell securities; (viii) synthetic guaranteed interest contracts; (ix) credit default swaps and TRRs to synthetically create investments; (x) basis swaps to better match the cash flows of assets and related liabilities; (xi) credit default swaps held in relation to trading portfolios; and (xii) swaptions to hedge interest rate risk. The following table presents changes in fair value related to derivatives that do not qualify for hedge accounting:
YEARS ENDED DECEMBER 31, -------------------- 2007 2006 2005 ----- ----- ---- (IN MILLIONS) Net investment gains (losses), excluding embedded derivatives............................................... $(743) $(701) $372 Net investment income (1)................................... $ 20 $ -- $ --
-------- (1) Changes in fair value related to derivatives held in relation to trading portfolios. EMBEDDED DERIVATIVES The Company has certain embedded derivatives that are required to be separated from their host contracts and accounted for as derivatives. These host contracts include guaranteed minimum withdrawal contracts, guaranteed minimum accumulation contracts and modified coinsurance contracts. F-54 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents the fair value of the Company's embedded derivatives at:
DECEMBER 31, ----------- 2007 2006 ---- ---- (IN MILLIONS) Embedded derivative assets.................................. $ 91 $ 57 Embedded derivative liabilities............................. $694 $164
The following table presents changes in fair value related to embedded derivatives:
YEARS ENDED DECEMBER 31, ------------------- 2007 2006 2005 ----- ---- ---- (IN MILLIONS) Net investment gains (losses).......................... $(135) $ 12 $ 29 Interest credited to policyholder account balances..... $ (66) $(80) $(45)
CREDIT RISK The Company may be exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. Generally, the current credit exposure of the Company's derivative contracts is limited to the fair value at the reporting date. The credit exposure of the Company's derivative transactions is represented by the fair value of contracts with a net positive fair value at the reporting date. The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Because exchange traded futures are effected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments. The Company enters into various collateral arrangements, which require both the pledging and accepting of collateral in connection with its derivative instruments. As of December 31, 2007 and 2006, the Company was obligated to return cash collateral under its control of $233 million and $94 million, respectively. This unrestricted cash collateral is included in cash and cash equivalents and the obligation to return it is included in payables for collateral under securities loaned and other transactions in the consolidated balance sheets. As of December 31, 2007 and 2006, the Company had also accepted collateral consisting of various securities with a fair market value of $98 million and $16 million, respectively, which are held in separate custodial accounts. The Company is permitted by contract to sell or repledge this collateral, but as of December 31, 2007 and 2006, none of the collateral had been sold or repledged. As of December 31, 2007 and 2006, the Company provided collateral of $162 million and $80 million, respectively, which is included in fixed maturity securities in the consolidated balance sheets. In addition, the Company has exchange traded futures, which require the pledging of collateral. As of December 31, 2007 and 2006, the Company pledged collateral of $33 million and $23 million, respectively, which is included in fixed maturity securities. The counterparties are permitted by contract to sell or repledge this collateral. F-55 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED Information regarding DAC and VOBA is as follows:
DAC VOBA TOTAL ------- ----- ------- (IN MILLIONS) Balance at January 1, 2005......................... $10,255 $ 807 $11,062 Capitalizations.................................. 1,619 -- 1,619 ------- ----- ------- Subtotal.................................... 11,874 807 12,681 ------- ----- ------- Less: Amortization related to: Net investment gains (losses)................. 13 2 15 Unrealized investment gains (losses).......... (244) (15) (259) Other expenses................................ 1,304 66 1,370 ------- ----- ------- Total amortization.......................... 1,073 53 1,126 ------- ----- ------- Less: Dispositions and other..................... 120 (3) 117 ------- ----- ------- Balance at December 31, 2005....................... 10,681 757 11,438 Capitalizations.................................. 1,677 -- 1,677 ------- ----- ------- Subtotal.................................... 12,358 757 13,115 ------- ----- ------- Less: Amortization related to: Net investment gains (losses)................. (136) (2) (138) Unrealized investment gains (losses).......... 105 (14) 91 Other expenses................................ 1,248 (21) 1,227 ------- ----- ------- Total amortization.......................... 1,217 (37) 1,180 ------- ----- ------- Less: Dispositions and other..................... (85) (23) (108) ------- ----- ------- Balance at December 31, 2006....................... 11,226 817 12,043 Effect of SOP 05-1 adoption...................... (195) (123) (318) Capitalizations.................................. 1,689 -- 1,689 ------- ----- ------- Subtotal.................................... 12,720 694 13,414 ------- ----- ------- Less: Amortization related to: Net investment gains (losses)................. (224) (1) (225) Unrealized investment gains (losses).......... 110 71 181 Other expenses................................ 1,364 21 1,385 ------- ----- ------- Total amortization.......................... 1,250 91 1,341 ------- ----- ------- Less: Dispositions and other..................... (68) -- (68) ------- ----- ------- Balance at December 31, 2007....................... $11,538 $ 603 $12,141 ======= ===== =======
The estimated future amortization expense allocated to other expenses for the next five years for VOBA is $48 million in 2008, $41 million in 2009, $35 million in 2010, $37 million in 2011 and $38 million in 2012. Amortization of VOBA and DAC is related to (i) investment gains and losses and the impact of such gains and losses on the amount of the amortization; (ii) unrealized investment gains and losses to provide information regarding the amount that would have been amortized if such gains and losses had been recognized; and (iii) other F-56 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expenses to provide amounts related to the gross margins or profits originating from transactions other than investment gains and losses. 6. GOODWILL Goodwill, which is included in other assets, is the excess of cost over the fair value of net assets acquired. Information regarding goodwill is as follows:
DECEMBER 31, ----------- 2007 2006 ---- ---- (IN MILLIONS) Balance at January 1,....................................... $202 $200 Acquisitions................................................ 2 2 ---- ---- Balance at December 31,..................................... $204 $202 ==== ====
7. INSURANCE INSURANCE LIABILITIES Insurance liabilities are as follows:
DECEMBER 31, ------------------------------------------------------------- OTHER FUTURE POLICY POLICYHOLDER POLICYHOLDER BENEFITS ACCOUNT BALANCES FUNDS ----------------- ----------------- --------------- 2007 2006 2007 2006 2007 2006 ------- ------- ------- ------- ------ ------ (IN MILLIONS) Institutional Group life..................... $ 3,326 $ 3,250 $13,207 $12,774 $2,359 $2,252 Retirement & savings........... 26,119 25,797 38,749 32,396 213 20 Non-medical health & other..... 10,430 9,339 501 -- 595 529 Individual Traditional life............... 51,457 50,737 -- -- 1,431 1,395 Universal variable life........ 229 207 6,121 6,129 791 746 Annuities...................... 1,817 1,879 20,056 20,604 14 375 Other.......................... -- -- 2,368 2,381 1 1 International.................... 324 291 4 3 2 1 Reinsurance...................... 6,159 5,140 6,656 6,213 2,298 1,979 Corporate and Other (1).......... (21) (41) (2) (2) 39 74 ------- ------- ------- ------- ------ ------ Total....................... $99,840 $96,599 $87,660 $80,498 $7,743 $7,372 ======= ======= ======= ======= ====== ======
(1) Corporate and Other includes intersegment eliminations. Affiliated insurance liabilities included in the table above include reinsurance assumed and ceded. Affiliated future policy benefits, included in the table above, were $406 million and $422 million at December 31, 2007 and 2006, respectively. Affiliated policyholder account balances, included in the table above, were $613 million and $278 million at December 31, 2007 and 2006, respectively. Affiliated other policyholder funds, included in the table above, were ($251) million and $177 million at December 31, 2007 and 2006, respectively. F-57 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) VALUE OF DISTRIBUTION AGREEMENTS AND CUSTOMER RELATIONSHIPS ACQUIRED Information regarding the VODA and VOCRA, which are reported in other assets, is as follows:
YEARS ENDED DECEMBER 31, ---------------------- 2007 2006 --------- --------- (IN MILLIONS) Balance at January 1,.................................. $439 $ -- Capitalization......................................... -- 441 Amortization........................................... (8) (2) --------- --------- Balance at December 31,................................ $ 431 $ 439 ========= =========
The value of the other identifiable intangibles included in the table above reflects the estimated fair value of Citigroup/Travelers distribution agreement and customer relationships acquired at the original acquisition date and will be amortized in relation to the expected economic benefits of the agreement. The weighted average amortization period of the other intangible assets is 16 years. If actual experience under the distribution agreements or with customer relationships differs from expectations, the amortization of these intangibles will be adjusted to reflect actual experience. The use of discount rates was necessary to establish the fair value of the other identifiable intangible assets. In selecting the appropriate discount rates, management considered its weighted average cost of capital as well as the weighted average cost of capital required by market participants. A discounted rate of 11.5% was used to value these intangible assets. The estimated future amortization expense allocated to other expenses for the next five years for VODA and VOCRA is $12 million in 2008, $15 million in 2009, $18 million in 2010, $21 million in 2011 and $24 million in 2012. See Note 2 for a description of acquisitions and dispositions. SALES INDUCEMENTS Information regarding deferred sales inducements, which are reported in other assets, is as follows:
YEARS ENDED DECEMBER 31, -------------------- 2007 2006 2005 ----- ----- ---- (IN MILLIONS) Balance at January 1,................................ $121 $ 95 $75 Capitalization....................................... 29 31 29 Amortization......................................... (18) (5) (9) ----- ----- ---- Balance at December 31,.............................. $ 132 $ 121 $ 95 ===== ===== ====
SEPARATE ACCOUNTS Separate account assets and liabilities include two categories of account types: pass-through separate accounts totaling $71.4 billion and $64.5 billion at December 31, 2007 and 2006, respectively, for which the policyholder assumes all investment risk, and separate accounts with a minimum return or account value for which the Company contractually guarantees either a minimum return or account value to the policyholder which totaled $18.3 billion and $16.5 billion at December 31, 2007 and 2006, respectively. The latter category consisted primarily of Met Managed GICs and participating close-out contracts. The average interest rate credited on these contracts was 4.73% and 4.63% at December 31, 2007 and 2006, respectively. F-58 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $1.3 billion, $1.2 billion and $1.1 billion for the years ended December 31, 2007, 2006 and 2005, respectively. The Company's proportional interest in separate accounts is included in the consolidated balance sheets as follows:
DECEMBER 31, ----------- 2007 2006 ---- ---- (IN MILLIONS) Fixed maturity securities.................................... $ 6 $ 5 Equity securities............................................ $35 $35 Cash and cash equivalents.................................... $ 1 $ 1
For the years ended December 31, 2007, 2006 and 2005, there were no investment gains (losses) on transfers of assets from the general account to the separate accounts. OBLIGATIONS UNDER GUARANTEED INTEREST CONTRACT PROGRAM The Company issues fixed and floating rate obligations under its GIC program which are denominated in either U.S. dollars or foreign currencies. During the years ended December 31, 2007, 2006 and 2005, the Company issued $4.6 billion, $5.2 billion and $4.0 billion, respectively, and repaid $3.7 billion, $1.5 billion and $1.1 billion, respectively, of GICs under this program. At December 31, 2007 and 2006, GICs outstanding, which are included in policyholder account balances, were $19.1 billion and $16.8 billion, respectively. During the years ended December 31, 2007, 2006 and 2005, interest credited on the contracts, which are included in interest credited to policyholder account balances, was $918 million, $673 million and $384 million, respectively. OBLIGATIONS UNDER FUNDING AGREEMENTS Metropolitan Life Insurance Company is a member of the Federal Home Loan Bank of New York ("FHLB of NY") and holds $339 million and $136 million of common stock of the FHLB of NY at December 31, 2007 and 2006, respectively, which is included in equity securities. Metropolitan Life Insurance Company has also entered into funding agreements with the FHLB of NY whereby Metropolitan Life Insurance Company has issued such funding agreements in exchange for cash and for which the FHLB of NY has been granted a lien on certain Metropolitan Life Insurance Company assets, including residential mortgage-backed securities to collateralize Metropolitan Life Insurance Company 's obligations under the funding agreements. Metropolitan Life Insurance Company maintains control over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. Upon any event of default by Metropolitan Life Insurance Company , the FHLB of NY's recovery on the collateral is limited to the amount of Metropolitan Life Insurance Company 's liability to the FHLB of NY. The amount of the Company's liability for funding agreements with the FHLB of NY was $4.6 billion at December 31, 2007, which is included in policyholder account balances. The advances on these agreements are collateralized by residential mortgage-backed securities with fair values of $4.8 billion at December 31, 2007. Metropolitan Life Insurance Company did not have any funding agreements with the FHLB of NY at December 31, 2006. Metropolitan Life Insurance Company has issued funding agreements to certain trusts that have issued securities guaranteed as to payment of interest and principal by the Federal Agricultural Mortgage Corporation, a federally chartered instrumentality of the United States. The obligations under these funding agreements are secured by a pledge of certain eligible agricultural real estate mortgage loans and may, under certain circumstances, F-59 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) be secured by other qualified collateral. The amount of the Company's liability for funding agreements issued to such trusts was $2.5 billion and $1.5 billion at December 31, 2007 and 2006, respectively, which is included in policyholder account balances. The obligations under these funding agreements are collateralized by designated agricultural real estate mortgage loans with fair values of $2.9 billion and $1.7 billion at December 31, 2007 and 2006, respectively. LIABILITIES FOR UNPAID CLAIMS AND CLAIM EXPENSES Information regarding the liabilities for unpaid claims and claim expenses relating to group accident and non-medical health policies and contracts, which are reported in future policy benefits and other policyholder funds, is as follows:
YEARS ENDED DECEMBER 31, --------------------------- 2007 2006 2005 ------- ------- ------- (IN MILLIONS) Balance at January 1,............................. $ 4,500 $ 4,191 $ 3,847 Less: Reinsurance recoverables.................. (268) (295) (292) ------- ------- ------- Net balance at January 1,......................... 4,232 3,896 3,555 ------- ------- ------- Incurred related to: Current year.................................... 3,743 2,997 2,791 Prior years..................................... (104) (28) (41) ------- ------- ------- 3,639 2,969 2,750 ------- ------- ------- Paid related to: Current year.................................... (2,077) (1,814) (1,667) Prior years..................................... (885) (819) (742) ------- ------- ------- (2,962) (2,633) (2,409) ------- ------- ------- Net balance at December 31,....................... 4,909 4,232 3,896 Add: Reinsurance recoverables................... 265 268 295 ------- ------- ------- Balance at December 31,........................... $ 5,174 $ 4,500 $ 4,191 ======= ======= =======
During 2007 and 2006, as a result of changes in estimates of insured events in the respective prior year, claims and claim adjustment expenses associated with prior years decreased by $104 million and $28 million, respectively, due to improved loss ratio for non-medical health claim liabilities and improved claim management. In 2005, the claims and claim adjustment expenses decreased by $41 million due to a refinement in the estimation methodology for non-medical health long- term care claim liabilities, improved loss ratio for non-medical health claims liabilities and improved claim management. GUARANTEES The Company issues annuity contracts which may include contractual guarantees to the contractholder for: (i) return of no less than total deposits made to the contract less any partial withdrawals ("return of net deposits"); and (ii) the highest contract value on a specified anniversary date minus any withdrawals following the contract anniversary, or total deposits made to the contract less any partial withdrawals plus a minimum return ("anniversary contract value" or "minimum return"). The Company also issues annuity contracts that apply a lower rate of funds deposited if the contractholder elects to surrender the contract for cash and a higher rate if the contractholder elects F-60 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to annuitize ("two tier annuities"). These guarantees include benefits that are payable in the event of death or at annuitization. The Company also issues universal and variable life contracts where the Company contractually guarantees to the contractholder a secondary guarantee or a guaranteed paid up benefit. Information regarding the types of guarantees relating to annuity contracts and universal and variable life contracts is as follows:
DECEMBER 31, --------------------------------------------------------------------- 2007 2006 -------------------------------- -------------------------------- IN THE AT IN THE AT EVENT OF DEATH ANNUITIZATION EVENT OF DEATH ANNUITIZATION -------------- ------------- -------------- ------------- (IN MILLIONS) ANNUITY CONTRACTS (1) RETURN OF NET DEPOSITS Separate account value........ $ 3,937 N/A $ 3,233 N/A Net amount at risk (2)........ $ 7(3) N/A $ --(3) N/A Average attained age of contractholders............. 60 years N/A 59 years N/A ANNIVERSARY CONTRACT VALUE OR MINIMUM RETURN Separate account value........ $ 36,404 $ 6,524 $ 34,362 $ 5,273 Net amount at risk (2)........ $ 399(3) $ 86(4) $ 354(3) $ 16(4) Average attained age of contractholders............. 62 years 57 years 61 years 57 years TWO TIER ANNUITIES General account value......... N/A $ 286 N/A $ 296 Net amount at risk (2)........ N/A $ 51(5) N/A $ 53(5) Average attained age of contractholders............. N/A 60 years N/A 58 years
DECEMBER 31, ------------------------------------------------- 2007 2006 ----------------------- ----------------------- SECONDARY PAID UP SECONDARY PAID UP GUARANTEES GUARANTEES GUARANTEES GUARANTEES ---------- ---------- ---------- ---------- (IN MILLIONS) UNIVERSAL AND VARIABLE LIFE CONTRACTS (1) Account value (general and separate account)............................ $ 6,550 $ 1,403 $ 6,094 $ 1,770 Net amount at risk (2)................ $ 103,219(3) $ 13,482(3) $ 101,431(3) $ 14,500(3) Average attained age of policyholders....................... 47 years 54 years 46 years 53 years
-------- (1) The Company's annuity and life contracts with guarantees may offer more than one type of guarantee in each contract. Therefore, the amounts listed above may not be mutually exclusive. (2) The net amount at risk is based on the direct amount at risk (excluding reinsurance). (3) The net amount at risk for guarantees of amounts in the event of death is defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date. F-61 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) The net amount at risk for guarantees of amounts at annuitization is defined as the present value of the minimum guaranteed annuity payments available to the contractholder determined in accordance with the terms of the contract in excess of the current account balance. (5) The net amount at risk for two tier annuities is based on the excess of the upper tier, adjusted for a profit margin, less the lower tier. Information regarding the liabilities for guarantees (excluding base policy liabilities) relating to annuity and universal and variable life contracts is as follows:
