MLIC-2014.9.30-10Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
Form 10-Q
(Mark One)
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014
or
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 000-55029
________________________________________
Metropolitan Life Insurance Company
(Exact name of registrant as specified in its charter)
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New York | | 13-5581829 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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200 Park Avenue, New York, N.Y. | | 10166-0188 |
(Address of principal executive offices) | | (Zip Code) |
(212) 578-2211
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ¨ | | Accelerated filer ¨ |
Non-accelerated filer þ (Do not check if a smaller reporting company) | | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
At November 12, 2014, 494,466,664 shares of the registrant’s common stock, $0.01 par value per share, were outstanding, all of which were owned directly by MetLife, Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is, therefore, filing this Form 10-Q with the reduced disclosure format.
Table of Contents
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Item 1. | Financial Statements (at September 30, 2014 (Unaudited) and December 31, 2013 and for the Three Months and Nine Months Ended September 30, 2014 and 2013 (Unaudited)) | |
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Item 2. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 6. | | |
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As used in this Form 10-Q, “MLIC,” the “Company,” “we,” “our” and “us” refer to Metropolitan Life Insurance Company, a New York corporation incorporated in 1868, and its subsidiaries. Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc.
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning, or are tied to future periods, in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results.
Any or all forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the actual future results of MLIC. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements. Risks, uncertainties, and other factors that might cause such differences include the risks, uncertainties and other factors identified in Metropolitan Life Insurance Company's filings with the U.S. Securities and Exchange Commission (the “SEC”). These factors include: (1) difficult conditions in the global capital markets; (2) increased volatility and disruption of the capital and credit markets, which may affect our ability to meet liquidity needs and access capital, generate fee income and market-related revenue and finance statutory reserve requirements and may require us to pledge collateral or make payments related to declines in value of specified assets, including assets supporting risks ceded to certain affiliated captive reinsurers or hedging arrangements associated with those risks; (3) exposure to financial and capital market risks, including as a result of the disruption in Europe; (4) impact on us of comprehensive financial services regulation reform, including regulation of MetLife, Inc. as a potential non-bank systemically important financial institution, or otherwise; (5) numerous rulemaking initiatives required or permitted by the Dodd-Frank Wall Street Reform and Consumer Protection Act which may impact how we conduct our business, including those compelling the liquidation of certain financial institutions; (6) regulatory, legislative or tax changes relating to our insurance or other operations that may affect the cost of, or demand for, our products or services, or increase the cost or administrative burdens of providing benefits to employees; (7) adverse results or other consequences from litigation, arbitration or regulatory investigations; (8) potential liquidity and other risks resulting from our participation in a securities lending program and other transactions; (9) investment losses and defaults, and changes to investment valuations; (10) changes in assumptions related to investment valuations, deferred policy acquisition costs, deferred sales inducements, value of business acquired or goodwill; (11) impairments of goodwill and realized losses or market value impairments to illiquid assets; (12) defaults on our mortgage loans; (13) the defaults or deteriorating credit of other financial institutions that could adversely affect us; (14) fluctuations in foreign currency exchange rates; (15) downgrades in our claims paying ability, financial strength ratings or those of MetLife, Inc.’s other insurance subsidiaries, or MetLife, Inc.’s credit ratings; (16) an inability of MetLife, Inc. or MLIC to access its credit facilities; (17) availability and effectiveness of reinsurance or indemnification arrangements, as well as any default or failure of counterparties to perform; (18) differences between actual claims experience and underwriting and reserving assumptions; (19) ineffectiveness of MetLife, Inc.'s risk management policies and procedures; (20) catastrophe losses; (21) deterioration in the experience of the closed block established in connection with the reorganization of MLIC; (22) increasing cost and limited market capacity for statutory life insurance reserve financings; (23) heightened competition, including with respect to pricing, entry of new competitors, consolidation of distributors, the development of new products by new and existing competitors, and for personnel; (24) exposure to losses related to variable annuity guarantee benefits, including from significant and sustained downturns or extreme volatility in equity markets, reduced interest rates, unanticipated policyholder behavior, mortality or longevity, and the adjustment for nonperformance risk; (25) our ability to address difficulties, unforeseen liabilities, asset impairments, or rating agency actions arising from business acquisitions, and integrating and managing the growth of such acquired businesses, or arising from dispositions of businesses or legal entity reorganizations; (26) changes in accounting standards, practices and/or policies; (27) increased expenses relating to pension and postretirement benefit plans for employees and retirees of MetLife, Inc. and its subsidiaries, as well as health care and other employee benefits; (28) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (29) inability to attract and retain sales representatives; (30) the effects of business disruption or economic contraction due to disasters such as terrorist attacks, cyberattacks, other hostilities, or natural catastrophes, including any related impact on the value of our investment portfolio, MetLife, Inc.'s disaster recovery systems, cyber- or other information security systems and management continuity planning; (31) the effectiveness of MetLife, Inc.'s programs and practices in avoiding giving associates incentives to take excessive risks; and (32) other risks and uncertainties described from time to time in Metropolitan Life Insurance Company's filings with the SEC. Metropolitan Life Insurance Company does not undertake any obligation to publicly correct or update any forward-looking statement if Metropolitan Life Insurance Company later becomes aware that such statement is not likely to be achieved. Please consult any further disclosures Metropolitan Life Insurance Company makes on related subjects in reports to the SEC.
Note Regarding Reliance on Statements in Our Contracts
See “Exhibit Index — Note Regarding Reliance on Statements in Our Contracts” for information regarding agreements included as exhibits to this Quarterly Report on Form 10-Q.