UNIVERSAL AND VARIABLE LIFE CONTRACTS ----------------------- ANNUITY CONTRACTS -------------------------- GUARANTEED GUARANTEED DEATH ANNUITIZATION SECONDARY PAID UP BENEFITS BENEFITS GUARANTEES GUARANTEES TOTAL ---------- ------------- ---------- ---------- --------- (IN MILLIONS) Balance at January 1, 2005.. $ 6 $ 7 $ 6 $ 7 $ 26 Incurred guaranteed benefits.................. 4 -- 3 3 10 Paid guaranteed benefits.... (2) -- (1) -- (3) ---------- ------------- ---------- ---------- --------- Balance at December 31, 2005...................... 8 7 8 10 33 Incurred guaranteed benefits.................. 1 -- 1 (1) 1 Paid guaranteed benefits.... (3) -- -- -- (3) ---------- ------------- ---------- ---------- --------- Balance at December 31, 2006...................... 6 7 9 9 31 Incurred guaranteed benefits.................. 4 8 4 3 19 Paid guaranteed benefits.... (2) -- -- -- (2) ---------- ------------- ---------- ---------- --------- Balance at December 31, 2007...................... $ 8 $15 $13 $12 $48 ========== ============= ========== ========== =========
Account balances of contracts with insurance guarantees are invested in separate account asset classes as follows:
DECEMBER 31, ----------------- 2007 2006 ------- ------- (IN MILLIONS) Mutual Fund Groupings Equity................................................ $23,494 $23,510 Bond.................................................. 3,430 2,757 Balanced.............................................. 5,312 1,125 Money Market.......................................... 350 220 Specialty............................................. 402 522 ------- ------- Total.............................................. $32,988 $28,134 ======= =======
8. REINSURANCE The Company's life insurance operations participate in reinsurance activities in order to limit losses, minimize exposure to large risks, and provide additional capacity for future growth. The Company has historically reinsured the mortality risk on new individual life insurance policies primarily on an excess of retention basis or a quota share basis. Until 2005, the Company reinsured up to 90% of the mortality risk for all new individual life insurance policies that it wrote through its various franchises. This practice was initiated by the different franchises for different products starting at various points in time between 1992 and 2000. During 2005, the Company changed its F-62 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) retention practices for certain individual life insurance. Amounts reinsured in prior years remain reinsured under the original reinsurance; however, under the new retention guidelines, the Company reinsures up to 90% of the mortality risk in excess of $1 million for most new individual life insurance policies that it writes through its various franchises and for certain individual life policies the retention limits remained unchanged. On a case by case basis, the Company may retain up to $20 million per life and reinsure 100% of amounts in excess of the Company's retention limits. The Company evaluates its reinsurance programs routinely and may increase or decrease its retention at any time. In addition, the Company reinsures a significant portion of the mortality risk on its individual universal life policies issued since 1983. Placement of reinsurance is done primarily on an automatic basis and also on a facultative basis for risks with specific characteristics. In addition to reinsuring mortality risk as described previously, the Company reinsures other risks, as well as specific coverages. The Company routinely reinsures certain classes of risks in order to limit its exposure to particular travel, avocation and lifestyle hazards. The Company has exposure to catastrophes, which could contribute to significant fluctuations in the Company's results of operations. The Company uses excess of retention and quota share reinsurance arrangements to provide greater diversification of risk and minimize exposure to larger risks. The Company had also protected itself through the purchase of combination risk coverage. This reinsurance coverage pooled risks from several lines of business and included individual and group life claims in excess of $2 million per policy. This combination risk coverage was commuted during 2005. The Company reinsures its business through a diversified group of reinsurers. No single unaffiliated reinsurer has a material obligation to the Company nor is the Company's business substantially dependent upon any reinsurance contracts. The Company is contingently liable with respect to ceded reinsurance should any reinsurer be unable to meet its obligations under these agreements. In the Reinsurance Segment, Reinsurance Group of America, Incorporated ("RGA"), retains a maximum of $6 million of coverage per individual life with respect to its assumed reinsurance business. The amounts in the consolidated statements of income are presented net of reinsurance ceded. Information regarding the effect of reinsurance is as follows:
YEARS ENDED DECEMBER 31, --------------------------- 2007 2006 2005 ------- ------- ------- (IN MILLIONS) Direct premiums.................................. $17,413 $16,960 $16,466 Reinsurance assumed.............................. 5,961 5,061 4,517 Reinsurance ceded................................ (2,029) (1,737) (1,727) ------- ------- ------- Net premiums..................................... $21,345 $20,284 $19,256 ======= ======= ======= Reinsurance recoverables netted against policyholder benefits and claims............... $ 1,637 $ 1,552 $ 1,495 ======= ======= =======
Reinsurance recoverables, included in premiums and other receivables, were $21.2 billion and $5.2 billion at December 31, 2007 and 2006, respectively, including $17.2 billion and $1.2 billion for years ending December 31, 2007 and 2006, respectively, relating to reinsurance of long-term GICs, structured settlement lump sum contracts and closed block liabilities accounted for as financing transactions, and $1.1 billion and $1.4 billion at December 31, 2007 and 2006, respectively, relating to the reinsurance of investment-type contracts held by small market defined contribution plans. Reinsurance and ceded commissions payables, included in other liabilities, were $323 million and $202 million at December 31, 2007 and 2006, respectively. F-63 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has reinsurance agreements with certain of the Holding Company's subsidiaries, including Exeter Reassurance Company, Ltd., Texas Life Insurance Company ("TLIC"), First MetLife Investors Insurance Company, MetLife Insurance Company of Connecticut ("MICC"), MetLife Investors USA Insurance Company ("MLI USA"), MetLife Investors Insurance Company, MetLife Reinsurance Company of Charleston ("MRC"), and MTL, all of which are related parties. At December 31, 2007, the Company had reinsurance-related assets and liabilities from these agreements totaling $17.6 billion and $20.1 billion, respectively. At December 31, 2006, comparable assets and liabilities were $1.7 billion and $5.6 billion, respectively. The following table reflects the related party reinsurance information recorded in income for the:
YEARS ENDED DECEMBER 31, ------------------- 2007 2006 2005 ---- ---- ----- (IN MILLIONS) Assumed premiums...................................... $ 52 $ 42 $ 37 Assumed fees, included in universal life and investment-type product policy fees................. $ 2 $ 1 $ -- Interest earned on assumed reinsurance, included in other revenues...................................... $ (4) $ (3) $ (3) Assumed benefits, included in policyholder benefits and claims.......................................... $ 54 $ 86 $ 108 Assumed benefits, included in interest credited to policyholder account balances....................... $ 18 $ 11 $ 8 Assumed acquisition costs, included in other expenses............................................ $144 $322 $ 137 Ceded premiums........................................ $113 $116 $ 141 Ceded fees, included in universal life and investment- type product policy fees............................ $112 $ 64 $ 218 Ceded fees, included in net investment gains (losses)............................................ $ -- $ -- $ 6 Interest earned on ceded reinsurance, included in other revenues...................................... $ -- $ -- $ 2 Ceded benefits, included in policyholder benefits and claims.............................................. $ 80 $ 69 $ 85 Ceded benefits, included in interest credited to policyholder account balances....................... $ 65 $ 49 $ 42 Ceded benefits, included in policyholder dividends.... $ 29 $ 27 $ 24 Interest costs on ceded reinsurance, included in other expenses............................................ $ 5 $ (2) $(120)
The Company has ceded risks related to guaranteed minimum benefit riders written by the Company to another affiliate. The guaranteed minimum benefit riders directly written by the Company are embedded derivatives and are included within net investment gains (losses). The ceded reinsurance also contain embedded derivatives and changes in their fair value are included within net investment gains (losses). The ceded amounts were $42 million, ($18) million and ($5) million for the years ended December 31, 2007, 2006 and 2005, respectively. Effective January 1, 2005, a subsidiary of the Company, General American Life Insurance Company ("GALIC") entered into a reinsurance agreement to cede an in-force block of business to MLI USA, an affiliate. This agreement covered certain term and universal life policies issued by GALIC on and after January 1, 2000 through December 31, 2004. This agreement also covers certain term and universal life policies issued on or after January 1, 2005. Under this agreement, GALIC transferred $797 million of liabilities and $411 million in assets to MLI USA related to the policies in-force as of December 31, 2004. As a result of the transfer of assets, GALIC recognized a realized gain of $19 million, net of income taxes. GALIC also received and deferred 100% of a $386 million ceding commission resulting in no gain or loss on the transfer of the in-force business as of January 1, 2005. For the policies issued on or after January 1, 2005, GALIC ceded premiums and related fees of $121 million, $119 million and $192 million, respectively, and ceded benefits and related costs of $86 million, $98 million and $143 million, respectively, for the years ended December 31, 2007, 2006 and 2005. F-64 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reinsurance recoverables, included in premiums and other receivables, related to this reinsurance agreement as of December 31, 2007 and 2006 were $1.1 billion and $1.0 billion, respectively. On December 1, 2006, TLIC recaptured business previously ceded under a 2002 reinsurance treaty with the Company. The agreement required the Company to assume, on a co-insurance basis, certain structured settlement business from TLIC. On January 5, 2007, the Company transferred cash in the amount of $989 million, which represented $984 million for the fair value of the returned future policy benefits plus $5 million in interest. For the year ended December 31, 2006, as a result of this transaction, the Company recognized an expense of $184 million. In December 2007, the Company ceded a portion of its closed block liabilities on a coinsurance with funds withheld basis to MRC, an affiliate. The cession to MRC does not transfer significant risk and therefore is accounted for under the deposit method. In connection with this transaction the Company recorded in premiums and other receivables, an affiliated receivable of $16 billion and in other liabilities, an affiliated funds withheld liability of $16 billion. 9. CLOSED BLOCK On April 7, 2000, (the "Demutualization Date"), Metropolitan Life Insurance Company converted from a mutual life insurance company to a stock life insurance company and became a wholly-owned subsidiary of MetLife, Inc. The conversion was pursuant to an order by the New York Superintendent of Insurance (the "Superintendent") approving Metropolitan Life Insurance Company's plan of reorganization, as amended (the "Plan"). On the Demutualization Date, Metropolitan Life Insurance Company established a closed block for the benefit of holders of certain individual life insurance policies of Metropolitan Life Insurance Company. Assets have been allocated to the closed block in an amount that has been determined to produce cash flows which, together with anticipated revenues from the policies included in the closed block, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies, including, but not limited to, provisions for the payment of claims and certain expenses and taxes, and to provide for the continuation of policyholder dividend scales in effect for 1999, if the experience underlying such dividend scales continues, and for appropriate adjustments in such scales if the experience changes. At least annually, the Company compares actual and projected experience against the experience assumed in the then-current dividend scales. Dividend scales are adjusted periodically to give effect to changes in experience. The closed block assets, the cash flows generated by the closed block assets and the anticipated revenues from the policies in the closed block will benefit only the holders of the policies in the closed block. To the extent that, over time, cash flows from the assets allocated to the closed block and claims and other experience related to the closed block are, in the aggregate, more or less favorable than what was assumed when the closed block was established, total dividends paid to closed block policyholders in the future may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect for 1999 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to closed block policyholders and will not be available to stockholders. If the closed block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of the closed block. The closed block will continue in effect as long as any policy in the closed block remains in-force. The expected life of the closed block is over 100 years. The Company uses the same accounting principles to account for the participating policies included in the closed block as it used prior to the Demutualization Date. However, the Company establishes a policyholder dividend obligation for earnings that will be paid to policyholders as additional dividends as described below. The excess of closed block liabilities over closed block assets at the effective date of the demutualization (adjusted to eliminate the impact of related amounts in accumulated other comprehensive income) represents the estimated maximum future earnings from the closed block expected to result from operations attributed to the closed block after income taxes. Earnings of the closed block are recognized in income over the period the policies and contracts F-65 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) in the closed block remain in-force. Management believes that over time the actual cumulative earnings of the closed block will approximately equal the expected cumulative earnings due to the effect of dividend changes. If, over the period the closed block remains in existence, the actual cumulative earnings of the closed block is greater than the expected cumulative earnings of the closed block, the Company will pay the excess of the actual cumulative earnings of the closed block over the expected cumulative earnings to closed block policyholders as additional policyholder dividends unless offset by future unfavorable experience of the closed block and, accordingly, will recognize only the expected cumulative earnings in income with the excess recorded as a policyholder dividend obligation. If over such period, the actual cumulative earnings of the closed block is less than the expected cumulative earnings of the closed block, the Company will recognize only the actual earnings in income. However, the Company may change policyholder dividend scales in the future, which would be intended to increase future actual earnings until the actual cumulative earnings equal the expected cumulative earnings. F-66 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information regarding the closed block liabilities and assets designated to the closed block is as follows:
DECEMBER 31, ---------------- 2007 2006 ------- ------- (IN MILLIONS) CLOSED BLOCK LIABILITIES Future policy benefits.......................................... $43,362 $43,089 Other policyholder funds........................................ 323 282 Policyholder dividends payable.................................. 709 701 Policyholder dividend obligation................................ 789 1,063 Payables for collateral under securities loaned and other transactions................................................. 5,610 6,483 Other liabilities............................................... 290 192 ------- ------- Total closed block liabilities............................... 51,083 51,810 ------- ------- ASSETS DESIGNATED TO THE CLOSED BLOCK Investments: Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $29,631 and $30,286, respectively).... 30,481 31,255 Equity securities available-for-sale, at estimated fair value (cost: $1,555 and $1,184, respectively)...................... 1,875 1,484 Mortgage loans on real estate................................... 7,472 7,848 Policy loans.................................................... 4,290 4,212 Real estate and real estate joint ventures held-for-investment.. 297 242 Short-term investments.......................................... 14 62 Other invested assets........................................... 829 644 ------- ------- Total investments............................................ 45,258 45,747 Cash and cash equivalents......................................... 333 255 Accrued investment income......................................... 485 517 Deferred income tax assets........................................ 640 754 Premiums and other receivables.................................... 151 156 ------- ------- Total assets designated to the closed block.................. 46,867 47,429 ------- ------- Excess of closed block liabilities over assets designated to the closed block.................................................... 4,216 4,381 ------- ------- Amounts included in accumulated other comprehensive income: Unrealized investment gains (losses), net of income tax of $424 and $457, respectively....................................... 751 812 Unrealized gains (losses) on derivative instruments, net of income tax of ($19) and ($18), respectively.................. (33) (32) Allocated to policyholder dividend obligation, net of income tax of ($284) and ($381), respectively........................... (505) (681) ------- ------- Total amounts included in accumulated other comprehensive income....................................................... 213 99 ------- ------- Maximum future earnings to be recognized from closed block assets and liabilities................................................. $ 4,429 $ 4,480 ======= =======
F-67 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information regarding the closed block policyholder dividend obligation is as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2007 2006 2005 ------ ------ ------ (IN MILLIONS) Balance at January 1,..................................... $1,063 $1,607 $2,243 Impact on revenues, net of expenses and income tax........ -- (114) (9) Change in unrealized investment and derivative gains (losses)................................................ (274) (430) (627) ------ ------ ------ Balance at December 31,................................... $ 789 $1,063 $1,607 ====== ====== ======
Information regarding the closed block revenues and expenses is as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2007 2006 2005 ------ ------ ------ (IN MILLIONS) REVENUES Premiums................................................ $2,870 $2,959 $3,062 Net investment income and other revenues................ 2,350 2,355 2,382 Net investment gains (losses)........................... 28 (130) 10 ------ ------ ------ Total revenues....................................... 5,248 5,184 5,454 ------ ------ ------ EXPENSES Policyholder benefits and claims........................ 3,457 3,474 3,478 Policyholder dividends.................................. 1,492 1,479 1,465 Change in policyholder dividend obligation.............. -- (114) (9) Other expenses.......................................... 231 247 263 ------ ------ ------ Total expenses....................................... 5,180 5,086 5,197 ------ ------ ------ Revenues, net of expenses before income tax............... 68 98 257 Income tax................................................ 21 34 90 ------ ------ ------ Revenues, net of expenses and income tax from continuing operations.............................................. 47 64 167 Revenues, net of expenses and income tax from discontinued operations.............................................. -- 1 -- ------ ------ ------ Revenues, net of expenses and income tax and discontinued operations.............................................. $ 47 $ 65 $ 167 ====== ====== ======