Part I — Financial Information
Item 1. Financial Statements
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Interim Condensed Consolidated Balance Sheets
September 30, 2014 (Unaudited) and December 31, 2013
(In millions, except share and per share data)
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| | September 30, 2014 | | December 31, 2013 |
Assets | | | | |
Investments: | | | | |
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $174,846 and $165,371, respectively; includes $162 and $157, respectively, relating to variable interest entities) | | $ | 188,426 |
| | $ | 173,746 |
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Equity securities available-for-sale, at estimated fair value (cost: $1,861 and $1,813, respectively) | | 2,064 |
| | 1,892 |
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Trading and fair value option securities, at estimated fair value (includes $672 and $662, respectively, of actively traded securities; and $18 and $23, respectively, relating to variable interest entities) | | 726 |
| | 723 |
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Mortgage loans (net of valuation allowances of $262 and $272, respectively; includes $298 and $338, respectively, under the fair value option) | | 47,347 |
| | 46,024 |
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Policy loans | | 8,496 |
| | 8,421 |
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Real estate and real estate joint ventures (includes $8 and $1,141, respectively, relating to variable interest entities, includes $169 and $40, respectively, of real estate held-for-sale) | | 7,603 |
| | 7,798 |
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Other limited partnership interests (includes $53 and $53, respectively, relating to variable interest entities) | | 5,042 |
| | 4,716 |
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Short-term investments, principally at estimated fair value | | 4,677 |
| | 5,962 |
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Other invested assets, principally at estimated fair value (includes $56 and $78, respectively, relating to variable interest entities) | | 11,961 |
| | 10,589 |
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Total investments | | 276,342 |
| | 259,871 |
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Cash and cash equivalents, principally at estimated fair value (includes $2 and $21, respectively, relating to variable interest entities) | | 1,854 |
| | 1,098 |
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Accrued investment income (includes $2 and $2, respectively, relating to variable interest entities) | | 2,332 |
| | 2,249 |
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Premiums, reinsurance and other receivables (includes $7 and $7, respectively, relating to variable interest entities) | | 25,832 |
| | 23,637 |
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Deferred policy acquisition costs and value of business acquired | | 6,110 |
| | 6,416 |
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Other assets (includes $3 and $24, respectively, relating to variable interest entities) | | 5,444 |
| | 4,716 |
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Separate account assets | | 139,509 |
| | 134,796 |
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Total assets | | $ | 457,423 |
| | $ | 432,783 |
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Liabilities and Equity | | | | |
Liabilities | | | | |
Future policy benefits | | $ | 114,725 |
| | $ | 111,963 |
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Policyholder account balances | | 96,849 |
| | 92,498 |
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Other policy-related balances | | 5,971 |
| | 5,671 |
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Policyholder dividends payable | | 636 |
| | 601 |
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Policyholder dividend obligation | | 2,825 |
| | 1,771 |
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Payables for collateral under securities loaned and other transactions | | 23,097 |
| | 21,096 |
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Short-term debt | | 100 |
| | 175 |
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Long-term debt (includes $96 and $520, respectively, at estimated fair value, relating to variable interest entities) | | 2,162 |
| | 2,828 |
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Current income tax payable | | 433 |
| | 365 |
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Deferred income tax liability (includes $0 and $1, respectively, at estimated fair value, relating to variable interest entities) | | 3,932 |
| | 1,785 |
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Other liabilities (includes $18 and $31, respectively, relating to variable interest entities) | | 35,625 |
| | 32,180 |
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Separate account liabilities | | 139,509 |
| | 134,796 |
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Total liabilities | | 425,864 |
| | 405,729 |
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Contingencies, Commitments and Guarantees (Note 11) | |
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Redeemable noncontrolling interests | | — |
| | 774 |
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Equity | | | | |
Metropolitan Life Insurance Company 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 both September 30, 2014 and December 31, 2013 | | 5 |
| | 5 |
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Additional paid-in capital | | 14,446 |
| | 14,515 |
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Retained earnings | | 11,677 |
| | 9,352 |
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Accumulated other comprehensive income (loss) | | 5,076 |
| | 2,158 |
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Total Metropolitan Life Insurance Company stockholder’s equity | | 31,204 |
| | 26,030 |
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Noncontrolling interests | | 355 |
| | 250 |
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Total equity | | 31,559 |
| | 26,280 |
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Total liabilities and equity | | $ | 457,423 |
| | $ | 432,783 |
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See accompanying notes to the interim condensed consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Interim Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three Months and Nine Months Ended September 30, 2014 and 2013 (Unaudited)
(In millions)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenues | | | | | | | |
Premiums | $ | 5,087 |
| | $ | 4,804 |
| | $ | 15,415 |
| | $ | 14,563 |
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Universal life and investment-type product policy fees | 623 |
| | 596 |
| | 1,806 |
| | 1,773 |
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Net investment income | 2,990 |
| | 2,875 |
| | 8,931 |
| | 8,764 |
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Other revenues | 440 |
| | 415 |
| | 1,303 |
| | 1,260 |
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Net investment gains (losses): | | | | | | | |
Other-than-temporary impairments on fixed maturity securities | (3 | ) | | (8 | ) | | (15 | ) | | (64 | ) |
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss) | (8 | ) | | (14 | ) | | (9 | ) | | (42 | ) |
Other net investment gains (losses) | 174 |
| | (77 | ) | | 98 |
| | 95 |
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Total net investment gains (losses) | 163 |
| | (99 | ) | | 74 |
| | (11 | ) |
Net derivative gains (losses) | 554 |
| | (573 | ) | | 617 |
| | (933 | ) |
Total revenues | 9,857 |
| | 8,018 |
| | 28,146 |
| | 25,416 |
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Expenses | | | | | | | |
Policyholder benefits and claims | 5,697 |
| | 5,466 |
| | 17,315 |
| | 16,484 |
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Interest credited to policyholder account balances | 536 |
| | 551 |
| | 1,610 |
| | 1,705 |
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Policyholder dividends | 320 |
| | 300 |
| | 919 |
| | 904 |
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Other expenses | 1,464 |
| | 1,441 |
| | 4,272 |
| | 4,279 |
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Total expenses | 8,017 |
| | 7,758 |
| | 24,116 |
| | 23,372 |
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Income (loss) from continuing operations before provision for income tax | 1,840 |
| | 260 |
| | 4,030 |
| | 2,044 |
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Provision for income tax expense (benefit) | 537 |
| | 18 |
| | 1,150 |
| | 483 |
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Income (loss) from continuing operations, net of income tax | 1,303 |
| | 242 |
| | 2,880 |
| | 1,561 |
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Income (loss) from discontinued operations, net of income tax | — |
| | — |
| | (3 | ) | | — |
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Net income (loss) | 1,303 |
| | 242 |
| | 2,877 |
| | 1,561 |
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Less: Net income (loss) attributable to noncontrolling interests | (7 | ) | | (5 | ) | | (6 | ) | | (3 | ) |
Net income (loss) attributable to Metropolitan Life Insurance Company | $ | 1,310 |
| | $ | 247 |
| | $ | 2,883 |
| | $ | 1,564 |
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Comprehensive income (loss) | $ | 911 |
| | $ | 467 |
| | $ | 5,795 |
| | $ | (257 | ) |
Less: Comprehensive income (loss) attributable to noncontrolling interests, net of income tax | (7 | ) | | (5 | ) | | (6 | ) | | (3 | ) |
Comprehensive income (loss) attributable to Metropolitan Life Insurance Company | $ | 918 |
| | $ | 472 |
| | $ | 5,801 |
| | $ | (254 | ) |
See accompanying notes to the interim condensed consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Interim Condensed Consolidated Statements of Equity
For the Nine Months Ended September 30, 2014 (Unaudited)
(In millions)
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| | | | | | | | Accumulated Other Comprehensive Income (Loss) | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Net Unrealized Investment Gains (Losses) | | Other-Than- Temporary Impairments | | Foreign Currency Translation Adjustments | | Defined Benefit Plans Adjustment | | Total Metropolitan Life Insurance Company Stockholder’s Equity | | Noncontrolling Interests | | Total Equity |
Balance at December 31, 2013 | | $ | 5 |
| | $ | 14,515 |
| | $ | 9,352 |
| | $ | 3,797 |
| | $ | (93 | ) | | $ | 31 |
| | $ | (1,577 | ) | | $ | 26,030 |
| | $ | 250 |
| | $ | 26,280 |
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Capital contributions from MetLife, Inc. | | | | 3 |
| | | | | | | | | | | | 3 |
| | | | 3 |
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Returns of capital | | | | (76 | ) | | | | | | | | | | | | (76 | ) | | | | (76 | ) |
Excess tax benefits related to stock-based compensation | | | | 4 |
| |
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| | | | | | | | | | 4 |
| | | | 4 |
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Dividends on common stock | | | | | | (558 | ) | | | | | | | | | | (558 | ) | | | | (558 | ) |
Change in equity of noncontrolling interests | | | |
|
| | | | | | | | | | | | — |
| | 111 |
| | 111 |
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Net income (loss) | | | | | | 2,883 |
| | | | | | | | | | 2,883 |
| | (6 | ) | | 2,877 |
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Other comprehensive income (loss), net of income tax | | | | | | | | 2,800 |
| | 53 |
| | — |
| | 65 |
| | 2,918 |
| |
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| | 2,918 |
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Balance at September 30, 2014 | | $ | 5 |
| | $ | 14,446 |
| | $ | 11,677 |
| | $ | 6,597 |
| | $ | (40 | ) | | $ | 31 |
| | $ | (1,512 | ) | | $ | 31,204 |
| | $ | 355 |
| | $ | 31,559 |
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See accompanying notes to the interim condensed consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Interim Condensed Consolidated Statements of Equity — (Continued)
For the Nine Months Ended September 30, 2013 (Unaudited)
(In millions)
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| | | | | | | | Accumulated Other Comprehensive Income (Loss) | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Net Unrealized Investment Gains (Losses) | | Other-Than- Temporary Impairments | | Foreign Currency Translation Adjustments | | Defined Benefit Plans Adjustment | | Total Metropolitan Life Insurance Company Stockholder’s Equity | | Noncontrolling Interests | | Total Equity |
Balance at December 31, 2012 | | $ | 5 |
| | $ | 14,510 |
| | $ | 8,631 |
| | $ | 6,497 |
| | $ | (158 | ) | | $ | 18 |
| | $ | (2,349 | ) | | $ | 27,154 |
| | $ | 292 |
| | $ | 27,446 |
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Capital contributions from MetLife, Inc. | | | | 2 |
| | | | | | | | | | | | 2 |
| | | | 2 |
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Excess tax benefits related to stock-based compensation | | | | — |
| | | | | | | | | | | | — |
| | | | — |
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Dividends on common stock | | | | | | (714 | ) | | | | | | | | | | (714 | ) | | | | (714 | ) |
Change in equity of noncontrolling interests | | | | | | | | | | | | | | | | — |
| | (40 | ) | | (40 | ) |
Net income (loss) | | | | | | 1,564 |
| | | | | | | | | | 1,564 |
| | (3 | ) | | 1,561 |
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Other comprehensive income (loss), net of income tax | | | | | | | | (1,969 | ) | | 52 |
| | (2 | ) | | 101 |
| | (1,818 | ) | | | | (1,818 | ) |
Balance at September 30, 2013 | | $ | 5 |
| | $ | 14,512 |
| | $ | 9,481 |
| | $ | 4,528 |
| | $ | (106 | ) | | $ | 16 |
| | $ | (2,248 | ) | | $ | 26,188 |
| | $ | 249 |
| | $ | 26,437 |
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See accompanying notes to the interim condensed consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Interim Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2014 and 2013 (Unaudited)
(In millions)
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| | | | | | | |
| Nine Months Ended September 30, |
| 2014 | | 2013 |
Net cash provided by (used in) operating activities | $ | 4,502 |
| | $ | 3,459 |
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Cash flows from investing activities | | | |
Sales, maturities and repayments of: | | | |
Fixed maturity securities | 45,276 |
| | 59,547 |
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Equity securities | 176 |
| | 160 |
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Mortgage loans | 8,427 |
| | 6,892 |
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Real estate and real estate joint ventures | 542 |
| | 87 |
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Other limited partnership interests | 257 |
| | 285 |
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Purchases of: | | | |
Fixed maturity securities | (51,259 | ) | | (57,154 | ) |
Equity securities | (140 | ) | | (389 | ) |
Mortgage loans | (10,044 | ) | | (7,923 | ) |
Real estate and real estate joint ventures | (1,164 | ) | | (718 | ) |
Other limited partnership interests | (598 | ) | | (521 | ) |
Cash received in connection with freestanding derivatives | 440 |
| | 462 |
|
Cash paid in connection with freestanding derivatives | (697 | ) | | (996 | ) |
Purchases of loans to affiliates | (437 | ) | | — |
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Net change in policy loans | (75 | ) | | (66 | ) |
Net change in short-term investments | 1,289 |
| | 1,512 |
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Net change in other invested assets | (107 | ) | | (215 | ) |
Net change in property, equipment and leasehold improvements | (104 | ) | | (2 | ) |
Other, net | 18 |
| | — |
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Net cash provided by (used in) investing activities | (8,200 | ) | | 961 |
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Cash flows from financing activities | | | |
Policyholder account balances: | | | |
Deposits | 48,457 |
| | 38,260 |
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Withdrawals | (44,549 | ) | | (40,276 | ) |
Net change in payables for collateral under securities loaned and other transactions | 2,001 |
| | (1,112 | ) |
Net change in short-term debt | (320 | ) | | — |
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Long-term debt issued | — |
| | 23 |
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Long-term debt repaid | (245 | ) | | (21 | ) |
Dividends on common stock | (558 | ) | | (714 | ) |
Other, net | (332 | ) | | (27 | ) |
Net cash provided by (used in) financing activities | 4,454 |
| | (3,867 | ) |
Change in cash and cash equivalents | 756 |
| | 553 |
|
Cash and cash equivalents, beginning of period | 1,098 |
| | 1,401 |
|
Cash and cash equivalents, end of period | $ | 1,854 |
| | $ | 1,954 |
|
Supplemental disclosures of cash flow information | | | |
Net cash paid (received) for: | | | |
Interest | $ | 95 |
| | $ | 92 |
|
Income tax | $ | 623 |
| | $ | 519 |
|
Non-cash transactions: | | | |
Capital contributions from MetLife, Inc. | $ | 3 |
| | $ | 2 |
|
Real estate and real estate joint ventures acquired in satisfaction of debt | $ | 3 |
| | $ | 14 |
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Deconsolidation of MetLife Core Property Fund (see Note 5): | | | |
Reduction of redeemable noncontrolling interests | $ | 774 |
| | $ | — |
|
Reduction of long-term debt | $ | 413 |
| | $ | — |
|
Reduction of real estate and real estate joint ventures | $ | 1,132 |
| | $ | — |
|
Issuance of short-term debt | $ | 245 |
| | $ | — |
|
Returns of capital | $ | 76 |
| | $ | — |
|
See accompanying notes to the interim condensed consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
Metropolitan Life Insurance Company and its subsidiaries (collectively, “MLIC” or the “Company”) is a leading provider of insurance, annuities and employee benefit programs throughout the United States. The Company offers life insurance and annuities to individuals, as well as group insurance and retirement & savings products and services to corporations and other institutions. Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc.
The Company is organized into three segments: Retail; Group, Voluntary & Worksite Benefits; and Corporate Benefit Funding.
Basis of Presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the interim condensed consolidated financial statements. In applying these policies and estimates, management makes subjective and complex judgments that frequently require assumptions about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company’s business and operations. Actual results could differ from estimates.
The accompanying interim condensed consolidated financial statements include the accounts of Metropolitan Life Insurance Company and its subsidiaries, as well as partnerships and joint ventures in which the Company has control, and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Intercompany accounts and transactions have been eliminated.
The Company uses the equity method of accounting for investments in equity securities when it has significant influence or at least 20% interest and for investments in real estate joint ventures and other limited partnership interests (“investees”) when it has more than a minor ownership interest or more than a minor influence over the investee’s operations, but does not have a controlling financial interest. The Company generally recognizes its share of the investee’s earnings on a three-month lag in instances where the investee’s financial information is not sufficiently timely or when the investee’s reporting period differs from the Company’s reporting period. The Company uses the cost method of accounting for investments in which it has virtually no influence over the investee’s operations.