The change in the maximum future earnings of the closed block is as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2007 2006 2005 ------ ------ ------ (IN MILLIONS) Balance at December 31,............................... $4,429 $4,480 $4,545 Less: Cumulative effect of a change in accounting principle, net of income tax..................... (4) -- -- ------ ------ ------ Balance at January 1,................................. 4,480 4,545 4,712 ------ ------ ------ Change during year.................................... $ (47) $ (65) $ (167) ====== ====== ======
Metropolitan Life Insurance Company charges the closed block with federal income taxes, state and local premium taxes, and other additive state or local taxes, as well as investment management expenses relating to the F-68 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) closed block as provided in the Plan. Metropolitan Life Insurance Company also charges the closed block for expenses of maintaining the policies included in the closed block. 10. LONG-TERM AND SHORT-TERM DEBT Long-term and short-term debt outstanding is as follows:
INTEREST RATES ------------------------ DECEMBER 31, WEIGHTED --------------- RANGE AVERAGE MATURITY 2007 2006 ------------- -------- --------- ------ ------ (IN MILLIONS) Senior notes......................... 5.63% - 6.75% 6.08% 2011-2017 $ 497 $ 200 Surplus notes -- affiliated.......... 5.85% - 7.38% 6.61% 2009-2037 1,394 800 Surplus notes........................ 7.63% - 7.88% 7.76% 2015-2025 697 697 Capital notes -- affiliated.......... 7.13% 7.13% 2032-2033 500 500 Fixed rate notes..................... 5.50% - 7.25% 6.68% 2008 73 107 Other notes with varying interest rates.............................. 4.45% - 4.50% 4.47% 2010-2012 3 3 Capital lease obligations............ 51 62 ------ ------ Total long-term debt................. 3,215 2,369 Total short-term debt................ 357 833 ------ ------ Total.............................. $3,572 $3,202 ====== ======
The aggregate maturities of long-term debt as of December 31, 2007 for the next five years are $85 million in 2008, $13 million in 2009, $2 million in 2010, $201 million in 2011, $1 million in 2012 and $2,912 million thereafter. Capital lease obligations are collateralized and rank highest in priority, followed by unsecured senior debt which consists of senior notes, fixed rate notes and other notes with varying interest rates, followed by subordinated debt which consists of junior subordinated debentures. Payments of interest and principal on the Company's surplus notes, which are subordinate to all other debt, may be made only with the prior approval of the insurance department of the state of domicile. SENIOR NOTES In March 2007, RGA issued $300 million of 10-year senior notes with a fixed rate of 5.625%, payable semiannually. RGA used $50 million of the net proceeds of the offering to repay existing debt during the year ended December 31, 2007. RGA repaid a $100 million 7.25% senior note which matured in April 2006. SURPLUS NOTES In December 2007, the Company repaid the $800 million surplus note issued in December 2005 with an interest rate of 5.00% to the Holding Company and then issued to the Holding Company a $700 million surplus note with an interest rate of LIBOR plus 1.15%. In December 2007, the Company issued a $694 million surplus note to MetLife Capital Trust IV, an affiliate, with an interest rate of 7.38%. The Company repaid a $250 million 7% surplus note which matured on November 1, 2005. F-69 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SHORT-TERM DEBT During the years ended December 31, 2007, 2006 and 2005, the Company's short-term debt consisted of commercial paper with a weighted average interest rate of 5.1%, 5.1% and 3.3%, respectively. During the years ended December 31, 2007, 2006 and 2005, the commercial paper's average daily balance was $927 million, $768 million and $944 million, respectively and was outstanding for an average of 25 days, 53 days and 47 days, respectively. INTEREST EXPENSE Interest expense related to the Company's indebtedness included in other expenses was $222 million, $205 million and $174 million for the years ended December 31, 2007, 2006 and 2005, respectively, and does not include interest expense on collateral financing arrangements, junior subordinated debt securities, or shares subject to mandatory redemption. See Notes 11, 12, and 13. These amounts include $78 million, $76 million and $36 million of interest expense related to affiliated debt for the years ended December 31, 2007, 2006 and 2005, respectively. CREDIT AND COMMITTED FACILITIES AND LETTERS OF CREDIT Credit Facilities. The Company maintains committed and unsecured credit facilities aggregating $3.8 billion as of December 31, 2007. When drawn upon, these facilities bear interest at varying rates in accordance with the respective agreements. The facilities can be used for general corporate purposes and at December 31, 2007, $3.0 billion of the facilities also served as back-up lines of credit for the Company's commercial paper programs. Information on these credit facilities as of December 31, 2007 is as follows:
LETTER OF CREDIT UNUSED BORROWER(S) EXPIRATION CAPACITY ISSUANCES DRAWDOWNS COMMITMENTS ----------- ---------- -------- --------- ---------- ------------ (IN MILLIONS) MetLife, Inc. and MetLife Funding, Inc. ............................ June 2012 (1) $ 3,000 $ 1,532 $ -- $ 1,468 Reinsurance Group of America, Incorporated..................... May 2008 30 -- 30 -- Reinsurance Group of America, Incorporated..................... September 2012 (2) 750 406 -- 344 Reinsurance Group of America, Incorporated..................... March 2011 44 -- -- 44 -------- -------- ---------- ------------ Total............................ $3,824 $1,938 $30 $1,856 ======== ======== ========== ============
-------- (1) In June 2007, the Holding Company and MetLife Funding, Inc. (collectively, the "Borrowers") entered into a $3.0 billion credit agreement with various financial institutions, the proceeds of which are available to be used for general corporate purposes, to support their commercial paper programs and for the issuance of letters of credit. All borrowings under the credit agreement must be repaid by June 2012, except that letters of credit outstanding upon termination may remain outstanding until June 2013. The borrowers and the lenders under this facility may agree to extend the term of all or part of the facility to no later than June 2014, except that letters of credit outstanding upon termination may remain outstanding until June 2015. The $1.5 billion credit agreement, with an April 2009 expiration and the $1.5 billion credit agreement, with an April 2010 expiration, were both terminated in June 2007. (2) In September 2007, RGA and certain of its subsidiaries entered into a credit agreement with various financial institutions. Under the credit agreement, RGA may borrow and obtain letters of credit for general corporate purposes for its own account or for the account of its subsidiaries with an overall credit facility amount of up to $750 million. The credit agreement replaced a former credit agreement in the amount of up to $600 million which was scheduled to expire on September 29, 2010. F-70 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Committed Facilities. Information on committed facilities as of December 31, 2007 is as follows:
LETTERS OF CREDIT UNUSED MATURITY ACCOUNT PARTY/BORROWER(S) EXPIRATION CAPACITY ISSUANCES DRAWDOWNS COMMITMENTS (YEARS) ------------------------- ------------- -------- ---------- --------- ----------- -------- (IN MILLIONS) Exeter Reassurance Co Ltd., MetLife Inc., & Missouri Re............... June 2016 (1) $ 500 $490 $ -- $ 10 8 Timberlake Financial L.L.C. ........ June 2036 (2) 1,000 -- 850 150 29 ------- ------ --------- ---------- Total............................. $ 1,500 $ 490 $ 850 $ 160 ======= ====== ========= ==========
-------- (1) Letters of credit and replacements or renewals thereof issued under this facility of $280 million, and $10 million and $200 million are set to expire no later than December 2015, March 2016 and June 2016, respectively. (2) As described in Note 11, RGA may, at its option, offer up to $150 million of additional notes under this facility in the future. Letters of Credit. At December 31, 2007, the Company had outstanding $2.5 billion in letters of credit, all of which are associated with the aforementioned credit facilities, from various financial institutions, of which $2.4 billion were part of credit facilities. As commitments associated with letters of credit and financing arrangements may expire unused, these amounts do not necessarily reflect the Company's actual future cash funding requirements. 11. COLLATERAL FINANCING ARRANGEMENTS In June 2006, Timberlake Financial L.L.C., ("Timberlake Financial"), a subsidiary of RGA, completed an offering of $850 million of Series A Floating Rate Insured Notes due June 2036 in a private placement. Interest on the notes accrues at an annual rate of 1-month LIBOR plus 29 basis points payable monthly. The payment of interest and principal on the notes is insured through a financial guaranty insurance policy with a third party. The notes represent senior, secured indebtedness of Timberlake Financial with no recourse to RGA or its other subsidiaries. Up to $150 million of additional notes may be offered in the future. In order to make payments of principal and interest on the notes, Timberlake Financial will rely upon the receipt of interest and principal payments on surplus note and dividend payments from its wholly-owned subsidiary, Timberlake Reinsurance Company II ("Timberlake Re"), a South Carolina captive insurance company. The ability of Timberlake Re to make interest and principal payments on the surplus note and dividend payments to Timberlake Financial is contingent upon South Carolina regulatory approval and the performance of specified term life insurance policies with guaranteed level premiums retroceded by RGA's subsidiary, RGA Reinsurance Company ("RGA Reinsurance"), to Timberlake Re. Proceeds from the offering of the notes, along with a $113 million direct investment by RGA, collateralize the notes and are not available to satisfy the general obligations of RGA or the Company. Most of these assets were placed in a trust and provide long-term collateral as support for statutory reserves required by U.S. Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX) on term life insurance policies with guaranteed level premium periods reinsured by RGA Reinsurance. The trust is consolidated by Timberlake Re which in-turn is consolidated by Timberlake Financial. Timberlake Financial is considered to be a VIE and RGA is considered to be the primary beneficiary. As such, the results of Timberlake Financial have been consolidated by RGA and ultimately by the Company. At December 31, 2007, the Company held assets in trust of $899 million associated with the transaction. In addition, the Company held $50 million in custody as of December 31, 2007. The Company's consolidated balance sheets include the assets of Timberlake Financial recorded as fixed maturity securities and other invested assets, which consists of the restricted cash and cash equivalents held in custody. The Company's consolidated statements F-71 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of income include the investment returns on the assets held as collateral as investment income and the interest on the notes is included as a component of other expenses. Issuance costs associated with the offering of the notes of $13 million have been capitalized, are included in other assets, and are amortized using the effective interest method over the estimated life of the notes. Total interest expense was $52 million and $26 million for the years ended December 31, 2007 and 2006, respectively. 12. JUNIOR SUBORDINATED DEBENTURES In December 2005, RGA issued junior subordinated debentures with a face amount of $400 million. Interest is payable semi-annually at a fixed rate of 6.75% up to but not including the scheduled redemption date, December 15, 2015. The debentures may be redeemed (i) in whole or in part, at any time on or after December 15, 2015 at their principal amount plus accrued and unpaid interest to the date of redemption, or (ii) in whole or in part, prior to December 15, 2015 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, a make-whole price. In the event the debentures are not redeemed on or before the scheduled redemption date of December 15, 2015, interest on these debentures will accrue at an annual rate of 3-month LIBOR plus a margin equal to 2.665%, payable quarterly in arrears. The final maturity of the debentures is December 15, 2065. RGA has the right to, and in certain circumstances the requirement to, defer interest payments on the debentures for a period up to ten years. Upon an optional or mandatory deferral of interest payments, RGA is generally not permitted to pay common stock dividends or make payments of interest or principal on securities which rank equal or junior to the subordinated debentures, until the accrued and unpaid interest on the subordinated debentures is paid. Interest compounds during periods of deferral. Issuance costs associated with the offering of the debentures of $6 million have been capitalized, are included in other assets, and are amortized using the effective interest method over the period from the issuance date of the debentures until their scheduled redemption. Interest expense on the debentures was $27 million, $27 million and $2 million for the years ended December 31, 2007, 2006 and 2005, respectively. 13. SHARES SUBJECT TO MANDATORY REDEMPTION AND COMPANY-OBLIGATED MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS GenAmerica Capital I. In June 1997, GenAmerica Corporation ("GenAmerica") issued $125 million of 8.525% capital securities through a wholly-owned subsidiary trust, GenAmerica Capital I. In October 2007, GenAmerica redeemed these securities which were due to mature on June 30, 2027. As a result of this redemption, the Company recognized additional interest expense of $10 million. Capital securities outstanding were $119 million, net of unamortized discounts of $6 million at December 31, 2006. Interest expense on these instruments is included in other expenses and was $20 million, $11 million and $11 million for the years ended December 31, 2007, 2006 and 2005, respectively. RGA Capital Trust I. In December 2001, RGA, through its wholly-owned trust, RGA Capital Trust I (the "RGA Trust"), issued 4,500,000 Preferred Income Equity Redeemable Securities ("PIERS") Units. Each PIERS unit consists of: (i) a preferred security issued by the RGA Trust, having a stated liquidation amount of $50 per unit, representing an undivided beneficial ownership interest in the assets of the RGA Trust, which consist solely of junior subordinated debentures issued by RGA which have a principal amount at maturity of $50 and a stated maturity of March 18, 2051; and (ii) a warrant to purchase, at any time prior to December 15, 2050, 1.2508 shares of RGA stock at an exercise price of $50. The fair market value of the warrant on the issuance date was $14.87 and is detachable from the preferred security. RGA fully and unconditionally guarantees, on a subordinated basis, the obligations of the Trust under the preferred securities. The preferred securities and subordinated debentures were issued at a discount (original issue discount) to the face or liquidation value of $14.87 per security. The securities will accrete to their F-72 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $50 face/liquidation value over the life of the security on a level yield basis. The weighted average effective interest rate on the preferred securities and the subordinated debentures is 8.25% per annum. Capital securities outstanding were $159 million, net of unamortized discounts of $66 million, at both December 31, 2007 and 2006. Interest expense on these instruments is included in other expenses and was $13 million for each of the years ended December 31, 2007, 2006 and 2005. 14. INCOME TAXES The provision for income tax from continuing operations is as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2007 2006 2005 ------ ------ ------ (IN MILLIONS) Current: Federal........................................... $1,066 $ 492 $ 828 State and local................................... 22 5 64 Foreign........................................... 19 20 21 ------ ------ ------ Subtotal.......................................... 1,107 517 913 ------ ------ ------ Deferred: Federal........................................... $ 11 $100 $ 169 State and local................................... 18 19 11 Foreign........................................... 2 -- -- ------ ------ ------ Subtotal.......................................... 31 119 180 ------ ------ ------ Provision for income tax............................ $1,138 $636 $1,093 ====== ====== ======
The reconciliation of the income tax provision at the U.S. statutory rate to the provision for income tax as reported for continuing operations is as follows:
YEARS ENDED DECEMBER 31, ------------------------- 2007 2006 2005 ------ ------- ------ (IN MILLIONS) Tax provision at U.S. statutory rate................ $1,241 $ 860 $1,230 Tax effect of: Tax-exempt investment income...................... (160) (167) (84) State and local income tax........................ 33 19 33 Prior year tax.................................... 38 (26) (20) Foreign tax rate differential and change in valuation allowance............................ (18) (23) (25) Other, net........................................ 4 (27) (41) ------ ------- ------ Provision for income tax............................ $1,138 $ 636 $1,093 ====== ======= ======
F-73 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Net deferred income tax assets and liabilities consisted of the following:
DECEMBER 31, ----------------- 2007 2006 ------- ------- (IN MILLIONS) Deferred income tax assets: Policyholder liabilities and receivables............... $ 2,908 $ 2,122 Net operating loss carryforwards....................... 372 788 Employee benefits...................................... 162 440 Capital loss carryforwards............................. 4 -- Tax credit carryforwards............................... 4 -- Litigation-related and government mandated............. 45 62 Other.................................................. 55 32 ------- ------- 3,550 3,444 Less: Valuation allowance.............................. 16 11 ------- ------- 3,534 3,433 ------- ------- Deferred income tax liabilities: Investments............................................ 1,625 1,475 DAC.................................................... 3,139 3,441 Net unrealized investment gains........................ 689 968 Other.................................................. 7 2 ------- ------- 5,460 5,886 ------- ------- Net deferred income tax liability........................ $(1,926) $(2,453) ======= =======