Certain amounts in the prior year periods’ interim condensed consolidated financial statements and related footnotes thereto have been reclassified to conform with the 2014 presentation as discussed throughout the Notes to the Interim Condensed Consolidated Financial Statements.
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.
The accompanying interim condensed consolidated financial statements are unaudited and reflect all adjustments (including normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in conformity with GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2013 consolidated balance sheet data was derived from audited consolidated financial statements included in Metropolitan Life Insurance Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Annual Report”), which include all disclosures required by GAAP. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in the 2013 Annual Report.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Adoption of New Accounting Pronouncements
Effective January 1, 2014, the Company adopted new guidance regarding reporting of discontinued operations and disclosures of disposals of components of an entity. The guidance increases the threshold for a disposal to qualify as a discontinued operation, expands the disclosures for discontinued operations and requires new disclosures for certain disposals that do not meet the definition of a discontinued operation. Disposals must now represent a strategic shift that has or will have a major effect on the entity’s operations and financial results to qualify as discontinued operations. The new guidance did not have a material impact on the financial statements upon adoption.
Effective January 1, 2014, the Company adopted new guidance regarding the presentation of an unrecognized tax benefit. The new guidance requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, when the carryforwards are not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position or the applicable tax law does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with the related deferred tax asset. The adoption was prospectively applied and resulted in a reduction to other liabilities and a corresponding increase to deferred income tax liability in the amount of $190 million.
Effective January 1, 2014, the Company adopted new guidance regarding foreign currency that requires an entity that ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. The new guidance did not have a material impact on the financial statements upon adoption.
Effective January 1, 2014, the Company adopted new guidance regarding liabilities that requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, the amendments require an entity to disclose the nature and amount of the obligation, as well as other information about the obligation. The new guidance did not have a material impact on the financial statements upon adoption.
Effective January 1, 2014, the Company adopted new guidance on other expenses which address how health insurers should recognize and classify in their income statements fees mandated by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act. The amendments in this standard specify that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using the straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. In accordance with the adoption of the new accounting pronouncement on January 1, 2014, the Company recorded $55 million in other liabilities, and a corresponding deferred cost, in other assets.
Future Adoption of New Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance on transfers and servicing (Accounting Standards Update (“ASU”) 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosure), effective prospectively for fiscal years beginning after December 15, 2014 and interim periods within those years. The new guidance requires that repurchase-to-maturity transactions and repurchase financing arrangements be accounted for as secured borrowings and provides for enhanced disclosures, including the nature of collateral pledged and the time to maturity. Certain interim period disclosures for repurchase agreements and securities lending transactions are not required until the second quarter of 2015. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
In May 2014, the FASB issued a comprehensive new revenue recognition standard (ASU 2014‑09, Revenue from Contracts with Customers (Topic 606)), effective retrospectively for fiscal years beginning after December 15, 2016 and interim periods within those years. Early adoption of this standard is not permitted. The new guidance will supersede nearly all existing revenue recognition guidance under GAAP; however, it will not impact the accounting for insurance contracts, leases, financial instruments and guarantees. For those contracts that are impacted by the new guidance, the guidance will require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to, in exchange for those goods or services. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In January 2014, the FASB issued new guidance regarding investments (ASU 2014-01, Investments — Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects), effective retrospectively for fiscal years beginning after December 15, 2014 and interim reporting periods within those years. The new guidance is applicable to investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. Under the guidance, an entity that meets certain conditions is permitted to make an accounting policy election to amortize the initial cost of its investment in proportion to the tax credits and other tax benefits received, and recognize the net investment performance on the statement of operations as a component of income tax expense (benefit). The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
2. Segment Information
The Company is organized into three segments: Retail; Group, Voluntary & Worksite Benefits; and Corporate Benefit Funding. In addition, the Company reports certain of its results of operations in Corporate & Other.
Retail
The Retail segment offers a broad range of protection products and services and a variety of annuities to individuals and employees of corporations and other institutions, and is organized into two businesses: Life & Other and Annuities. Life & Other insurance products and services include variable life, universal life, term life and whole life products. Additionally, through broker-dealer affiliates, the Company offers a full range of mutual funds and other securities products. Life & Other products and services also include individual disability income products. Annuities includes a variety of variable and fixed annuities which provide for both asset accumulation and asset distribution needs.
Group, Voluntary & Worksite Benefits
The Group, Voluntary & Worksite Benefits segment offers a broad range of protection products and services to individuals and corporations, as well as other institutions and their respective employees. Group insurance products and services include variable life, universal life and term life products. Group insurance products and services also include dental, group short- and long-term disability and accidental death and dismemberment coverages. Voluntary & Worksite products and services include long-term care, prepaid legal plans and critical illness products.
Corporate Benefit Funding
The Corporate Benefit Funding segment offers a broad range of annuity and investment products, including guaranteed interest products and other stable value products, income annuities, and separate account contracts for the investment management of defined benefit and defined contribution plan assets. This segment also includes structured settlements and certain products to fund postretirement benefits and company-, bank- or trust-owned life insurance used to finance non-qualified benefit programs for executives.
Corporate & Other
Corporate & Other contains the excess capital, as well as enterprise-wide strategic initiative restructuring charges, not allocated to the segments, and various business activities such as start-up and certain run-off businesses, the Company’s ancillary international operations, interest expense related to the majority of the Company’s outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues. Start-up businesses include direct and digital marketing products. In addition, Corporate & Other includes ancillary U.S. sponsored direct business, comprised of group and individual products sold through sponsoring organizations and affinity groups. Corporate & Other also includes the investment management business through which the Company offers fee-based investment management services to institutional clients. Additionally, Corporate & Other includes the elimination of intersegment amounts, which generally relate to intersegment loans, which bear interest rates commensurate with related borrowings.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
2. Segment Information (continued)
Financial Measures and Segment Accounting Policies
Operating earnings is the measure of segment profit or loss the Company uses to evaluate segment performance and allocate resources. Consistent with GAAP guidance for segment reporting, operating earnings is the Company’s measure of segment performance and is reported below. Operating earnings should not be viewed as a substitute for income (loss) from continuing operations, net of income tax. The Company believes the presentation of operating earnings as the Company measures it for management purposes enhances the understanding of its performance by highlighting the results of operations and the underlying profitability drivers of the business.
Operating earnings is defined as operating revenues less operating expenses, both net of income tax.
Operating revenues excludes net investment gains (losses) and net derivative gains (losses).
The following additional adjustments are made to GAAP revenues, in the line items indicated, in calculating operating revenues:
| |
• | Universal life and investment-type product policy fees excludes the amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain variable annuity guaranteed minimum income benefits (“GMIBs”) fees (“GMIB Fees”); and |
| |
• | Net investment income: (i) includes amounts for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment, (ii) includes income from discontinued real estate operations, (iii) excludes post-tax operating earnings adjustments relating to insurance joint ventures accounted for under the equity method, and (iv) excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP. |
The following adjustments are made to GAAP expenses, in the line items indicated, in calculating operating expenses:
| |
• | Policyholder benefits and claims and policyholder dividends excludes: (i) changes in the policyholder dividend obligation related to net investment gains (losses) and net derivative gains (losses), (ii) amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets, (iii) benefits and hedging costs related to GMIBs (“GMIB Costs”), and (iv) market value adjustments associated with surrenders or terminations of contracts (“Market Value Adjustments”); |
| |
• | Interest credited to policyholder account balances includes adjustments for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of policyholder account balances (“PABs”) but do not qualify for hedge accounting treatment; |
| |
• | Amortization of deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”) excludes amounts related to: (i) net investment gains (losses) and net derivative gains (losses), (ii) GMIB Fees and GMIB Costs, and (iii) Market Value Adjustments; |
| |
• | Interest expense on debt excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and |
| |
• | Other expenses excludes costs related to noncontrolling interests and goodwill impairments. |
Set forth in the tables below is certain financial information with respect to the Company’s segments, as well as Corporate & Other, for the three months and nine months ended September 30, 2014 and 2013. The segment accounting policies are the same as those used to prepare the Company’s consolidated financial statements, except for operating earnings adjustments as defined above. In addition, segment accounting policies include the method of capital allocation described below.