Domestic net operating loss carryforwards amount to $1,011 million at December 31, 2007 and will expire beginning in 2019. Foreign net operating loss carryforwards amount to $55 million at December 31, 2007 and were generated in various foreign countries with expiration periods of five years to indefinite expiration. Capital loss carryforwards amount to $11 million at December 31, 2007 and will expire beginning in 2010. Tax credit carryforwards amount to $4 million at December 31, 2007. The Company has recorded a valuation allowance related to tax benefits of certain foreign net operating loss carryforwards. The valuation allowance reflects management's assessment, based on available information, that it is more likely than not that the deferred income tax asset for certain foreign net operating loss carryforwards will not be realized. The tax benefit will be recognized when management believes that it is more likely than not that these deferred income tax assets are realizable. In 2007, the Company recorded $5 million of additional deferred income tax valuation allowance related to certain foreign net operating loss carryforwards. The Company files income tax returns with the U.S. federal government and various state and local jurisdictions, as well as foreign jurisdictions. The Company is under continuous examination by the Internal Revenue Service ("IRS") and other tax authorities in jurisdictions in which the Company has significant business operations. The income tax years under examination vary by jurisdiction. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2000. In the first quarter of 2005, the IRS commenced an examination of the Company's U.S. income tax returns for 2000 through 2002 that is anticipated to be completed in 2008. F-74 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As a result of the implementation of FIN 48 on January 1, 2007, the Company recognized a $35 million increase in the liability for unrecognized tax benefits, an $11 million decrease in the interest liability for unrecognized tax benefits, and a corresponding reduction to the January 1, 2007 balance of retained earnings of $13 million, net of $11 million of minority interest. The Company's total amount of unrecognized tax benefits upon adoption of FIN 48 was $993 million. The Company reclassified, at adoption, $577 million of current income tax payables to the liability for unrecognized tax benefits included within other liabilities. The Company also reclassified, at adoption, $381 million of deferred income tax liabilities, for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility, to the liability for unrecognized tax benefits. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. The total amount of unrecognized tax benefits as of January 1, 2007 that would affect the effective tax rate, if recognized, was $612 million. The Company also had $228 million of accrued interest, included within other liabilities, as of January 1, 2007. The Company classifies interest accrued related to unrecognized tax benefits in interest expense, while penalties are included within income tax expense. As of December 31, 2007, the Company's total amount of unrecognized tax benefits is $853 million and the total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, is $503 million. The total amount of unrecognized tax benefits decreased by $140 million from the date of adoption primarily due to settlements reached with the IRS with respect to certain significant issues involving demutualization, post-sale purchase price adjustments, and reinsurance offset by additions for tax positions of the current year. As a result of the settlements, items within the liability for unrecognized tax benefits, in the amount of $171 million, were reclassified to current and deferred income taxes, as applicable, and a payment of $156 million was made in December of 2007 with the remaining $15 million to be paid in future years. In addition, the Company's liability for unrecognized tax benefits may change significantly in the next 12 months pending the outcome of remaining issues associated with the current IRS audit including demutualization, leasing, tax-exempt income, transfer pricing and tax credits. Management is working to resolve the remaining audit items directly with IRS auditors as well as through available accelerated IRS resolution programs and may protest any unresolved issues through the IRS appeals process and, possibly, litigation, the timing and extent of which is uncertain. Therefore, a reasonable estimate of the range of a payment or change in the liability cannot be made at this time; however, the Company continues to believe that the ultimate resolution of the issues will not result in a material effect on its consolidated financial statements, although the resolution of income tax matters could impact the Company's effective tax rate for a particular future period. A reconciliation of the beginning and ending amount of unrecognized tax benefits, for the year ended December 31, 2007, is as follows:
TOTAL UNRECOGNIZED TAX BENEFITS ------------------ (IN MILLIONS) Balance at January 1, 2007 (date of adoption)............. $ 993 Additions for tax positions of prior years................ 32 Reductions for tax positions of prior years............... (57) Additions for tax positions of current year............... 60 Settlements with tax authorities.......................... (171) Lapses of statutes of limitations......................... (4) ---------------- Balance at December 31, 2007.............................. $ 853 ================
F-75 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During the year ended December 31, 2007, the Company recognized $89 million in interest expense associated with the liability for unrecognized tax benefits. As of December 31, 2007, the Company had $231 million of accrued interest associated with the liability for unrecognized tax benefits. The $3 million increase from the date of adoption in accrued interest associated with the liability for unrecognized tax benefits resulted from an increase of $89 million of interest expense and an $86 million decrease primarily resulting from the aforementioned IRS settlements. During 2007, $73 million of the $86 million, resulting from IRS settlements, has been reclassified to current income tax payable and the remaining $13 million reduced interest expense. On September 25, 2007, the IRS issued Revenue Ruling 2007-61, which announced its intention to issue regulations with respect to certain computational aspects of the Dividends Received Deduction ("DRD") on separate account assets held in connection with variable annuity contracts. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that would have changed accepted industry and IRS interpretations of the statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other interested parties will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are unknown at this time. For the year ended December 31, 2007, the Company recognized an income tax benefit of $113 million related to the separate account DRD. 15. CONTINGENCIES, COMMITMENTS AND GUARANTEES CONTINGENCIES LITIGATION The Company is a defendant in a large number of litigation matters. In some of the matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading practice in the United States permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. This variability in pleadings, together with the actual experience of the Company in litigating or resolving through settlement numerous claims over an extended period of time, demonstrate to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value. Thus, unless stated below, the specific monetary relief sought is not noted. Due to the vagaries of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time may normally be inherently impossible to ascertain with any degree of certainty. Inherent uncertainties can include how fact finders will view individually and in their totality documentary evidence, the credibility and effectiveness of witnesses' testimony, and how trial and appellate courts will apply the law in the context of the pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law. On a quarterly and annual basis, the Company reviews relevant information with respect to litigation and contingencies to be reflected in the Company's consolidated financial statements. The review includes senior legal and financial personnel. In 2007, the Company received $39 million upon the resolution of an indemnification claim associated with the 2000 acquisition of GALIC, and the Company reduced legal liabilities by $31 million after the settlement of certain cases. Unless stated below, estimates of possible losses or ranges of loss for particular matters cannot in the ordinary course be made with a reasonable degree of certainty. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been F-76 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) established for a number of the matters noted below; in 2007 the Company increased legal liabilities for pending sales practices, employment and intellectual property litigation matters against the Company. It is possible that some of the matters could require the Company to pay damages or make other expenditures or establish accruals in amounts that could not be estimated as of December 31, 2007. Demutualization Actions Several lawsuits were brought in 2000 challenging the fairness of the Plan and the adequacy and accuracy of Metropolitan Life Insurance Company's disclosure to policyholders regarding the Plan. The actions discussed below name as defendants some or all of Metropolitan Life Insurance Company, the Holding Company, and individual directors. Metropolitan Life Insurance Company, the Holding Company, and the individual directors believe they have meritorious defenses to the plaintiffs' claims and are contesting vigorously all of the plaintiffs' claims in these actions. Fiala, et al. v. Metropolitan Life Ins. Co., et al. (Sup. Ct., N.Y. County, filed March 17, 2000). The plaintiffs in the consolidated state court class actions seek compensatory relief and punitive damages against Metropolitan Life Insurance Company, the Holding Company, and individual directors. On January 30, 2007, the trial court signed an order certifying a litigation class of present and former policyholders on plaintiffs' claim that defendants violated section 7312 of the New York Insurance Law, but denying plaintiffs' motion to certify a litigation class with respect to a common law fraud claim. Plaintiffs and defendants have filed notices of appeal from this order. The court has directed various forms of class notice. In re MetLife Demutualization Litig. (E.D.N.Y., filed April 18, 2000). In this class action against Metropolitan Life Insurance Company and the Holding Company, plaintiffs served a second consolidated amended complaint in 2004. Plaintiffs assert violations of the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in connection with the Plan, claiming that the Policyholder Information Booklets failed to disclose certain material facts and contained certain material misstatements. They seek rescission and compensatory damages. By orders dated July 19, 2005 and August 29, 2006, the federal trial court certified a litigation class of present and former policyholders. The court has not yet directed the manner and form of class notice. Asbestos-Related Claims Metropolitan Life Insurance Company is and has been a defendant in a large number of asbestos-related suits filed primarily in state courts. These suits principally allege that the plaintiff or plaintiffs suffered personal injury resulting from exposure to asbestos and seek both actual and punitive damages. Metropolitan Life Insurance Company has never engaged in the business of manufacturing, producing, distributing or selling asbestos or asbestos- containing products nor has Metropolitan Life Insurance Company issued liability or workers' compensation insurance to companies in the business of manufacturing, producing, distributing or selling asbestos or asbestos- containing products. The lawsuits principally have focused on allegations with respect to certain research, publication and other activities of one or more of Metropolitan Life Insurance Company's employees during the period from the 1920's through approximately the 1950's and allege that Metropolitan Life Insurance 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. Metropolitan Life Insurance Company believes that it should not have legal liability in these cases. The outcome of most asbestos litigation matters, however, is uncertain and can be impacted by numerous variables, including differences in legal rulings in various jurisdictions, the nature of the alleged injury, and factors unrelated to the ultimate legal merit of the claims asserted against Metropolitan Life Insurance Company. Metropolitan Life Insurance Company employs a number of resolution strategies to manage its asbestos loss exposure, including seeking resolution of pending litigation by judicial rulings and settling litigation under appropriate circumstances. F-77 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Claims asserted against Metropolitan Life Insurance Company have included negligence, intentional tort and conspiracy concerning the health risks associated with asbestos. Metropolitan Life Insurance Company's defenses (beyond denial of certain factual allegations) include that: (i) Metropolitan Life Insurance Company owed no duty to the plaintiffs -- it had no special relationship with the plaintiffs and did not manufacture, produce, distribute or sell the asbestos products that allegedly injured plaintiffs; (ii) plaintiffs did not rely on any actions of Metropolitan Life Insurance Company; (iii) Metropolitan Life Insurance Company's conduct was not the cause of the plaintiffs' injuries; (iv) plaintiffs' exposure occurred after the dangers of asbestos were known; and (v) the applicable time with respect to filing suit has expired. During the course of the litigation, certain trial courts have granted motions dismissing claims against Metropolitan Life Insurance Company, while other trial courts have denied Metropolitan Life Insurance Company's motions to dismiss. There can be no assurance that Metropolitan Life Insurance Company will receive favorable decisions on motions in the future. While most cases brought to date have settled, Metropolitan Life Insurance Company intends to continue to defend aggressively against claims based on asbestos exposure, including defending claims at trials. The approximate total number of asbestos personal injury claims pending against Metropolitan Life Insurance Company as of the dates indicated, the approximate number of new claims during the years ended on those dates and the approximate total settlement payments made to resolve asbestos personal injury claims at or during those years are set forth in the following table:
DECEMBER 31, ---------------------------- 2007 2006 2005 ------- ------- -------- (IN MILLIONS, EXCEPT NUMBER OF CLAIMS) Asbestos personal injury claims at year end...... 79,717 87,070 100,250 Number of new claims during the year............. 7,161 7,870 18,500 Settlement payments during the year (1).......... $ 28.2 $ 35.5 $ 74.3
-------- (1) Settlement payments represent payments made by Metropolitan Life Insurance Company during the year in connection with settlements made in that year and in prior years. Amounts do not include Metropolitan Life Insurance Company's attorneys' fees and expenses and do not reflect amounts received from insurance carriers. In 2004, Metropolitan Life Insurance Company received approximately 23,900 new claims, ending the year with a total of approximately 108,000 claims, and paid approximately $85.5 million for settlements reached in 2004 and prior years. In 2003, Metropolitan Life Insurance Company received approximately 58,750 new claims, ending the year with a total of approximately 111,700 claims, and paid approximately $84.2 million for settlements reached in 2003 and prior years. The number of asbestos cases that may be brought or the aggregate amount of any liability that Metropolitan Life Insurance Company may ultimately incur is uncertain. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for asbestos-related claims. Metropolitan Life Insurance Company's recorded asbestos liability is based on its estimation of the following elements, as informed by the facts presently known to it, its understanding of current law, and its past experiences: (i) the reasonably probable and estimable liability for asbestos claims already asserted against Metropolitan Life Insurance Company, including claims settled but not yet paid; (ii) the reasonably probable and estimable liability for asbestos claims not yet asserted against Metropolitan Life Insurance Company, but which Metropolitan Life Insurance Company believes are reasonably probable of assertion; and (iii) the legal defense costs associated with the foregoing claims. Significant assumptions underlying Metropolitan Life Insurance Company's analysis of the adequacy of its recorded liability with respect to asbestos litigation include: (i) the number of future claims; (ii) the cost to resolve claims; and (iii) the cost to defend claims. Metropolitan Life Insurance Company reevaluates on a quarterly and annual basis its exposure from asbestos litigation, including studying its claims experience, reviewing external literature regarding asbestos claims F-78 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) experience in the United States, assessing relevant trends impacting asbestos liability and considering numerous variables that can affect its asbestos liability exposure on an overall or per claim basis. These variables include bankruptcies of other companies involved in asbestos litigation, legislative and judicial developments, the number of pending claims involving serious disease, the number of new claims filed against it and other defendants, and the jurisdictions in which claims are pending. As previously disclosed, in 2002 Metropolitan Life Insurance Company increased its recorded liability for asbestos-related claims by $402 million from approximately $820 million to $1,225 million. Metropolitan Life Insurance Company regularly reevaluates its exposure from asbestos litigation and has updated its liability analysis for asbestos-related claims through December 31, 2007. The ability of Metropolitan Life Insurance Company to estimate its ultimate asbestos exposure is subject to considerable uncertainty, and the conditions impacting its liability can be dynamic and subject to change. The availability of reliable data is limited and it is difficult to predict with any certainty the numerous variables that can affect liability estimates, including the number of future claims, the cost to resolve claims, the disease mix and severity of disease in pending and future claims, the impact of the number of new claims filed in a particular jurisdiction and variations in the law in the jurisdictions in which claims are filed, the possible impact of tort reform efforts, the willingness of courts to allow plaintiffs to pursue claims against Metropolitan Life Insurance Company when exposure to asbestos took place after the dangers of asbestos exposure were well known, and the impact of any possible future adverse verdicts and their amounts. The ability to make estimates regarding ultimate asbestos exposure declines significantly as the estimates relate to years further in the future. In the Company's judgment, there is a future point after which losses cease to be probable and reasonably estimable. It is reasonably possible that the Company's total exposure to asbestos claims may be materially greater than the asbestos liability currently accrued and that future charges to income may be necessary. While the potential future charges could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known by management, management does not believe any such charges are likely to have a material adverse effect on the Company's financial position. During 1998, Metropolitan Life Insurance Company paid $878 million in premiums for excess insurance policies for asbestos-related claims. The excess insurance policies for asbestos-related claims provide for recovery of losses up to $1.5 billion, which is in excess of a $400 million self-insured retention. The Company's initial option to commute the excess insurance policies for asbestos-related claims arises at the end of 2008. Thereafter, the Company will have a commutation right every five years. The excess insurance policies for asbestos-related claims are also subject to annual and per claim sublimits. Amounts exceeding the sublimits during 2007, 2006 and 2005 were approximately $16 million, $8 million and $0, respectively. The Company continues to study per claim averages, and there can be no assurance as to the number and cost of claims resolved in the future, including related defense costs, and the applicability of the sublimits to these costs. Amounts are recoverable under the policies annually with respect to claims paid during the prior calendar year. Although amounts paid by Metropolitan Life Insurance Company in any given year that may be recoverable in the next calendar year under the policies will be reflected as a reduction in the Company's operating cash flows for the year in which they are paid, management believes that the payments will not have a material adverse effect on the Company's liquidity. Each asbestos-related policy contains an experience fund and a reference fund that provide for payments to Metropolitan Life Insurance Company at the commutation date if the reference fund is greater than zero at commutation or pro rata reductions from time to time in the loss reimbursements to Metropolitan Life Insurance Company if the cumulative return on the reference fund is less than the return specified in the experience fund. The return in the reference fund is tied to performance of the Standard & Poor's ("S&P") 500 Index and the Lehman Brothers Aggregate Bond Index. A claim with respect to the prior year was made under the excess insurance policies in each year from 2003 through 2007 for the amounts paid with respect to asbestos litigation in excess of the retention. As the performance of the indices impacts the return in the reference fund, it is possible that loss reimbursements to the Company and the recoverable amount with respect to later periods may be less than the F-79 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amount of the recorded losses. Foregone loss reimbursements may be recovered upon commutation depending upon future performance of the reference fund. If at some point in the future, the Company believes the liability for probable and reasonably estimable losses for asbestos-related claims should be increased, an expense would be recorded and the insurance recoverable would be adjusted subject to the terms, conditions and limits of the excess insurance policies. Portions of the change in the insurance recoverable would be recorded as a deferred gain and amortized into income over the estimated remaining settlement period of the insurance policies. The foregone loss reimbursements were approximately $56.1 million with respect to claims for the period of 2002 through 2006 and are estimated, as of December 31, 2007, to be approximately $69.1 million in the aggregate, including future years. Sales Practices Claims Over the past several years, Metropolitan Life Insurance Company; New England Mutual Life Insurance Company, New England Life Insurance Company and New England Securities Corporation (collectively "New England"); and GALIC; have faced numerous claims, including class action lawsuits, alleging improper marketing or sales of individual life insurance policies, annuities, mutual funds or other products. As of December 31, 2007, there were approximately 130 sales practices litigation matters pending against the Company. The Company continues to vigorously defend against the claims in these matters. Some sales practices claims have been resolved through settlement. Other sales practices claims have been won by dispositive motions or have gone to trial. Most of the current cases seek substantial damages, including in some cases punitive and treble damages and attorneys' fees. Additional litigation relating to the Company's marketing and sales of individual life insurance, mutual funds or other products may be commenced in the future. Two putative class action lawsuits involving sales practices claims are pending against Metropolitan Life Insurance Company in Canada. In Jacynthe Evoy- Larouche v. Metropolitan Life Ins. Co. (Que. Super. Ct., filed March 1998), plaintiff alleges misrepresentations regarding dividends and future payments for life insurance policies and seeks unspecified damages. In Ace Quan v. Metropolitan Life Ins. Co. (Ont. Gen. Div., filed April 1997), plaintiff alleges breach of contract and negligent misrepresentations relating to, among other things, life insurance premium payments and seeks damages, including punitive damages. Regulatory authorities in a small number of states have had investigations or inquiries relating to Metropolitan Life Insurance Company's, New England's, or GALIC's sales of individual life insurance policies or annuities or other products. Over the past several years, these and a number of investigations by other regulatory authorities were resolved for monetary payments and certain other relief. The Company may continue to resolve investigations in a similar manner. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for sales practices claims against Metropolitan Life Insurance Company, New England, and GALIC. Regulatory Matters The Company receives and responds to subpoenas or other inquiries from state regulators, including state insurance commissioners; state attorneys general or other state governmental authorities; federal regulators, including the SEC; federal governmental authorities, including congressional committees; and the Financial Industry Regulatory Authority seeking a broad range of information. The issues involved in information requests and regulatory matters vary widely. Certain regulators have requested information and documents regarding contingent commission payments to brokers, the Company's awareness of any "sham" bids for business, bids and quotes that the Company submitted to potential customers, incentive agreements entered into with brokers, or compensation paid to intermediaries. Regulators also have requested information relating to market timing and late trading of mutual funds and variable insurance products and, generally, the marketing of products. The Company has received a subpoena from the Office of the U.S. Attorney for the Southern District of California asking for F-80 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) documents regarding the insurance broker Universal Life Resources. The Company has been cooperating fully with these inquiries. Other Litigation In Re Ins. Brokerage Antitrust Litig. (D. N.J., filed February 24, 2005). In this multi-district proceeding, plaintiffs filed a class action complaint consolidating claims from several separate actions that had been filed in or transferred to the District of New Jersey in 2004 and 2005. The consolidated complaint alleged that the Holding Company, Metropolitan Life Insurance Company, several non-affiliated insurance companies and several insurance brokers violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), the Employee Retirement Income Security Act of 1974 ("ERISA"), and antitrust laws and committed other misconduct in the context of providing insurance to employee benefit plans and to persons who participate in such employee benefit plans. In August and September 2007, the court issued orders granting defendants' motions to dismiss with prejudice the federal antitrust and the RICO claims. In January 2008, the court issued an order granting defendants' summary judgment motion on the ERISA claims, and in February 2008, the court dismissed the remaining state law claims on jurisdictional grounds. Plaintiffs have filed a notice of appeal of the court's decisions. A putative class action alleging that the Holding Company and other non-affiliated defendants violated state laws was transferred to the District of New Jersey but was not consolidated with other related actions. Plaintiffs' motion to remand this action to state court in Florida is pending. The American Dental Association, et al. v. MetLife Inc., et al. (S.D. Fla., filed May 19, 2003). The American Dental Association and three individual providers have sued the Holding Company, Metropolitan Life Insurance Company and other non-affiliated insurance companies in a putative class action lawsuit. The plaintiffs purport to represent a nationwide class of in-network providers who allege that their claims are being wrongfully reduced by downcoding, bundling, and the improper use and programming of software. The complaint alleges federal racketeering and various state law theories of liability. The district court has granted in part and denied in part the Company's motion to dismiss. The plaintiffs filed an amended complaint, and the Company filed another motion to dismiss. The court has issued a tag-along order, related to a medical managed care trial, which has stayed the lawsuit. Thomas, et al. v. Metropolitan Life Ins. Co., et al. (W.D. Okla., filed January 31, 2007). A putative class action complaint was filed against Metropolitan Life Insurance Company and MetLife Securities, Inc. Plaintiffs assert legal theories of violations of the federal securities laws and violations of state laws with respect to the sale of certain proprietary products by the Company's agency distribution group. Plaintiffs seek rescission, compensatory damages, interest, punitive damages and attorneys' fees and expenses. The Company is vigorously defending against the claims in this matter. Metropolitan Life Insurance Company also has been named as a defendant in a number of welding and mixed dust lawsuits filed in various state and federal courts. The Company is continuing to vigorously defend against these claims. Summary Putative or certified class action litigation and other litigation and claims and assessments against the Company, in addition to those discussed previously and those otherwise provided for in the Company's consolidated financial statements, have arisen in the course of the Company's business, including, but not limited to, in connection with its activities as an insurer, employer, investor, investment advisor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company's compliance with applicable insurance and other laws and regulations. F-81 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses, except as noted previously in connection with specific matters. In some of the matters referred to previously, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company's financial position, based on information currently known by the Company's management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's consolidated net income or cash flows in particular quarterly or annual periods. INSOLVENCY ASSESSMENTS Most of the jurisdictions in which the Company is admitted to transact business require insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. Assets and liabilities held for insolvency assessments are as follows:
DECEMBER 31, ----------- 2007 2006 ---- ---- (IN MILLIONS) Other Assets: Premium tax offset for future undiscounted assessments.. $24 $28 Premium tax offsets currently available for paid assessments........................................... 5 5 --- --- $29 $33 === === Liability: Insolvency assessments..................................... $41 $49 === ===
Assessments levied against the Company were less than $1 million for the year ended December 31, 2007, and $1 million for both the years ended December 31, 2006 and 2005. IMPACT OF HURRICANES On August 29, 2005, Hurricane Katrina made landfall in the states of Louisiana, Mississippi and Alabama, causing catastrophic damage to these coastal regions. The Company's cumulative gross losses were $21 million at December 31, 2005. During the year ended December 31, 2005, the Company recognized total net losses, net of income tax and reinsurance recoverables and including reinstatement premiums and other reinsurance-related premium adjustments related to the catastrophe of $14 million, net of income tax. There were no additional losses recognized for the years ended December 31, 2007 and 2006. Additional hurricane-related losses may be recorded in future periods as claims are received from insureds and claims to reinsurers are processed. Reinsurance recoveries are dependent upon the continued creditworthiness of the reinsurers, which may be affected by their other reinsured losses in connection with Hurricanes Katrina and otherwise. In addition, lawsuits, including purported class actions, have been filed in Louisiana and Mississippi challenging denial of claims for damages caused to property during Hurricane Katrina. The Company is a named party in some of these lawsuits. In addition, rulings in cases in which the Company is not a party may affect F-82 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interpretation of its policies. The Company intends to vigorously defend these matters. However, any adverse rulings could result in an increase in the Company's hurricane-related claim exposure and losses. Based on information known by management, it does not believe that additional claim losses resulting from Hurricane Katrina will have a material adverse impact on the Company's consolidated financial statements. COMMITMENTS LEASES In accordance with industry practice, certain of the Company's income from lease agreements with retail tenants are 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 sublease income, and minimum gross rental payments relating to these lease agreements are as follows:
GROSS RENTAL SUBLEASE RENTAL INCOME INCOME PAYMENTS ------ -------- -------- (IN MILLIONS) 2008............................................... $ 411 $ 18 $ 178 2009............................................... $ 377 $ 10 $ 186 2010............................................... $ 325 $ 5 $ 176 2011............................................... $ 248 $ 5 $ 151 2012............................................... $ 181 $ 4 $ 125 Thereafter......................................... $ 575 $ 4 $ 1,128
COMMITMENTS TO FUND PARTNERSHIP INVESTMENTS The Company makes commitments to fund partnership investments in the normal course of business. The amounts of these unfunded commitments were $3.9 billion and $2.4 billion at December 31, 2007 and 2006, respectively. The Company anticipates that these amounts will be invested in partnerships over the next five years. MORTGAGE LOAN COMMITMENTS The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $3.3 billion at both December 31, 2007 and 2006. COMMITMENTS TO FUND BANK CREDIT FACILITIES, BRIDGE LOANS AND PRIVATE CORPORATE BOND INVESTMENTS The Company commits to lend funds under bank credit facilities, bridge loans and private corporate bond investments. The amounts of these unfunded commitments were $667 million and $1.7 billion at December 31, 2007 and 2006, respectively. OTHER COMMITMENTS In December 2005, RGA repurchased 1.6 million shares of its outstanding common stock at an aggregate price of $76 million under an accelerated share repurchase agreement with a major bank. The bank borrowed the stock sold to RGA from third parties and purchased the shares in the open market over the subsequent few months to return to the lenders. RGA would either pay or receive an amount based on the actual amount paid by the bank to purchase the shares. These repurchases resulted in an increase in the Company's ownership percentage of RGA to approximately 53% at December 31, 2005 from approximately 52% at December 31, 2004. In February 2006, the final purchase price was determined, resulting in a cash settlement substantially equal to the aggregate cost. RGA F-83 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recorded the initial repurchase of shares as treasury stock and recorded the amount received as an adjustment to the cost of the treasury stock. At December 31, 2007, the Company's ownership was approximately 52% of RGA. GUARANTEES In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties pursuant to which it may be required to make payments now or in the future. In the context of acquisition, disposition, investment and other transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and other specific liabilities, and other indemnities and guarantees that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities, such as third party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual limitations and those that arise by operation of law, such as applicable statutes of limitation. In some cases, the maximum potential obligation under the indemnities and guarantees is subject to a contractual limitation ranging from less than $1 million to $800 million, with a cumulative maximum of $1.6 billion, while in other cases such limitations are not specified or applicable. Since certain of these obligations are not subject to limitations, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these guarantees in the future. In addition, the Company indemnifies its directors and officers as provided in its charters and by-laws. Also, the Company indemnifies its agents for liabilities incurred as a result of their representation of the Company's interests. Since these indemnities are generally not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these indemnities in the future. During the year ended December 31, 2007, the Company did not record any additional liabilities for indemnities, guarantees and commitments. The Company had no liability for indemnities, guarantees and commitments at December 31, 2007 and 2006. In connection with synthetically created investment transactions, the Company writes credit default swap obligations that generally require payment of principal outstanding due in exchange for the referenced credit obligation. If a credit event, as defined by the contract, occurs the Company's maximum amount at risk, assuming the value of the referenced credits becomes worthless, was $1.3 billion at December 31, 2007. The credit default swaps expire at various times during the next ten years. 16. EMPLOYEE BENEFIT PLANS PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The Company sponsors and administers various qualified and non-qualified defined benefit pension plans and other postretirement employee benefit plans covering employees and sales representatives who meet specified eligibility requirements of the sponsor and its participating affiliates. Participating affiliates are allocated a proportionate share of net expense related to the plans as well as contributions made to the plans. Pension benefits are provided utilizing either a traditional formula or cash balance formula. The traditional formula provides benefits based upon years of credited service and either final average or career average earnings. The cash balance formula utilizes hypothetical or notional accounts which credit participants with benefits equal to a percentage of eligible pay as well as earnings credits, determined annually, based upon the average annual rate of interest on 30-year U.S. Treasury securities, for each account balance. As of December 31, 2007, virtually all of the Company's obligations have been calculated using the traditional formula. The non-qualified pension plans provide supplemental benefits, in excess of amounts permitted by governmental agencies, to certain executive level F-84 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) employees. The Company's proportionate share of net pension expense related to its sponsored pension plans was $88 million or 94% for the year ended December 31, 2007. The Company also provides certain postemployment benefits and certain postretirement medical and life insurance benefits for retired employees. The other postretirement plans cover eligible employees of the sponsor and its participating affiliates who were hired prior to 2003 (or, in certain cases, rehired during or after 2003) and meet age and service criteria while working for the Company or its participating affiliates, at various levels, in accordance with the applicable plans. Virtually all retirees, or their beneficiaries, contribute a portion of the total cost of postretirement medical benefits. Participating affiliates are allocated a proportionate share of net expense and contributions related to the postemployment and other postretirement plans. Employees hired after 2003 are not eligible for any employer subsidy for postretirement medical benefits. The Company's proportionate share of net other postretirement expense related to its sponsored other postretirement plans was less than $1 million or 5% for the year ended December 31, 2007. As described more fully in Note 1, effective December 31, 2006, the Company adopted SFAS 158. The adoption of SFAS 158 required the recognition of the funded status of defined benefit pension and other postretirement plans and eliminated the additional minimum pension liability provision of SFAS 87. The Company's additional minimum pension liability was $78 million, and the intangible asset was $12 million, at December 31, 2005. The excess of the additional minimum pension liability over the intangible asset of $66 million, $41 million net of income tax, was recorded as a reduction of accumulated other comprehensive income. At December 31, 2006, immediately prior to adopting SFAS 158, the Company's additional minimum pension liability was $92 million. The additional minimum pension liability of $59 million, net of income tax of $33 million, was recorded as a reduction of accumulated other comprehensive income. The change in the additional minimum pension liability of $18 million, net of income tax, was reflected as a component of comprehensive income for the year ended December 31, 2006. Upon adoption of SFAS 158, the Company eliminated the additional minimum pension liability and recognized as an adjustment to accumulated other comprehensive income, net of income tax, those amounts of actuarial gains and losses, prior service costs and credits, and the remaining net transition asset or obligation that had not yet been included in net periodic benefit cost at the date of adoption. The following table summarizes the adjustments to the December 31, 2006 consolidated balance sheet as a result of recognizing the funded status of the defined benefit plans:
DECEMBER 31, 2006 ------------------------------------------------------- MINIMUM PRE PENSION ADOPTION OF POST SFAS 158 LIABILITY SFAS 158 SFAS 158 BALANCE SHEET CAPTION ADJUSTMENTS ADJUSTMENT ADJUSTMENT ADJUSTMENTS --------------------- ----------- ---------- ----------- ----------- (IN MILLIONS) Other assets: Prepaid pension benefit cost..................................... $ 1,878 $ -- $ (999) $ 879 Other assets: Intangible asset............. $ 12 $(12) $ -- $ -- Other liabilities: Accrued pension benefit cost..................................... $ (482) $(14) $ (79) $ (575) Other liabilities: Accrued postretirement benefit cost............................. $ (696) $ -- $ (100) $ (796) --------- --------- Accumulated other comprehensive income (loss), before income tax: Defined benefit plans.................... $ (66) $(26) $ (1,178) $ (1,270) Minority interest.......................... $ -- $ 8 Deferred income tax........................ $ 8 $ 421 --------- --------- Accumulated other comprehensive income (loss), net of income tax: Defined benefit plans.................... $ (41) $ (18) $ (749) $ (808) ========== ===========
F-85 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A December 31 measurement date is used for all of the Company's defined benefit pension and other postretirement benefit plans. OBLIGATIONS, FUNDED STATUS AND NET PERIODIC BENEFIT COSTS