Economic capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model accounts for the unique and specific nature of the risks inherent in MetLife, Inc.’s and the Company’s business.
MetLife, Inc.’s economic capital model aligns segment allocated equity with emerging standards and consistent risk principles. The model applies statistics-based risk evaluation principles to the material risks to which the Company is exposed. These consistent risk principles include calibrating required economic capital shock factors to a specific confidence level and time horizon and applying an industry standard method for the inclusion of diversification benefits among risk types.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
2. Segment Information (continued)
Segment net investment income is credited or charged based on the level of allocated equity; however, changes in allocated equity do not impact the Company’s consolidated net investment income, operating earnings or income (loss) from continuing operations, net of income tax.
Net investment income is based upon the actual results of each segment’s specifically identifiable investment portfolios 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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Operating Earnings | | | | |
Three Months Ended September 30, 2014 | | Retail | | Group, Voluntary & Worksite Benefits | | Corporate Benefit Funding | | Corporate & Other | | Total | | Adjustments | | Total Consolidated |
| | (In millions) |
Revenues | | | | | | | | | | | | | | |
Premiums | | $ | 1,010 |
| | $ | 3,606 |
| | $ | 438 |
| | $ | 33 |
| | $ | 5,087 |
| | $ | — |
| | $ | 5,087 |
|
Universal life and investment-type product policy fees | | 377 |
| | 180 |
| | 51 |
| | — |
| | 608 |
| | 15 |
| | 623 |
|
Net investment income | | 1,344 |
| | 458 |
| | 1,257 |
| | 49 |
| | 3,108 |
| | (118 | ) | | 2,990 |
|
Other revenues | | 97 |
| | 101 |
| | 69 |
| | 173 |
| | 440 |
| | — |
| | 440 |
|
Net investment gains (losses) | | — |
| | — |
| | — |
| | — |
| | — |
| | 163 |
| | 163 |
|
Net derivative gains (losses) | | — |
| | — |
| | — |
| | — |
| | — |
| | 554 |
| | 554 |
|
Total revenues | | 2,828 |
| | 4,345 |
| | 1,815 |
| | 255 |
| | 9,243 |
| | 614 |
| | 9,857 |
|
Expenses | | | | | | | | | | | | | | |
Policyholder benefits and claims and policyholder dividends | | 1,581 |
| | 3,466 |
| | 929 |
| | 23 |
| | 5,999 |
| | 18 |
| | 6,017 |
|
Interest credited to policyholder account balances | | 245 |
| | 38 |
| | 250 |
| | — |
| | 533 |
| | 3 |
| | 536 |
|
Capitalization of DAC | | (92 | ) | | (4 | ) | | (10 | ) | | — |
| | (106 | ) | | — |
| | (106 | ) |
Amortization of DAC and VOBA | | 78 |
| | 8 |
| | 4 |
| | — |
| | 90 |
| | (2 | ) | | 88 |
|
Interest expense on debt | | 1 |
| | — |
| | 3 |
| | 34 |
| | 38 |
| | — |
| | 38 |
|
Other expenses | | 470 |
| | 525 |
| | 135 |
| | 295 |
| | 1,425 |
| | 19 |
| | 1,444 |
|
Total expenses | | 2,283 |
| | 4,033 |
| | 1,311 |
| | 352 |
| | 7,979 |
| | 38 |
| | 8,017 |
|
Provision for income tax expense (benefit) | | 191 |
| | 114 |
| | 176 |
| | (146 | ) | | 335 |
| | 202 |
| | 537 |
|
Operating earnings | | $ | 354 |
| | $ | 198 |
| | $ | 328 |
| | $ | 49 |
| | 929 |
| | | | |
Adjustments to: | | | | | | | | | | | | | | |
Total revenues | | | | | | | | | | 614 |
| | | | |
Total expenses | | | | | | | | | | (38 | ) | | | | |
Provision for income tax (expense) benefit | | (202 | ) | | | | |
Income (loss) from continuing operations, net of income tax | | $ | 1,303 |
| | | | $ | 1,303 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
2. Segment Information (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Operating Earnings | | | | |
Three Months Ended September 30, 2013 | | Retail | | Group, Voluntary & Worksite Benefits | | Corporate Benefit Funding | | Corporate & Other | | Total | | Adjustments | | Total Consolidated |
| | (In millions) |
Revenues | | | | | | | | | | | | | | |
Premiums | | $ | 976 |
| | $ | 3,383 |
| | $ | 425 |
| | $ | 20 |
| | $ | 4,804 |
| | $ | — |
| | $ | 4,804 |
|
Universal life and investment-type product policy fees | | 363 |
| | 171 |
| | 45 |
| | — |
| | 579 |
| | 17 |
| | 596 |
|
Net investment income | | 1,318 |
| | 443 |
| | 1,144 |
| | 91 |
| | 2,996 |
| | (121 | ) | | 2,875 |
|
Other revenues | | 88 |
| | 100 |
| | 67 |
| | 160 |
| | 415 |
| | — |
| | 415 |
|
Net investment gains (losses) | | — |
| | — |
| | — |
| | — |
| | — |
| | (99 | ) | | (99 | ) |
Net derivative gains (losses) | | — |
| | — |
| | — |
| | — |
| | — |
| | (573 | ) | | (573 | ) |
Total revenues | | 2,745 |
| | 4,097 |
| | 1,681 |
| | 271 |
| | 8,794 |
| | (776 | ) | | 8,018 |
|
Expenses | | | | | | | | | | | | | | |
Policyholder benefits and claims and policyholder dividends | | 1,510 |
| | 3,274 |
| | 946 |
| | 23 |
| | 5,753 |
| | 13 |
| | 5,766 |
|
Interest credited to policyholder account balances | | 248 |
| | 39 |
| | 257 |
| | — |
| | 544 |
| | 7 |
| | 551 |
|
Capitalization of DAC | | (125 | ) | | (5 | ) | | (2 | ) | | — |
| | (132 | ) | | — |
| | (132 | ) |
Amortization of DAC and VOBA | | 123 |
| | 8 |
| | 4 |
| | — |
| | 135 |
| | (64 | ) | | 71 |
|
Interest expense on debt | | 2 |
| | — |
| | 3 |
| | 33 |
| | 38 |
| | — |
| | 38 |
|
Other expenses | | 573 |
| | 495 |
| | 126 |
| | 258 |
| | 1,452 |
| | 12 |
| | 1,464 |
|
Total expenses | | 2,331 |
| | 3,811 |
| | 1,334 |
| | 314 |
| | 7,790 |
| | (32 | ) | | 7,758 |
|
Provision for income tax expense (benefit) | | 145 |
| | 101 |
| | 121 |
| | (88 | ) | | 279 |
| | (261 | ) | | 18 |
|
Operating earnings | | $ | 269 |
| | $ | 185 |
| | $ | 226 |
| | $ | 45 |
| | 725 |
| | | | |
Adjustments to: | | | | | | | | | | | | | | |
Total revenues | | | | | | | | | | (776 | ) | | | | |
Total expenses | | | | | | | | | | 32 |
| | | | |
Provision for income tax (expense) benefit | | 261 |
| | | | |
Income (loss) from continuing operations, net of income tax | | $ | 242 |