DECEMBER 31, --------------------------------- OTHER PENSION POSTRETIREMENT BENEFITS BENEFITS --------------- --------------- 2007 2006 2007 2006 ------ ------ ------ ------ (IN MILLIONS) Change in benefit obligation: Benefit obligation at beginning of year...... $5,896 $5,717 $2,055 $2,160 Service cost............................... 161 158 26 35 Interest cost.............................. 350 330 103 116 Plan participants' contributions........... -- -- 31 29 Divestitures............................... -- (3) -- -- Net actuarial (gains) losses............... (385) 15 (465) (1) Change in benefits......................... 39 (2) -- (143) Prescription drug subsidy.................. -- -- 13 10 Benefits paid.............................. (349) (319) (171) (151) ------ ------ ------ ------ Benefit obligation at end of year............ 5,712 5,896 1,592 2,055 ------ ------ ------ ------ Change in plan assets: Fair value of plan assets at beginning of year....................................... 6,249 5,471 1,169 1,091 Actual return on plan assets............... 541 715 58 103 Divestitures............................... -- (3) -- -- Employer contribution...................... 50 385 1 1 Benefits paid.............................. (349) (319) (47) (26) ------ ------ ------ ------ Fair value of plan assets at end of year..... 6,491 6,249 1,181 1,169 ------ ------ ------ ------ Funded status at end of year................. $ 779 $ 353 $ (411) $ (886) ====== ====== ====== ====== Amounts recognized in the consolidated balance sheet consist of: Other assets............................... $1,382 $ 935 $ -- $ -- Other liabilities.......................... (603) (582) (411) (886) ------ ------ ------ ------ Net amount recognized................... $ 779 $ 353 $ (411) $ (886) ====== ====== ====== ====== Accumulated other comprehensive (income) loss: Net actuarial (gains) losses............... $ 633 $1,126 $ (112) $ 328 Prior service cost (credit)................ 63 39 (194) (230) ------ ------ ------ ------ Accumulated other comprehensive (income) loss.................................. $ 696 $1,165 $ (306) $ 98 ====== ====== ====== ======
F-86 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate projected benefit obligation and aggregate fair value of plan assets for the pension plans were as follows:
DECEMBER 31, ------------------------------------------------- NON-QUALIFIED QUALIFIED PLAN PLAN TOTAL --------------- ------------- --------------- 2007 2006 2007 2006 2007 2006 ------ ------ ----- ----- ------ ------ (IN MILLIONS) Aggregate fair value of plan assets (principally Company contracts)...................... $6,491 $6,249 $ -- $ -- $6,491 $6,249 Aggregate projected benefit obligation...................... 5,111 5,318 601 578 5,712 5,896 ------ ------ ----- ----- ------ ------ Over (under) funded............... $1,380 $ 931 $(601) $(578) $ 779 $ 353 ====== ====== ===== ===== ====== ======
The accumulated benefit obligation for all defined benefit pension plans was $5,295 million and $5,457 million at December 31, 2007 and 2006, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets is as follows:
DECEMBER 31, ----------- 2007 2006 ---- ---- (IN MILLIONS) Projected benefit obligation................................ $601 $578 Accumulated benefit obligation.............................. $524 $497 Fair value of plan assets................................... $ -- $ --
Information for pension and other postretirement plans with a projected benefit obligation in excess of plan assets is as follows:
DECEMBER 31, ----------------------------- OTHER PENSION POSTRETIREMENT BENEFITS BENEFITS ----------- --------------- 2007 2006 2007 2006 ---- ---- ------ ------ (IN MILLIONS) Projected benefit obligation.................... $627 $603 $1,592 $2,055 Fair value of plan assets....................... $ 24 $ 22 $1,181 $1,169
F-87 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of net periodic benefit cost and other changes in plan assets and benefit obligations recognized in other comprehensive income were as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------- OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS --------------------- ------------------- 2007 2006 2005 2007 2006 2005 ----- ----- ----- ----- ---- ---- (IN MILLIONS) NET PERIODIC BENEFIT COST Service cost.......................... $ 161 $ 158 $ 141 $ 26 $ 35 $ 36 Interest cost......................... 350 330 315 103 116 120 Expected return on plan assets........ (502) (448) (443) (87) (79) (78) Amortization of net actuarial (gains) losses.............................. 68 128 116 -- 22 14 Amortization of prior service cost (credit)............................ 17 10 16 (36) (37) (18) ----- ----- ----- ----- ---- ---- Net periodic benefit cost........... 94 $ 178 $ 145 6 $ 57 $ 74 ----- ===== ===== ----- ==== ==== OTHER CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS RECOGNIZED IN OTHER COMPREHENSIVE INCOME Net actuarial (gains) losses........ (424) (440) Prior service cost (credit)......... 40 -- Amortization of net actuarial (gains) losses................... (68) -- Amortization of prior service cost (credit)......................... (17) 36 ----- ----- Total recognized in other comprehensive income........... (469) (404) ----- ----- Total recognized in net periodic benefit cost and other comprehensive income............. $(375) $(398) ===== =====
The estimated net actuarial losses and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year are $13 million and $15 million, respectively. The estimated net actuarial gains and prior service credit for the defined benefit other postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year are less than $1 million and $36 million, respectively. In 2004, the Company adopted the guidance in FSP 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("FSP 106-2"), to account for future subsidies to be received under the Prescription Drug Act. The Company began receiving these subsidies F-88 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) during 2006. A summary of the reduction to the APBO and related reduction to the components of net periodic other postretirement benefit cost is as follows:
DECEMBER 31, ------------------ 2007 2006 2005 ---- ---- ---- (IN MILLIONS) Cumulative reduction in benefit obligation: Beginning of year.................................... $328 $298 $230 Service cost......................................... 7 6 6 Interest cost........................................ 19 19 16 Net actuarial gains (losses)......................... (42) 15 46 Prescription drug subsidy............................ (13) (10) -- ---- ---- ---- End of year....................................... $299 $328 $298 ==== ==== ====
YEARS ENDED DECEMBER 31, ------------------------ 2007 2006 2005 ---- ---- ---- (IN MILLIONS) Reduction in net periodic benefit cost: Service cost........................................ $ 7 $ 6 $ 6 Interest cost....................................... 19 19 16 Amortization of net actuarial gains (losses)........ 5 30 23 --- --- --- Total reduction in net periodic benefit cost..... $31 $55 $45 === === ===
The Company received subsidies of $10 million and $8 million for the years ended December 31, 2007 and 2006, respectively. ASSUMPTIONS Assumptions used in determining benefit obligations were as follows:
DECEMBER 31, --------------------------------- OTHER POSTRETIRE- PENSION BENEFITS MENT BENEFITS ----------------- ------------- 2007 2006 2007 2006 ------- ------- ----- ----- Weighted average discount rate............. 6.65% 6.00% 6.65% 6.00% Rate of compensation increase.............. 4% - 8% 4% - 8% N/A N/A
Assumptions used in determining net periodic benefit cost were as follows:
DECEMBER 31, --------------------------------------------------- OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS --------------------------- --------------------- 2007 2006 2005 2007 2006 2005 ------- ------- ------- ----- ----- ----- Weighted average discount rate........................ 6.00% 5.80% 5.85% 6.00% 5.79% 5.83% Weighted average expected rate of return on plan assets.... 8.25% 8.25% 8.49% 7.48% 7.42% 7.50% Rate of compensation increase.................... 4% - 8% 4% - 8% 4% - 8% N/A N/A N/A
F-89 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The discount rate is determined annually based on the yield, measured on a yield to worst basis, of a hypothetical portfolio constructed of high quality debt instruments available on the valuation date, which would provide the necessary future cash flows to pay the aggregate projected benefit obligation when due. The expected rate of return on plan assets is based on anticipated performance of the various asset sectors in which the plan invests, weighted by target allocation percentages. Anticipated future performance is based on long- term historical returns of the plan assets by sector, adjusted for the Company's long-term expectations on the performance of the markets. While the precise expected return derived using this approach will fluctuate from year to year, the Company's policy is to hold this long-term assumption constant as long as it remains within reasonable tolerance from the derived rate. The weighted average expected return on plan assets for use in that plan's valuation in 2008 is currently anticipated to be 8.25% for pension benefits and postretirement medical benefits and 6.25% for postretirement life benefits. The assumed healthcare cost trend rates used in measuring the APBO and net periodic benefit cost were as follows:
DECEMBER 31, ----------------------------------------------------------- 2007 2006 ---------------------------- ---------------------------- Pre-Medicare eligible claims.................... 8.5% down to 5% in 2014 9.0% down to 5% in 2014 Medicare eligible claims.... 10.5% down to 5% in 2018 11.0% down to 5% in 2018
Assumed healthcare cost trend rates may have a significant effect on the amounts reported for healthcare plans. A one-percentage point change in assumed healthcare cost trend rates would have the following effects:
ONE PERCENT ONE PERCENT INCREASE DECREASE ----------- ----------- (IN MILLIONS) Effect on total of service and interest cost components......................................... $ 7 $ (6) Effect of accumulated postretirement benefit obligation......................................... $ 63 $ (62)
PLAN ASSETS The Company has issued group annuity and life insurance contracts supporting approximately 99% of all pension and other postretirement benefit plans' assets. The account values of the group annuity and life insurance contracts issued by the Company and held as assets of the pension and other postretirement benefit plans were $7,565 million and $7,321 million as of December 31, 2007 and 2006, respectively. The majority of such account values are held in separate accounts established by the Company. Total revenue from these contracts recognized in the consolidated statements of income was $28 million, $29 million and $28 million for the years ended December 31, 2007, 2006 and 2005, respectively, and includes policy charges, net investment income from investments backing the contracts and administrative fees. Total investment income, including realized and unrealized gains and losses, credited to the account balances were $603 million, $818 million and $460 million for the years ended December 31, 2007, 2006 and 2005, respectively. The terms of these contracts are consistent in all material respects with those the Company offers to unaffiliated parties that are similarly situated. F-90 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted-average allocations of pension plan and other postretirement benefit plan assets were as follows:
DECEMBER 31, ----------------------------- OTHER PENSION POSTRETIRE- BENEFITS MENT BENEFITS ------------- ------------- 2007 2006 2007 2006 ----- ----- ----- ----- ASSET CATEGORY Equity securities............................... 38% 42% 37% 37% Fixed maturity securities....................... 44% 42% 58% 57% Other (Real Estate and Alternative Investments)................................. 18% 16% 5% 6% --- --- --- --- Total........................................... 100% 100% 100% 100% === === === ===
The weighted average target allocations of pension plan and other postretirement benefit plan assets for 2008 are as follows:
PENSION OTHER --------- --------- ASSET CATEGORY Equity securities................................... 30% - 55% 30% - 45% Fixed maturity securities........................... 30% - 65% 45% - 70% Other (Real Estate and Alternative Investments)..... 10% - 25% 0% - 10%
Target allocations of assets are determined with the objective of maximizing returns and minimizing volatility of net assets through adequate asset diversification. Adjustments are made to target allocations based on an assessment of the impact of economic factors and market conditions. CASH FLOWS It is the Company's practice to make contributions to the qualified pension plans to comply with minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended. In accordance with such practice, no contributions were required for the years ended December 31, 2007 or 2006. No contributions will be required for 2008. The Company did not make discretionary contributions to the qualified pension plans during the year ended December 31, 2007 and made contributions of $335 million during the year ended December 31, 2006. The Company expects to make additional discretionary contributions of $144 million in 2008. Benefit payments due under the non-qualified pension plans are funded from the Company's general assets as they become due under the provision of the plans. These payments totaled $50 million and $35 million for the years ended December 31, 2007 and 2006, respectively. These payments are expected to be at approximately the same level in 2008. Other postretirement benefits represent a non-vested, non-guaranteed obligation of the Company and current regulations do not require specific funding levels for these benefits. While the Company has partially funded such plans in advance, it has been the Company's practice to primarily use their general assets, net of participant's contributions, to pay postretirement medical claims as they come due in lieu of utilizing plan assets. Total payments equaled $171 million and $151 million for the years ended December 31, 2007 and 2006, respectively. The Company expects to make contributions of $115 million, net of participant's contributions, toward the other postretirement plan obligations in 2008. As noted previously, the Company expects to receive subsidies under the Prescription Drug Act to partially offset such payments. F-91 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Gross benefit payments for the next ten years, which reflect expected future service where appropriate, and gross subsidies to be received under the Prescription Drug Act are expected to be as follows:
OTHER POSTRETIREMENT BENEFITS ----------------------------- PENSION PRESCRIPTION BENEFITS GROSS DRUG SUBSIDIES NET -------- ----- -------------- ---- (IN MILLIONS) 2008........................................ $ 355 $115 $ (14) $101 2009........................................ $ 368 $119 $ (15) $104 2010........................................ $ 378 $123 $ (16) $107 2011........................................ $ 391 $127 $ (16) $111 2012........................................ $ 407 $130 $ (17) $113 2013 - 2017................................. $2,251 $705 $(100) $605
SAVINGS AND INVESTMENT PLANS The Company sponsors savings and investment plans for substantially all employees under which a portion of employee contributions are matched. The Company contributed $69 million, $73 million and $70 million for the years ended December 31, 2007, 2006 and 2005, respectively. 17. EQUITY CAPITAL CONTRIBUTIONS On December 12, 2007, the Holding Company contributed $7 million to the Company in connection with the Company's issuance of a surplus note to MetLife Capital Trust IV. See Note 10. On October 20, 2006, the Holding Company contributed $17 million to the Company in connection with the sale and merger of CLIC. See Note 2. On September 30, 2006, the Holding Company contributed $377 million to the Company in the form of intangible assets. See Note 2. On May 1, 2006, GALIC, an indirect insurance subsidiary of the Company, sold its wholly-owned insurance subsidiary, Paragon Life Insurance Company ("Paragon"), to its ultimate parent, the Holding Company. Immediately following the sale, the Holding Company merged Paragon, an affiliate of the Company, with and into the Company. In connection with the transaction, the Holding Company contributed $76 million to the Company. EXCESS PROCEEDS RECEIVED ON SALE OF INTERESTS IN AFFILIATES On November 1, 2007, the Company sold its interests in MetLife Mexico, S.A. and MetLife Pensiones, S.A., both affiliates, to MetLife International Holdings, Inc. ("MIHI"), also an affiliate, at their approximate aggregate fair value of $34 million. The Company's carrying value of the interests at the time of sale was $4 million. The excess cash consideration received from MIHI over the Company's carrying value resulted in an increase of $30 million in additional paid-in capital. STOCK-BASED COMPENSATION PLANS Overview As described more fully in Note 1, effective January 1, 2006, in conjunction with the Holding Company, the Company adopted SFAS 123(r) using the modified prospective transition method. The adoption of SFAS 123(r) did not have a significant impact on the Company's financial position or results of operations. F-92 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The stock-based compensation expense recognized by the Company is related to awards under incentive plans of the Holding Company, as described herein. Description of Plans The MetLife, Inc. 2000 Stock Incentive Plan, as amended (the "Stock Incentive Plan"), authorized the granting of awards in the form of options to buy shares of Holding Company common stock ("Stock Options") that either qualify as incentive Stock Options under Section 422A of the Internal Revenue Code or are non-qualified. Under the MetLife, Inc. 2005 Stock and Incentive Compensation Plan, as amended (the "2005 Stock Plan"), awards granted may be in the form of Stock Options, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units, Performance Shares or Performance Share Units, Cash-Based Awards, and Stock-Based Awards (each as defined in the 2005 Stock Plan). The Stock Incentive Plan, 2005 Stock Plan, and the LTPCP, as described below, are hereinafter collectively referred to as the "Incentive Plans." The aggregate number of shares of Holding Company common stock reserved for issuance under the 2005 Stock Plan and the LTPCP is 68,000,000, plus those shares available but not utilized under the Stock Incentive Plan and those shares utilized under the Stock Incentive Plan that are recovered due to forfeiture of Stock Options. Additional shares of Holding Company common stock carried forward from the Stock Incentive Plan and available for issuance under the 2005 Stock Plan were 12,506,003 as of December 31, 2007. Each share issued under the 2005 Stock Plan in connection with a Stock Option or Stock Appreciation Right reduces the number of shares remaining for issuance under that plan by one, and each share issued under the 2005 Stock Plan in connection with awards other than Stock Options or Stock Appreciation Rights reduces the number of shares remaining for issuance under that plan by 1.179 shares. As of December 31, 2007, the aggregate number of shares of Holding Company common stock remaining available for issuance pursuant to the 2005 Stock Plan was 60,862,366. Stock Option exercises and other stock-based awards to employees settled in shares are satisfied through the issuance of shares held in treasury by the Holding Company. The Company does not issue any of its own shares in satisfaction of stock-based compensation awards to employees. The Holding Company allocated 88%, 90% and 92% of stock-based compensation to the Company for the years ended December 31, 2007, 2006 and 2005, respectively. This allocation represents substantially all stock-based compensation recognized in the Company's consolidated results of operations. Accordingly, the discussion herein addresses the Holding Company's practices for recognizing expense for awards under the Incentive Plans. Underlying awards are expressed in their entirety with related expense amounts representing the resulting allocation to the Company. Compensation expense related to awards under the Incentive Plans is recognized based on the number of awards expected to vest, which represents the awards granted less expected forfeitures over the life of the award, as estimated at the date of grant. Unless a material deviation from the assumed rate is observed during the term in which the awards are expensed, any adjustment necessary to reflect differences in actual experience is recognized in the period the award becomes payable or exercisable. Compensation expense of $128 million, $130 million and $112 million, and income tax benefits of $45 million, $46 million and $39 million, related to the Incentive Plans was allocated to the Company for the years ended December 31, 2007, 2006 and 2005, respectively. Compensation expense is principally related to the issuance of Stock Options, Performance Shares and LTPCP arrangements. Stock Options All Stock Options granted had an exercise price equal to the closing price of the Holding Company's common stock as reported on the New York Stock Exchange on the date of grant, and have a maximum term of ten years. Certain Stock Options granted under the Stock Incentive Plan and the 2005 Stock Plan have or will become F-93 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exercisable over a three year period commencing with the date of grant, while other Stock Options have or will become exercisable three years after the date of grant. A summary of the activity related to Stock Options for the year ended December 31, 2007 is presented below. The aggregate intrinsic value was computed using the closing share price on December 31, 2007 of $61.62 and December 29, 2006 of $59.01, as applicable.