| | | | $ | 242 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
2. Segment Information (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Operating Earnings | | | | |
Nine Months Ended September 30, 2014 | | Retail | | Group, Voluntary & Worksite Benefits | | Corporate Benefit Funding | | Corporate & Other | | Total | | Adjustments | | Total Consolidated |
| | (In millions) |
Revenues | | | | | | | | | | | | | | |
Premiums | | $ | 2,978 |
| | $ | 10,863 |
| | $ | 1,475 |
| | $ | 99 |
| | $ | 15,415 |
| | $ | — |
| | $ | 15,415 |
|
Universal life and investment-type product policy fees | | 1,092 |
| | 538 |
| | 145 |
| | — |
| | 1,775 |
| | 31 |
| | 1,806 |
|
Net investment income | | 4,057 |
| | 1,340 |
| | 3,655 |
| | 226 |
| | 9,278 |
| | (347 | ) | | 8,931 |
|
Other revenues | | 273 |
| | 310 |
| | 214 |
| | 506 |
| | 1,303 |
| | — |
| | 1,303 |
|
Net investment gains (losses) | | — |
| | — |
| | — |
| | — |
| | — |
| | 74 |
| | 74 |
|
Net derivative gains (losses) | | — |
| | — |
| | — |
| | — |
| | — |
| | 617 |
| | 617 |
|
Total revenues | | 8,400 |
| | 13,051 |
| | 5,489 |
| | 831 |
| | 27,771 |
| | 375 |
| | 28,146 |
|
Expenses | | | | | | | | | | | | | | |
Policyholder benefits and claims and policyholder dividends | | 4,669 |
| | 10,494 |
| | 2,965 |
| | 61 |
| | 18,189 |
| | 45 |
| | 18,234 |
|
Interest credited to policyholder account balances | | 729 |
| | 117 |
| | 755 |
| | — |
| | 1,601 |
| | 9 |
| | 1,610 |
|
Capitalization of DAC | | (272 | ) | | (12 | ) | | (29 | ) | | — |
| | (313 | ) | | — |
| | (313 | ) |
Amortization of DAC and VOBA | | 422 |
| | 19 |
| | 13 |
| | — |
| | 454 |
| | 28 |
| | 482 |
|
Interest expense on debt | | 3 |
| | — |
| | 8 |
| | 102 |
| | 113 |
| | 1 |
| | 114 |
|
Other expenses | | 1,149 |
| | 1,575 |
| | 378 |
| | 868 |
| | 3,970 |
| | 19 |
| | 3,989 |
|
Total expenses | | 6,700 |
| | 12,193 |
| | 4,090 |
| | 1,031 |
| | 24,014 |
| | 102 |
| | 24,116 |
|
Provision for income tax expense (benefit) | | 595 |
| | 315 |
| | 489 |
| | (346 | ) | | 1,053 |
| | 97 |
| | 1,150 |
|
Operating earnings | | $ | 1,105 |
| | $ | 543 |
| | $ | 910 |
| | $ | 146 |
| | 2,704 |
| | | | |
Adjustments to: | | | | | | | | | | | | | | |
Total revenues | | | | | | | | | | 375 |
| | | | |
Total expenses | | | | | | | | | | (102 | ) | | | | |
Provision for income tax (expense) benefit | | (97 | ) | | | | |
Income (loss) from continuing operations, net of income tax | | $ | 2,880 |
| | | | $ | 2,880 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
2. Segment Information (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Operating Earnings | | | | |
Nine Months Ended September 30, 2013 | | Retail | | Group, Voluntary & Worksite Benefits | | Corporate Benefit Funding | | Corporate & Other | | Total | | Adjustments | | Total Consolidated |
| | (In millions) |
Revenues | | | | | | | | | | | | | | |
Premiums | | $ | 2,903 |
| | $ | 10,308 |
| | $ | 1,295 |
| | $ | 57 |
| | $ | 14,563 |
| | $ | — |
| | $ | 14,563 |
|
Universal life and investment-type product policy fees | | 1,042 |
| | 521 |
| | 160 |
| | — |
| | 1,723 |
| | 50 |
| | 1,773 |
|
Net investment income | | 4,005 |
| | 1,336 |
| | 3,425 |
| | 312 |
| | 9,078 |
| | (314 | ) | | 8,764 |
|
Other revenues | | 242 |
| | 303 |
| | 204 |
| | 511 |
| | 1,260 |
| | — |
| | 1,260 |
|
Net investment gains (losses) | | — |
| | — |
| | — |
| | — |
| | — |
| | (11 | ) | | (11 | ) |
Net derivative gains (losses) | | — |
| | — |
| | — |
| | — |
| | — |
| | (933 | ) | | (933 | ) |
Total revenues | | 8,192 |
| | 12,468 |
| | 5,084 |
| | 880 |
| | 26,624 |
| | (1,208 | ) | | 25,416 |
|
Expenses | | | | | | | | | | | | | | |
Policyholder benefits and claims and policyholder dividends | | 4,612 |
| | 9,904 |
| | 2,817 |
| | 49 |
| | 17,382 |
| | 6 |
| | 17,388 |
|
Interest credited to policyholder account balances | | 742 |
| | 116 |
| | 833 |
| | — |
| | 1,691 |
| | 14 |
| | 1,705 |
|
Capitalization of DAC | | (400 | ) | | (15 | ) | | (23 | ) | | — |
| | (438 | ) | | — |
| | (438 | ) |
Amortization of DAC and VOBA | | 379 |
| | 20 |
| | 17 |
| | — |
| | 416 |
| | (185 | ) | | 231 |
|
Interest expense on debt | | 4 |
| | 1 |
| | 8 |
| | 100 |
| | 113 |
| | 2 |
| | 115 |
|
Other expenses | | 1,681 |
| | 1,473 |
| | 372 |
| | 833 |
| | 4,359 |
| | 12 |
| | 4,371 |
|
Total expenses | | 7,018 |
| | 11,499 |
| | 4,024 |
| | 982 |
| | 23,523 |
| | (151 | ) | | 23,372 |
|
Provision for income tax expense (benefit) | | 411 |
| | 340 |
| | 371 |
| | (259 | ) | | 863 |
| | (380 | ) | | 483 |
|
Operating earnings | | $ | 763 |
| | $ | 629 |
| | $ | 689 |
| | $ | 157 |
| | 2,238 |
| | | | |
Adjustments to: | | | | | | | | | | | | | | |
Total revenues | | | | | | | | | | (1,208 | ) | | | | |
Total expenses | | | | | | | | | | 151 |
| | | | |
Provision for income tax (expense) benefit | | 380 |
| | | | |
Income (loss) from continuing operations, net of income tax | | $ | 1,561 |
| | | | $ | 1,561 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
2. Segment Information (continued)
The following table presents total assets with respect to the Company’s segments, as well as Corporate & Other, at:
|
| | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| (In millions) |
Retail | $ | 177,925 |
| | $ | 174,853 |
|
Group, Voluntary & Worksite Benefits | 42,492 |
| | 41,059 |
|
Corporate Benefit Funding | 206,627 |
| | 188,960 |
|
Corporate & Other | 30,379 |
| | 27,911 |
|
Total | $ | 457,423 |
| | $ | 432,783 |
|
3. Insurance
Guarantees
As discussed in Notes 1 and 4 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report, the Company issues variable annuity products with guaranteed minimum benefits. The non-life-contingent portion of guaranteed minimum withdrawal benefits (“GMWBs”) and the portion of certain GMIBs that does not require annuitization are accounted for as embedded derivatives in PABs and are further discussed in Note 6.