WEIGHTED AVERAGE WEIGHTED REMAINING SHARES UNDER AVERAGE CONTRACTUAL AGGREGATE OPTION EXERCISE PRICE TERM INTRINSIC VALUE ------------ -------------- ----------- --------------- (YEARS) (IN MILLIONS) Outstanding at January 1, 2007............... 24,814,183 $ 34.69 6.58 $ 604 =========== =========== =============== Granted...................................... 3,297,875 $62.86 Exercised.................................... (3,508,416) $31.33 Cancelled/Expired............................ (68,314) $30.57 Forfeited.................................... (172,582) $55.13 ---------- Outstanding at December 31, 2007............. 24,362,746 $38.85 6.18 $555 ========== =========== =========== =========== Aggregate number of stock options expected to vest at December 31, 2007.................. 23,777,440 $38.52 6.13 $549 ========== =========== =========== =========== Exercisable, December 31, 2007............... 17,393,154 $32.84 5.29 $501 ========== =========== =========== ===========
Prior to January 1, 2005, the Black-Scholes model was used to determine the fair value of Stock Options granted and recognized in the financial statements or as reported in the pro forma disclosure which follows. The fair value of Stock Options issued on or after January 1, 2005 was estimated on the date of grant using a binomial lattice model. The Holding Company made this change because lattice models produce more accurate option values due to the ability to incorporate assumptions about grantee exercise behavior resulting from changes in the price of the underlying shares. In addition, lattice models allow for changes in critical assumptions over the life of the option in comparison to closed-form models like Black-Scholes, which require single-value assumptions at the time of grant. The Holding Company used daily historical volatility since the inception of trading when calculating Stock Option values using the Black-Scholes model. In conjunction with the change to the binomial lattice model, the Holding Company began estimating expected future volatility based upon an analysis of historical prices of the Holding Company's common stock and call options on that common stock traded on the open market. The Holding Company uses a weighted-average of the implied volatility for publicly traded call options with the longest remaining maturity nearest to the money as of each valuation date and the historical volatility, calculated using monthly closing prices of the Holding Company's common stock. The Holding Company chose a monthly measurement interval for historical volatility as it believes this better depicts the nature of employee option exercise decisions being based on longer-term trends in the price of the underlying shares rather than on daily price movements. The risk-free rate is based on observed interest rates for instruments with maturities similar to the expected term of the Stock Options. Whereas the Black- Scholes model requires a single spot rate for instruments with a term matching the expected life of the option at the valuation date, the binomial lattice model allows for the use of different rates for each year over the contractual term of the option. The table below presents the full range of imputed forward rates for U.S. Treasury Strips that was used in the binomial lattice model over the contractual term of all Stock Options granted in the period. F-94 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Dividend yield is determined based on historical dividend distributions compared to the price of the underlying common stock as of the valuation date and held constant over the life of the Stock Option. Use of the Black-Scholes model requires an input of the expected life of the Stock Options, or the average number of years before Stock Options will be exercised or expired. The Holding Company estimated expected life using the historical average years to exercise or cancellation and average remaining years outstanding for vested Stock Options. Alternatively, the binomial model used by the Holding Company incorporates the contractual term of the Stock Options and then considers expected exercise behavior and a post-vesting termination rate, or the rate at which vested options are exercised or expire prematurely due to termination of employment, to derive an expected life. The post-vesting termination rate is determined from actual historical exercise and expiration activity under the Incentive Plans. Exercise behavior in the binomial lattice model used by the Holding Company is expressed using an exercise multiple, which reflects the ratio of exercise price to the strike price of Stock Options granted at which holders of the Stock Options are expected to exercise. The exercise multiple is derived from actual historical exercise activity. The following weighted average assumptions, with the exception of risk-free rate, which is expressed as a range, were used to determine the fair value of Stock Options issued during the:
YEARS ENDED DECEMBER 31, ------------------------------------------- 2007 2006 2005 ------------- ------------- ------------- Dividend yield................................ 0.94% 1.04% 1.19% Risk-free rate of return...................... 4.30% - 5.32% 4.17% - 4.96% 3.34% - 5.41% Expected volatility........................... 19.54% 22.00% 23.24% Exercise multiple............................. 1.66 1.52 1.48 Post-vesting termination rate................. 3.66% 4.09% 5.19% Contractual term (years)...................... 10 10 10 Expected Life (years)......................... 6 6 6 Weighted average exercise price of stock options granted............................. $ 62.86 $ 50.21 $ 38.70 Weighted average fair value of stock options granted..................................... $ 17.76 $ 13.84 $ 10.09
Compensation expense related to Stock Option awards expected to vest and granted prior to January 1, 2006 is recognized ratably over the requisite service period, which equals the vesting term. Compensation expense related to Stock Option awards expected to vest and granted on or after January 1, 2006 is recognized ratably over the requisite service period or the period to retirement eligibility, if shorter. Compensation expense of $49 million, $51 million and $47 million related to Stock Options was allocated to the Company for the years ended December 31, 2007, 2006 and 2005, respectively. F-95 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Had compensation expense for grants awarded prior to January 1, 2003 been determined based on the fair value at the date of grant rather than the intrinsic value method, the Company's earnings would have been reduced to the following pro forma amounts for the following:
YEAR ENDED DECEMBER 31, ------------- 2005 ------------- (IN MILLIONS) Net income................................................... $ 3,253 Add: Stock option-based employee compensation expense included in reported net income, net of income tax......... 30 Deduct: Total stock option-based employee compensation determined under fair value based method for all awards, net of income tax.......................................... (32) ----------- Pro forma net income......................................... $3,251 ===========
As of December 31, 2007, the Holding Company had $41 million of total unrecognized compensation costs related to Stock Options. It is expected that these costs will be recognized over a weighted average period of 1.70 years. The Company's allocated portion of Stock Option expense was 89%. The Holding Company allocated to its subsidiaries the tax benefit associated with the deduction allowed for Stock Option exercises. The Company's consolidated results of operations include $41 million, $22 million, and $11 million of such tax benefits for the years ended December 31, 2007, 2006, and 2005, respectively. Performance Shares Beginning in 2005, the Holding Company awarded certain members of management Performance Shares under (and as defined in) the 2005 Stock Plan. Participants are awarded an initial target number of Performance Shares with the final number of Performance Shares payable being determined by the product of the initial target multiplied by a factor of 0.0 to 2.0. The factor applied is based on measurements of the Holding Company's performance with respect to: (i) the change in annual net operating earnings per share, as defined; and (ii) the proportionate total shareholder return, as defined, with reference to the three- year performance period relative to other companies in the S&P Insurance Index with reference to the same three-year period. Performance Share awards will normally vest in their entirety at the end of the three-year performance period (subject to certain contingencies) and will be payable entirely in shares of the Holding Company's common stock. The following is a summary of Performance Share activity for the year ended December 31, 2007:
WEIGHTED AVERAGE PERFORMANCE GRANT DATE SHARES FAIR VALUE ----------- ---------------- Outstanding at January 1, 2007.................... 1,849,575 $ 42.24 Granted......................................... 916,075 $60.86 Forfeited....................................... (75,525) $49.20 ----------- Outstanding at December 31, 2007.................. 2,690,125 $48.39 =========== Performance Shares expected to vest at December 31, 2007........................................ 2,641,669 $48.20 ===========
Performance Share amounts above represent aggregate initial target awards and do not reflect potential increases or decreases resulting from the final performance factor to be determined at the end of the respective performance period. As of December 31, 2007, the three year performance period for the 2005 Performance Share grants was completed. Included in the immediately preceding table are 965,525 outstanding Performance Shares to F-96 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) which the final performance factor will be applied. The calculation of the performance factor is expected to be finalized during the second quarter of 2008 after all data necessary to perform the calculation is publicly available. Performance Share awards are accounted for as equity awards but are not credited with dividend-equivalents for actual dividends paid on the Holding Company's common stock during the performance period. Accordingly, the fair value of Performance Shares is based upon the closing price of the Holding Company's common stock on the date of grant, reduced by the present value of estimated dividends to be paid on that stock during the performance period. Compensation expense related to initial Performance Shares granted prior to January 1, 2006 and expected to vest is recognized ratably during the performance period. Compensation expense related to initial Performance Shares granted on or after January 1, 2006 and expected to vest is recognized ratably over the performance period or the period to retirement eligibility, if shorter. Performance Shares expected to vest and the related compensation expenses may be further adjusted by the performance factor most likely to be achieved, as estimated by management, at the end of the performance period. Compensation expense of $79 million, $67 million and $22 million, related to Performance Shares was allocated to the Company for the years ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007, the Holding Company had $57 million of total unrecognized compensation costs related to Performance Share awards. It is expected that these costs will be recognized over a weighted average period of 1.72 years. The Company's allocated portion of Performance Share expense was 88%. Long-Term Performance Compensation Plan Prior to January 1, 2005, the Holding Company granted stock-based compensation to certain members of management under the LTPCP. Each participant was assigned a target compensation amount (an "Opportunity Award") at the inception of the performance period with the final compensation amount determined based on the total shareholder return on the Holding Company's common stock over the three-year performance period, subject to limited further adjustment approved by the Holding Company's Board of Directors. Payments on the Opportunity Awards were normally payable in their entirety (subject to certain contingencies) at the end of the three-year performance period, and were paid in whole or in part with shares of the Holding Company's common stock, as approved by the Holding Company's Board of Directors. There were no new grants under the LTPCP during the years ended December 31, 2007, 2006 and 2005. A portion of each Opportunity Award under the LTPCP was settled in shares of the Holding Company's common stock while the remainder was settled in cash. The portion of the Opportunity Award settled in shares of the Holding Company's common stock was accounted for as an equity award with the fair value of the award determined based upon the closing price of the Holding Company's common stock on the date of grant. The compensation expense associated with the equity award, based upon the grant date fair value, was recognized into expense ratably over the respective three-year performance period. The portion of the Opportunity Award settled in cash was accounted for as a liability and was remeasured using the closing price of the Holding Company's common stock on the final day of each subsequent reporting period during the three-year performance period. The final LTPCP performance period concluded during the six months ended June 30, 2007. Final Opportunity Awards in the amount of 618,375 shares of the Holding Company's common stock and $16 million in cash were paid on April 18, 2007. No significant compensation expense related to LTPCP was recognized during the year ended December 31, 2007. Compensation expense of $12 million and $43 million related to LTPCP Opportunity Awards was allocated to the Company for the years ended December 31, 2006 and 2005, respectively. F-97 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATUTORY EQUITY AND INCOME Each insurance company's state of domicile imposes minimum risk-based capital ("RBC") requirements that were developed by the National Association of Insurance Commissioners ("NAIC"). The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of total adjusted capital, as defined by the NAIC, to authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. Metropolitan Life Insurance Company and each of its U.S. insurance subsidiaries exceeded the minimum RBC requirements for all periods presented herein. The NAIC adopted the Codification of Statutory Accounting Principles ("Codification") in 2001. Codification was intended to standardize regulatory accounting and reporting to state insurance departments. However, statutory accounting principles continue to be established by individual state laws and permitted practices. Modifications by the various state insurance departments may impact the effect of Codification on the statutory capital and surplus of Metropolitan Life Insurance Company and its insurance subsidiaries. Statutory accounting principles differ from GAAP primarily by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions, reporting surplus notes as surplus instead of debt and valuing securities on a different basis. In addition, certain assets are not admitted under statutory accounting principles and are charged directly to surplus. The most significant assets not admitted by the Company are net deferred income tax assets resulting from temporary differences between statutory accounting principles basis and tax basis not expected to reverse and become recoverable within a year. Further, statutory accounting principles do not give recognition to purchase accounting adjustments. Statutory net income of Metropolitan Life Insurance Company, a New York domiciled insurer, was $2.1 billion, $1.0 billion and $2.2 billion for the years ended December 31, 2007, 2006 and 2005, respectively. Statutory capital and surplus, as filed with the Department, was $13.0 billion and $9.2 billion at December 31, 2007 and 2006, respectively. DIVIDEND RESTRICTIONS Under New York State Insurance Law, Metropolitan Life Insurance Company is permitted, without prior insurance regulatory clearance, to pay stockholder dividends to the Holding Company as long as the aggregate amount of all such dividends in any calendar year does not exceed the lesser of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year; or (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains). Metropolitan Life Insurance Company will be permitted to pay a cash dividend to the Holding Company in excess of the lesser of such two amounts only if it files notice of its intention to declare such a dividend and the amount thereof with the Superintendent and the Superintendent does not disapprove the distribution within 30 days of its filing. Under New York State Insurance Law, the Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its shareholders. The New York State Department of Insurance (the "Department") has established informal guidelines for such determinations. The guidelines, among other things, focus on the insurer's overall financial condition and profitability under statutory accounting practices. During the years ended December 31, 2007 and 2006, Metropolitan Life Insurance Company paid to the Holding Company $500 million and $863 million, respectively, in ordinary dividends. The maximum amount of dividends which Metropolitan Life Insurance Company may pay to the Holding Company in 2008 without prior regulatory approval is $1,299 million. F-98 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stockholder dividends or other distributions proposed to be paid by New England Life Insurance Company ("NELICO") to its parent, Metropolitan Life Insurance Company , must be approved by Massachusetts Commissioner of Insurance (the "Commissioner") if such dividends or distributions made within the preceding calendar year, exceed the greater of (i) 10% of NELICO's statutory surplus as of the immediately preceding calendar year or (ii) NELICO's statutory net gains from operations for the immediately preceding calendar year. In addition, dividends cannot be paid from a source other than statutory unassigned funds surplus without prior approval of the Commissioner. NELICO paid no common stockholder dividends for the years ended December 31, 2007, 2006 and 2005. The maximum amount of the dividend which NELICO may pay to Metropolitan Life Insurance Company in 2008 without prior regulatory approval is $94 million. For the years ended December 31, 2007, 2006 and 2005, Metropolitan Life Insurance Company received dividends from subsidiaries of $60 million, $34 million and $77 million, respectively. OTHER COMPREHENSIVE INCOME (LOSS) The following table sets forth the reclassification adjustments required for the years ended December 31, 2007, 2006 and 2005 in other comprehensive income (loss) that are included as part of net income for the current year that have been reported as a part of other comprehensive income (loss) in the current or prior year:
YEARS ENDED DECEMBER 31, --------------------------- 2007 2006 2005 ------- ------- ------- (IN MILLIONS) Holding gains (losses) on investments arising during the year.................................................... $(1,485) $ (926) $(2,611) Income tax effect of holding gains (losses)............... 655 324 984 Reclassification adjustments: Recognized holding (gains) losses included in current year income.......................................... (173) 403 241 Amortization of premiums and accretion of discounts associated with investments.......................... 493 (443) (186) Income tax effect......................................... (141) 14 (21) Allocation of holding gains on investments relating to other policyholder amounts.............................. 532 792 1,580 Income tax effect of allocation of holding gains to other policyholder amounts.................................... (235) (277) (596) Unrealized investment gains of subsidiary at date of sale.................................................... -- -- 15 Deferred income tax on unrealized investment gains of subsidiary at date of sale.............................. -- -- (5) ------- ------- ------- Net unrealized investment gains (losses).................. (354) (113) (599) ------- ------- ------- Foreign currency translation adjustments.................. 139 7 (54) Foreign currency translation adjustments of subsidiary at due date of sale........................................ -- -- 5 ------- ------- ------- Foreign currency translation adjustment................... 139 7 (49) Minimum pension liability adjustment...................... -- (18) 89 Defined benefit plan adjustment........................... 524 -- -- ------- ------- ------- Other comprehensive income (loss)......................... $ 309 $(124) $ (559) ======= ======= =======
F-99 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. OTHER EXPENSES Information on other expenses is as follows:
YEARS ENDED DECEMBER 31, --------------------------- 2007 2006 2005 ------- ------- ------- (IN MILLIONS) Compensation...................................... $ 2,693 $ 2,661 $ 2,564 Commissions....................................... 1,711 1,701 1,334 Interest and debt issue costs..................... 418 332 245 Amortization of DAC and VOBA...................... 1,160 1,089 1,385 Capitalization of DAC............................. (1,689) (1,677) (1,619) Rent, net of sublease income...................... 217 201 227 Minority interest................................. 302 225 168 Insurance tax..................................... 551 527 417 Other............................................. 981 1,255 996 ------- ------- ------- Total other expenses............................ $ 6,344 $ 6,314 $ 5,717 ======= ======= =======
As discussed in Note 8, the Company recognized an expense related to the recapture of a reinsurance treaty by an affiliate for the year ended December 31, 2006. For the year ended December 31, 2005, the Company entered into a reinsurance agreement with an affiliate and it received a ceding commission which is included in the table above. See Notes 8, 10, and 22 for discussion of affiliated expenses included in the table above. 19. BUSINESS SEGMENT INFORMATION The Company is a leading provider of insurance and other financial services with operations throughout the United States. The Company's business is divided into three operating segments: Institutional, Individual and Reinsurance, as well as Corporate & Other. These segments are managed separately because they either provide different products and services, require different strategies or have different technology requirements. Institutional offers a broad range of group insurance and retirement & savings products and services, including group life insurance, non-medical health insurance, such as short and long-term disability, long-term care, and dental insurance, and other insurance products and services. Individual offers a wide variety of protection and asset accumulation products, including life insurance, annuities and mutual funds. Through the Company's majority-owned subsidiary, RGA, the Reinsurance segment provides reinsurance of life and annuity policies in North America and various international markets. Additionally, reinsurance of critical illness policies is provided in select international markets. Corporate & Other contains the excess capital not allocated to the business segments, various start-up entities and run-off entities, as well as interest expense related to the majority of the Company's outstanding debt and expenses associated with certain legal proceedings and income tax audit issues. Corporate & Other also includes the elimination of all intersegment amounts, which generally relate to intersegment loans, which bear interest rates commensurate with related borrowings, as well as intersegment transactions. Additionally, the Company's asset management business, including amounts reported as discontinued operations, is included in the results of operations for Corporate & Other. See Note 20 for disclosures regarding discontinued operations, including real estate. Economic capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model accounts for the F-100 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) unique and specific nature of the risks inherent in Company's businesses. As a part of the economic capital process, a portion of net investment income is credited to the segments based on the level of allocated equity. Set forth in the tables below is certain financial information with respect to the Company's segments, as well as Corporate & Other, for the years ended December 31, 2007, 2006 and 2005. The accounting policies of the segments are the same as those of the Company, except for the method of capital allocation and the accounting for gains (losses) from intercompany sales, which are eliminated in consolidation. The Company allocates equity to each segment based upon the economic capital model that allows the Company to effectively manage its capital. The Company evaluates the performance of each segment based upon net income excluding net investment gains (losses), net of income tax, adjustments related to net investment gains (losses), net of income tax, the impact from the cumulative effect of changes in accounting, net of income tax and discontinued operations, other than discontinued real estate, net of income tax. The Company allocates certain non-recurring items, such as expenses associated with certain legal proceedings, to Corporate & Other.