The Company also issues annuity contracts that apply a lower rate on funds deposited if the contractholder elects to surrender the contract for cash and a higher rate if the contractholder elects to annuitize (“two tier annuities”). These guarantees include benefits that are payable in the event of death, maturity or at annuitization. Additionally, the Company issues universal and variable life contracts where the Company contractually guarantees to the contractholder a secondary guarantee or a guaranteed paid-up benefit.
Based on the type of guarantee, the Company defines net amount at risk as listed below. These amounts include direct business, but exclude offsets from hedging or reinsurance, if any.
Variable Annuity Guarantees
In the Event of Death
Defined as the death benefit less the total contract account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed on all contracts on the balance sheet date and includes any additional contractual claims associated with riders purchased to assist with covering income taxes payable upon death.
At Annuitization
Defined as the amount (if any) that would be required to be added to the total contract account value to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit. This amount represents the Company’s potential economic exposure to such guarantees in the event all contractholders were to annuitize on the balance sheet date, even though the contracts contain terms that allow annuitization of the guaranteed amount only after the 10th anniversary of the contract, which not all contractholders have achieved.
Two Tier Annuities
Defined as the excess of the upper tier, adjusted for a profit margin, less the lower tier, as of the balance sheet date. These contracts apply a lower rate on funds if the contractholder elects to surrender the contract for cash and a higher rate if the contractholder elects to annuitize.
Universal and Variable Life Contracts
Defined as the guarantee amount less the account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed on all contracts on the balance sheet date.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
3. Insurance (continued)
Information regarding the types of guarantees relating to annuity contracts and universal and variable life contracts was as follows at:
|
| | | | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| In the Event of Death | | At Annuitization | | In the Event of Death | | At Annuitization |
| (In millions) |
Annuity Contracts (1) | | | | | | | |
Variable Annuity Guarantees | | | | | | | |
Total contract account value | $ | 62,502 |
| | $ | 29,262 |
| | $ | 62,763 |
| | $ | 28,934 |
|
Separate account value | $ | 50,649 |
| | $ | 28,107 |
| | $ | 50,700 |
| | $ | 27,738 |
|
Net amount at risk | $ | 723 |
| | $ | 204 |
| | $ | 641 |
| | $ | 123 |
|
Average attained age of contractholders | 65 years |
| | 63 years |
| | 64 years |
| | 62 years |
|
| | | | | | | |
Two Tier Annuities | | | | | | | |
General account value | N/A |
| | $ | 398 |
| | N/A |
| | $ | 397 |
|
Net amount at risk | N/A |
| | $ | 124 |
| | N/A |
| | $ | 123 |
|
Average attained age of contractholders | N/A |
| | 56 years |
| | N/A |
| | 54 years |
|
|
| | | | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| Secondary Guarantees | | Paid-Up Guarantees | | Secondary Guarantees | | Paid-Up Guarantees |
| (In millions) |
Universal and Variable Life Contracts (1) | | | | | | | |
Account value (general and separate account) | $ | 8,165 |
| | $ | 1,098 |
| | $ | 7,871 |
| | $ | 1,125 |
|
Net amount at risk | $ | 79,448 |
| | $ | 8,290 |
| | $ | 81,888 |
| | $ | 8,701 |
|
Average attained age of policyholders | 54 years |
| | 60 years |
| | 53 years |
| | 59 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. |
4. 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 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.
Experience within the closed block, in particular mortality and investment yields, as well as realized and unrealized gains and losses, directly impact the policyholder dividend obligation. Amortization of the closed block DAC, which resides outside of the closed block, is based upon cumulative actual and expected earnings within the closed block. Accordingly, the Company’s net income continues to be sensitive to the actual performance of the closed block.
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.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
4. Closed Block (continued)
Information regarding the closed block liabilities and assets designated to the closed block was as follows at:
|
| | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| (In millions) |
Closed Block Liabilities | | | |
Future policy benefits | $ | 41,683 |
| | $ | 42,076 |
|
Other policy-related balances | 282 |
| | 298 |
|
Policyholder dividends payable | 493 |
| | 456 |
|
Policyholder dividend obligation | 2,825 |
| | 1,771 |
|
Current income tax payable | 23 |
| | 18 |
|
Other liabilities | 629 |
| | 582 |
|
Total closed block liabilities | 45,935 |
| | 45,201 |
|
Assets Designated to the Closed Block | | | |
Investments: | | | |
Fixed maturity securities available-for-sale, at estimated fair value | 28,976 |
| | 28,374 |
|
Equity securities available-for-sale, at estimated fair value | 90 |
| | 86 |
|
Mortgage loans | 6,091 |
| | 6,155 |
|
Policy loans | 4,651 |
| | 4,669 |
|
Real estate and real estate joint ventures | 586 |
| | 492 |
|
Other invested assets | 882 |
| | 814 |
|
Total investments | 41,276 |
| | 40,590 |
|
Cash and cash equivalents | 349 |
| | 238 |
|
Accrued investment income | 501 |
| | 477 |
|
Premiums, reinsurance and other receivables | 91 |
| | 98 |
|
Deferred income tax assets | 301 |
| | 293 |
|
Total assets designated to the closed block | 42,518 |
| | 41,696 |
|
Excess of closed block liabilities over assets designated to the closed block | 3,417 |
| | 3,505 |
|
Amounts included in accumulated other comprehensive income (loss) (“AOCI”) | | | |
Unrealized investment gains (losses), net of income tax | 2,109 |
| | 1,502 |
|
Unrealized gains (losses) on derivatives, net of income tax | 12 |
| | (3 | ) |
Allocated to policyholder dividend obligation, net of income tax | (1,836 | ) | | (1,151 | ) |
Total amounts included in AOCI | 285 |
| | 348 |
|
Maximum future earnings to be recognized from closed block assets and liabilities | $ | 3,702 |
| | $ | 3,853 |
|
Information regarding the closed block policyholder dividend obligation was as follows:
|
| | | | | | | | |
| | Nine Months Ended September 30, 2014 | | Year Ended December 31, 2013 |
| | (In millions) |
Balance, beginning of period | | $ | 1,771 |
| | $ | 3,828 |
|
Change in unrealized investment and derivative gains (losses) | | 1,054 |
| | (2,057 | ) |
Balance, end of period | | $ | 2,825 |
| | $ | 1,771 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
4. Closed Block (continued)
Information regarding the closed block revenues and expenses was as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2014 | | 2013 | | 2014 | | 2013 |
| | (In millions) |
Revenues | | | | | | | | |
Premiums | | $ | 461 |
| | $ | 478 |
| | $ | 1,380 |
| | $ | 1,431 |
|
Net investment income | | 516 |
| | 514 |
| | 1,568 |
| | 1,576 |
|
Net investment gains (losses) | | — |
| | (7 | ) | | 8 |
| | 20 |
|
Net derivative gains (losses) | | 17 |
| | (16 | ) | | 13 |
| | (1 | ) |
Total revenues | | 994 |
| | 969 |
| | 2,969 |
| | 3,026 |
|
Expenses | | | | | | | | |
Policyholder benefits and claims | | 620 |
| | 651 |
| | 1,889 |
| | 1,963 |
|
Policyholder dividends | | 255 |
| | 251 |
| | 731 |
| | 740 |
|
Other expenses | | 39 |
| | 39 |
| | 118 |
| | 124 |
|
Total expenses | | 914 |
| | 941 |
| | 2,738 |
| | 2,827 |
|
Revenues, net of expenses before provision for income tax expense (benefit) | | 80 |
| | 28 |
| | 231 |
| | 199 |
|
Provision for income tax expense (benefit) | | 28 |
| | 10 |
| | 81 |
| | 70 |
|
Revenues, net of expenses and provision for income tax expense (benefit) | | $ | 52 |
| | $ | 18 |
| | $ | 150 |
| | $ | 129 |
|
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 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.