FOR THE YEAR ENDED CORPORATE & DECEMBER 31, 2007 INSTITUTIONAL INDIVIDUAL REINSURANCE OTHER TOTAL ----------------------------------- ------------- ---------- ----------- ---------------- -------- (IN MILLIONS) STATEMENT OF INCOME: Premiums........................... $ 12,358 $ 4,073 $ 4,910 $ 4 $ 21,345 Universal life and investment-type product policy fees.............. 763 1,483 -- -- 2,246 Net investment income.............. 6,669 5,552 871 394 13,486 Other revenues..................... 712 152 77 61 1,002 Net investment gains (losses)...... (269) (81) (177) 63 (464) Policyholder benefits and claims... 13,332 4,924 3,989 19 22,264 Interest credited to policyholder account balances................. 2,451 1,064 262 -- 3,777 Policyholder dividends............. -- 1,685 -- 2 1,687 Other expenses..................... 2,391 2,290 1,226 437 6,344 -------- -------- ----------- ---------------- -------- Income from continuing operations before provision (benefit) for income tax....................... 2,059 1,216 204 64 3,543 Provision (benefit) for income tax.............................. 701 431 71 (65) 1,138 -------- -------- ----------- ---------------- -------- Income from continuing operations.. 1,358 785 133 129 2,405 Income from discontinued operations, net of income tax.... 7 -- -- 20 27 -------- -------- ----------- ---------------- -------- Net income......................... $ 1,365 $ 785 $ 133 $ 149 $ 2,432 ======== ======== =========== ================ ======== BALANCE SHEET: Total assets....................... $170,540 $167,257 $21,331 $14,786 $373,914 DAC and VOBA....................... $ 907 $ 7,715 $ 3,513 $ 6 $ 12,141 Separate account assets............ $ 49,577 $ 40,143 $ 17 $ (17) $ 89,720 Policyholder liabilities........... $ 95,499 $ 86,065 $15,113 $ 346 $197,023 Separate account liabilities....... $ 49,577 $ 40,143 $ 17 $ (17) $ 89,720
F-101 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED CORPORATE & DECEMBER 31, 2006 INSTITUTIONAL INDIVIDUAL REINSURANCE OTHER TOTAL ----------------------------------- ------------- ---------- ----------- ----------- -------- (IN MILLIONS) STATEMENT OF INCOME: Premiums........................... $ 11,801 $ 4,129 $ 4,348 $ 6 $ 20,284 Universal life and investment-type product policy fees.............. 750 1,433 -- -- 2,183 Net investment income.............. 5,815 5,481 732 269 12,297 Other revenues..................... 677 114 66 33 890 Net investment gains (losses)...... (348) (394) 7 (92) (827) Policyholder benefits and claims... 12,918 4,712 3,490 17 21,137 Interest credited to policyholder account balances................. 1,944 1,049 254 -- 3,247 Policyholder dividends............. -- 1,669 -- 2 1,671 Other expenses..................... 2,483 2,213 1,227 391 6,314 -------- -------- ----------- --------- -------- Income (loss) from continuing operations before provision (benefit) for income tax......... 1,350 1,120 182 (194) 2,458 Provision (benefit) for income tax.............................. 445 400 64 (273) 636 -------- -------- ----------- --------- -------- Income from continuing operations.. 905 720 118 79 1,822 Income from discontinued operations, net of income tax.... 42 18 -- 44 104 -------- -------- ----------- --------- -------- Net income......................... $ 947 $ 738 $ 118 $ 123 $ 1,926 ======== ======== =========== ========= ======== BALANCE SHEET: Total assets....................... $157,673 $150,508 $18,818 $ 13,059 $340,058 DAC and VOBA....................... $ 1,205 $ 7,677 $ 3,152 $ 9 $ 12,043 Separate account assets............ $ 44,546 $ 36,403 $ 16 $ -- $ 80,965 Policyholder liabilities........... $ 86,359 $ 86,473 $13,332 $ 325 $186,489 Separate account liabilities....... $ 44,546 $ 36,403 $ 16 $ -- $ 80,965
F-102 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED CORPORATE & DECEMBER 31, 2005 INSTITUTIONAL INDIVIDUAL REINSURANCE OTHER TOTAL ------------------------------------ ------------- ---------- ----------- ----------- ------- (IN MILLIONS) STATEMENT OF INCOME: Premiums............................ $ 11,271 $ 4,113 $ 3,869 $ 3 $19,256 Universal life and investment-type product policy fees............... 753 1,193 -- 2 1,948 Net investment income............... 5,231 5,555 606 326 11,718 Other revenues...................... 642 92 58 28 820 Net investment gains (losses)....... 76 83 22 (2) 179 Policyholder benefits and claims.... 12,448 4,823 3,206 (32) 20,445 Interest credited to policyholder account balances.................. 1,347 1,029 220 -- 2,596 Policyholder dividends.............. 1 1,644 -- 2 1,647 Other expenses...................... 2,199 2,173 991 354 5,717 --------- -------- ---------- ---------- ------- Income from continuing operations before provision (benefit) for income tax........................ 1,978 1,367 138 33 3,516 Provision (benefit) for income tax.. 661 487 46 (101) 1,093 --------- -------- ---------- ---------- ------- Income from continuing operations... 1,317 880 92 134 2,423 Income from discontinued operations, net of income tax................. 174 296 -- 360 830 --------- -------- ---------- ---------- ------- Net income.......................... $ 1,491 $1,176 $ 92 $ 494 $ 3,253 ========= ======== ========== ========== =======
Net investment income and net investment gains (losses) are based upon the actual results of each segment's specifically identifiable asset portfolio adjusted for allocated equity. Other costs are allocated to each of the segments based upon: (i) a review of the nature of such costs; (ii) time studies analyzing the amount of employee compensation costs incurred by each segment; and (iii) cost estimates included in the Company's product pricing. Revenues derived from any customer did not exceed 10% of consolidated revenues for the years ended December 31, 2007, 2006 and 2005. Revenues from U.S. operations were $35.4 billion, $33.0 billion and $32.4 billion for the years ended December 31, 2007, 2006 and 2005, respectively, which represented 94%, 95% and 95%, respectively, of consolidated revenues. 20. DISCONTINUED OPERATIONS REAL ESTATE The Company actively manages its real estate portfolio with the objective of maximizing earnings through selective acquisitions and dispositions. Income related to real estate classified as held-for-sale or sold is presented in discontinued operations. These assets are carried at the lower of depreciated cost or fair value less expected disposition costs. F-103 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following information presents the components of income from discontinued real estate operations:
YEARS ENDED DECEMBER 31, -------------------- 2007 2006 2005 ---- ---- ------ (IN MILLIONS) Investment income..................................... $ 54 $ 68 $ 174 Investment expense.................................... (40) (47) (102) Net investment gains.................................. 7 91 961 ---- ---- ------ Total revenues...................................... 21 112 1,033 Provision for income tax.............................. 8 40 371 ---- ---- ------ Income from discontinued operations, net of income tax.............................................. $ 13 $ 72 $ 662 ==== ==== ======
The carrying value of real estate related to discontinued operations was $172 million and $177 million at December 31, 2007 and 2006, respectively. The following table presents the discontinued real estate operations by segment:
YEARS ENDED DECEMBER 31, ---------------------- 2007 2006 2005 ---- ---- ---- (IN MILLIONS) Net investment income Institutional........................................ $ 3 $ 8 $ 29 Individual........................................... -- 4 20 Corporate & Other.................................... 11 9 23 --- --- ---- Total net investment income....................... $14 $21 $ 72 === === ==== Net investment gains (losses) Institutional........................................ $ 7 $58 $242 Individual........................................... -- 23 443 Corporate & Other.................................... -- 10 276 --- --- ---- Total net investment gains (losses)............... $ 7 $91 $961 === === ====
In the second quarter of 2005, the Company sold its One Madison Avenue property in Manhattan, New York for $918 million resulting in a gain, net of income tax, of $431 million. Net investment income on One Madison Avenue was $13 million for the year ended December 31, 2005. OPERATIONS On September 29, 2005, the Company completed the sale of MetLife Indonesia to a third party, resulting in a gain upon disposal of $10 million, net of income tax. As a result of this sale, the Company recognized income from discontinued operations of $5 million, net of income tax, for the year ended December 31, 2005. The Company reclassified the operations of MetLife Indonesia into discontinued operations for all years presented. F-104 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents the amounts related to the operations of MetLife Indonesia that have been combined with the discontinued real estate operations in the consolidated statements of income:
YEAR ENDED DECEMBER 31, ------------- 2005 ------------- (IN MILLIONS) Revenues..................................................... $ 5 Expenses..................................................... 10 ------------ Income before provision for income tax....................... (5) Provision for income tax..................................... -- Net investment gain, net of income tax....................... 10 ------------ Income (loss) from discontinued operations, net of income tax..................................................... $ 5 ============
On January 31, 2005, the Company completed the sale of SSRM to a third party for $328 million in cash and stock. The Company reported the operations of SSRM in discontinued operations. As a result of the sale of SSRM, the Company recognized income from discontinued operations of $157 million, net of income tax, comprised of a realized gain of $165 million, net of income tax, and an operating expense related to a lease abandonment of $8 million, net of income tax. The Company's discontinued operations for the year ended December 31, 2005 included expenses of $6 million, net of income tax, related to the sale of SSRM. Under the terms of the sale agreement, MetLife will have an opportunity to receive additional payments based on, among other things, certain revenue retention and growth measures. The purchase price is also subject to reduction over five years, depending on retention of certain Company-related business. In the fourth quarter of 2007, the Company accrued a liability for $2 million, net of income tax, related to the termination of certain Company-related business. Also under the terms of such agreement, the Company had the opportunity to receive additional consideration for the retention of certain customers for a specific period in 2005. Upon finalization of the computation, the Company received payments of $30 million, net of income tax, in the second quarter of 2006 and $12 million, net of income tax, in the fourth quarter of 2005 due to the retention of these specific customer accounts. In the first quarter of 2007, the Company received a payment of $16 million, net of income tax, as a result of the revenue retention and growth measure provision in the sales agreement. In the fourth quarter of 2006, the Company eliminated $4 million of a liability that was previously recorded with respect to the indemnities provided in connection with the sale of SSRM, resulting in a benefit to the Company of $2 million, net of income tax. The Company believes that future payments relating to these indemnities are not probable. F-105 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The operations of SSRM include affiliated revenues of $5 million for the year ended December 31, 2005, related to asset management services provided by SSRM to the Company that have not been eliminated from discontinued operations as these transactions continued after the sale of SSRM. The following table presents the amounts related to operations of SSRM that have been combined with the discontinued real estate operations in the consolidated statements of income:
YEARS ENDED DECEMBER 31, ---------------------- 2007 2006 2005 ---- ---- ---- (IN MILLIONS) Revenues............................................... $-- $-- $ 19 Expenses............................................... -- -- 38 --- --- ---- Income before provision for income tax................. -- -- (19) Provision for income tax............................... -- -- (5) Net investment gain, net of income tax................. 14 32 177 --- --- ---- Income from discontinued operations, net of income tax............................................... $14 $32 $163 === === ====
21. FAIR VALUE INFORMATION The estimated fair value 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. The implementation of SFAS 157 may impact the fair value assumptions and methodologies associated with the valuation of assets and liabilities. See also Note 1 regarding the adoption of SFAS 157. F-106 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amounts related to the Company's financial instruments are as follows:
NOTIONAL CARRYING ESTIMATED AMOUNT VALUE FAIR VALUE DECEMBER 31, 2007 -------- -------- ---------- (IN MILLIONS) Assets: Fixed maturity securities..................... $161,664 $161,664 Equity securities............................. $ 4,304 $ 4,304 Trading securities............................ $ 457 $ 457 Mortgage and consumer loans................... $ 40,012 $ 40,561 Policy loans.................................. $ 8,736 $ 8,736 Short-term investments........................ $ 678 $ 678 Cash and cash equivalents..................... $ 2,331 $ 2,331 Accrued investment income..................... $ 2,529 $ 2,529 Mortgage loan commitments..................... $3,277 $ -- $ (32) Commitments to fund bank credit facilities, bridge loans and private corporate bond investments................................ $ 667 $ -- $ (25) Liabilities: Policyholder account balances.............. $ 75,565 $ 75,145 Short-term debt............................ $ 357 $ 357 Long-term debt............................. $ 3,215 $ 3,280 Collateral financing arrangements.......... $ 850 $ 761 Junior subordinated debt securities........ $ 399 $ 356 Shares subject to mandatory redemption..... $ 159 $ 178 Payables for collateral under securities loaned and other transactions............ $ 28,952 $ 28,952
NOTIONAL CARRYING ESTIMATED AMOUNT VALUE FAIR VALUE DECEMBER 31, 2006 -------- -------- ---------- (IN MILLIONS) Assets: Fixed maturity securities..................... $162,385 $162,385 Equity securities............................. $ 3,487 $ 3,487 Trading securities............................ $ 563 $ 563 Mortgage and consumer loans................... $ 35,939 $ 36,184 Policy loans.................................. $ 8,587 $ 8,587 Short-term investments........................ $ 1,244 $ 1,244 Cash and cash equivalents..................... $ 1,455 $ 1,455 Accrued investment income..................... $ 2,328 $ 2,328 Mortgage loan commitments..................... $3,290 $ -- $ -- Commitments to fund bank credit facilities, bridge loans and private corporate bond investments................................ $1,662 $ -- $ -- Liabilities: Policyholder account balances................. $ 69,198 $ 66,965 Short-term debt............................... $ 833 $ 833 Long-term debt................................ $ 2,369 $ 2,514 Collateral financing arrangements............. $ 850 $ 850 Junior subordinated debt securities........... $ 399 $ 400 Shares subject to mandatory redemption........ $ 278 $ 357 Payables for collateral under securities loaned and other transactions.............. $ 32,119 $ 32,119
F-107 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The methods and assumptions used to estimate the fair value of financial instruments are summarized as follows: FIXED MATURITY SECURITIES, TRADING SECURITIES AND EQUITY SECURITIES The fair values of publicly held fixed maturity securities and publicly held equity securities are based on quoted market prices or estimates from independent pricing services. However, in cases where quoted market prices are not available, such as for private fixed maturity securities, fair values are estimated using present value or valuation techniques. The determination of fair values is based on: (i) valuation methodologies; (ii) securities the Company deems to be comparable; and (iii) assumptions deemed appropriate given the circumstances. The fair value estimates are based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. Factors considered in estimating fair value include: coupon rate, maturity, estimated duration, call provisions, sinking fund requirements, credit rating, industry sector of the issuer, and quoted market prices of comparable securities. MORTGAGE AND CONSUMER LOANS, MORTGAGE LOAN COMMITMENTS AND COMMITMENTS TO FUND BANK CREDIT FACILITIES, BRIDGE LOANS AND PRIVATE CORPORATE BOND INVESTMENTS Fair values for mortgage and consumer loans are estimated by discounting expected future cash flows, using current interest rates for similar loans with similar credit risk. For mortgage loan commitments and commitments to fund bank credit facilities, bridge loans and private corporate bond investments the estimated fair value is the net premium or discount of the commitments. POLICY LOANS The carrying values for policy loans approximate fair value. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The carrying values for cash and cash equivalents and short-term investments approximate fair values due to the short-term maturities of these instruments. ACCRUED INVESTMENT INCOME The carrying value for accrued investment income approximates fair value. POLICYHOLDER ACCOUNT BALANCES The fair value of policyholder account balances which have final contractual maturities 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. The fair value of policyholder account balances without final contractual maturities are assumed to equal their current net surrender value. SHORT-TERM AND LONG-TERM DEBT, COLLATERAL FINANCING ARRANGEMENTS, JUNIOR SUBORDINATED DEBT SECURITIES AND SHARES SUBJECT TO MANDATORY REDEMPTION The fair values of short-term and long-term debt, collateral financing arrangements, junior subordinated debt securities and shares subject to mandatory redemption are determined by discounting expected future cash flows using risk rates currently available for debt with similar terms and remaining maturities. F-108 METROPOLITAN LIFE INSURANCE COMPANY AND SUBSIDIARIES (A Wholly-Owned Subsidiary of MetLife, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PAYABLES FOR COLLATERAL UNDER SECURITIES LOANED AND OTHER TRANSACTIONS The carrying value for payables for collateral under securities loaned and other transactions approximates fair value. DERIVATIVE FINANCIAL INSTRUMENTS The fair value of derivative financial instruments, including financial futures, financial forwards, interest rate, credit default and foreign currency swaps, foreign currency forwards, caps, floors, and options are based upon quotations obtained from dealers or other reliable sources. See Note 4 for derivative fair value disclosures. 22. RELATED PARTY TRANSACTIONS SERVICE AGREEMENTS MetLife Group, Incorporated, a wholly-owned subsidiary of the Holding Company, was formed as a personnel services company to provide personnel, as needed, to support the activities of the Company. Charges for these services, recorded in other expenses, were approximately $2.0 billion, $1.9 billion and $1.9 billion in 2007, 2006 and 2005, respectively. See Notes 3, 7, 8 and 10 for discussion of additional related party transactions. 23. SUBSEQUENT EVENTS On September 12, 2008, MetLife, Inc. completed a tax-free split-off of its majority-owned subsidiary, RGA. In connection with this transaction, GALIC dividended to Metropolitan Life Insurance Company and Metropolitan Life Insurance Company dividended to MetLife, Inc. substantially all of its interest in RGA at a value of $1,318 million. The net book value of RGA at the time of the dividend was $1,716 million. The loss recognized in connection with the dividend was approximately $400 million. Metropolitan Life Insurance Company, through its investment in GALIC, retained 3,000,000 shares of RGA class A common stock. These shares are marketable equity securities which do not constitute significant continuing involvement in the operations of RGA; accordingly, they will be classified within equity securities available for sale in the Company's consolidated financial statements at a cost basis of $157 million which is equivalent to the net book value of the shares. The carrying value will be adjusted to fair value at each subsequent reporting date. The Company has agreed to dispose of the remaining shares of RGA within the next five years. In connection with the Company's agreement to dispose of the remaining shares, the Company also recognized, in its provision for income tax on continuing operations, a deferred tax liability of $16 million which represents the difference between the book and taxable basis of the remaining investment in RGA. The disposition of RGA results in the elimination of the Company's Reinsurance segment. The Reinsurance segment was comprised of the results of RGA, which at disposition became discontinued operations of Corporate & Other, and the interest on economic capital, which will be reclassified to the continuing operations of Corporate & Other. Litigation During 1998, Metropolitan Life Insurance Company paid $878 million in premiums for excess insurance policies for asbestos-related claims. The excess insurance policies for asbestos-related claims provided for recovery of losses up to $1.5 billion in excess of a $400 million self-insured retention. The Company's initial option to commute the excess insurance policies for asbestos-related claims would have arisen at the end of 2008. On September 29, 2008, Metropolitan Life Insurance Company entered into agreements commuting the excess insurance policies as of September 30, 2008. As a result of the commutation of the policies, Metropolitan Life Insurance Company will receive cash and securities totaling approximately $632 million on or before January 30, 2009. Of this total, Metropolitan Life Insurance Company received approximately $115 million in fixed maturity securities on September 26, 2008, and Metropolitan Life Insurance Company received approximately $200 million in cash on October 29, 2008. Metropolitan Life Insurance Company will receive the remainder of the recoverable, approximately $317 million, in cash on or before January 30, 2009. Metropolitan Life Insurance Company recognized a loss on commutation of $35.3 million as of September 30, 2008. F-109