5. Investments
Fixed Maturity and Equity Securities Available-for-Sale
Fixed Maturity and Equity Securities Available-for-Sale by Sector
The following table presents the fixed maturity and equity securities available-for-sale (“AFS”) by sector. Redeemable preferred stock is reported within U.S. corporate and foreign corporate fixed maturity securities and non-redeemable preferred stock is reported within equity securities. Included within fixed maturity securities are structured securities including residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| Cost or Amortized Cost | | Gross Unrealized | | Estimated Fair Value | | Cost or Amortized Cost | | Gross Unrealized | | Estimated Fair Value |
|
Gains | | Temporary Losses | | OTTI Losses | |
Gains | | Temporary Losses | | OTTI Losses | |
| (In millions) |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | |
U.S. corporate | $ | 60,887 |
| | $ | 5,948 |
| | $ | 352 |
| | $ | — |
| | $ | 66,483 |
| | $ | 60,244 |
| | $ | 4,678 |
| | $ | 693 |
| | $ | — |
| | $ | 64,229 |
|
U.S. Treasury and agency | 34,408 |
| | 3,274 |
| | 46 |
| | — |
| | 37,636 |
| | 29,508 |
| | 1,730 |
| | 694 |
| | — |
| | 30,544 |
|
Foreign corporate | 27,500 |
| | 2,034 |
| | 288 |
| | — |
| | 29,246 |
| | 27,082 |
| | 1,959 |
| | 285 |
| | — |
| | 28,756 |
|
RMBS | 27,478 |
| | 1,381 |
| | 175 |
| | 60 |
| | 28,624 |
| | 24,119 |
| | 1,109 |
| | 368 |
| | 150 |
| | 24,710 |
|
CMBS | 7,881 |
| | 214 |
| | 34 |
| | — |
| | 8,061 |
| | 8,203 |
| | 262 |
| | 89 |
| | — |
| | 8,376 |
|
ABS (1) | 8,241 |
| | 121 |
| | 46 |
| | — |
| | 8,316 |
| | 7,789 |
| | 151 |
| | 117 |
| | (1 | ) | | 7,824 |
|
State and political subdivision | 5,264 |
| | 998 |
| | 19 |
| | — |
| | 6,243 |
| | 5,386 |
| | 467 |
| | 76 |
| | — |
| | 5,777 |
|
Foreign government | 3,187 |
| | 724 |
| | 94 |
| | — |
| | 3,817 |
| | 3,040 |
| | 597 |
| | 107 |
| | — |
| | 3,530 |
|
Total fixed maturity securities | $ | 174,846 |
| | $ | 14,694 |
| | $ | 1,054 |
| | $ | 60 |
| | $ | 188,426 |
| | $ | 165,371 |
| | $ | 10,953 |
| | $ | 2,429 |
| | $ | 149 |
| | $ | 173,746 |
|
Equity securities | | | | | | | | | | | | | | | | | | | |
Common stock | $ | 1,174 |
| | $ | 180 |
| | $ | 2 |
| | $ | — |
| | $ | 1,352 |
| | $ | 1,070 |
| | $ | 97 |
| | $ | 3 |
| | $ | — |
| | $ | 1,164 |
|
Non-redeemable preferred stock | 687 |
| | 53 |
| | 28 |
| | — |
| | 712 |
| | 743 |
| | 62 |
| | 77 |
| | — |
| | 728 |
|
Total equity securities | $ | 1,861 |
| | $ | 233 |
| | $ | 30 |
| | $ | — |
| | $ | 2,064 |
| | $ | 1,813 |
| | $ | 159 |
| | $ | 80 |
| | $ | — |
| | $ | 1,892 |
|
__________________
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
| |
(1) | The noncredit loss component of other-than-temporary impairment (“OTTI”) losses was in an unrealized gain position of $1 million for ABS at December 31, 2013 due to increases in estimated fair value subsequent to initial recognition of noncredit losses on such securities. See also “— Net Unrealized Investment Gains (Losses).” |
The Company held non-income producing fixed maturity securities with an estimated fair value of $10 million and $38 million with unrealized gains (losses) of $8 million and $12 million at September 30, 2014 and December 31, 2013, respectively.
Maturities of Fixed Maturity Securities
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity date, were as follows at:
|
| | | | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
|
Amortized Cost | | Estimated Fair Value | |
Amortized Cost | | Estimated Fair Value |
| (In millions) |
Due in one year or less | $ | 6,538 |
| | $ | 6,615 |
| | $ | 6,411 |
| | $ | 6,516 |
|
Due after one year through five years | 38,538 |
| | 40,214 |
| | 34,696 |
| | 36,556 |
|
Due after five years through ten years | 38,279 |
| | 40,827 |
| | 35,725 |
| | 38,347 |
|
Due after ten years | 47,891 |
| | 55,769 |
| | 48,428 |
| | 51,417 |
|
Subtotal | 131,246 |
| | 143,425 |
| | 125,260 |
| | 132,836 |
|
Structured securities (RMBS, CMBS and ABS) | 43,600 |
| | 45,001 |
| | 40,111 |
| | 40,910 |
|
Total fixed maturity securities | $ | 174,846 |
| | $ | 188,426 |
| | $ | 165,371 |
| | $ | 173,746 |
|
Actual maturities may differ from contractual maturities due to the exercise of call or prepayment options. Fixed maturity securities not due at a single maturity date have been presented in the year of final contractual maturity. RMBS, CMBS and ABS are shown separately, as they are not due at a single maturity.
Continuous Gross Unrealized Losses for Fixed Maturity and Equity Securities AFS by Sector
The following table presents the estimated fair value and gross unrealized losses of fixed maturity and equity securities AFS in an unrealized loss position, aggregated by sector and by length of time that the securities have been in a continuous unrealized loss position.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| Less than 12 Months | | Equal to or Greater than 12 Months | | Less than 12 Months | | Equal to or Greater than 12 Months |
| Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
| (In millions, except number of securities) |
Fixed maturity securities | | | | | | | | | | | | | | | |
U.S. corporate | $ | 9,293 |
| | $ | 162 |
| | $ | 2,450 |
| | $ | 190 |
| | $ | 8,512 |
| | $ | 426 |
| | $ | 1,948 |
| | $ | 267 |
|
U.S. Treasury and agency | 6,142 |
| | 15 |
| | 1,343 |
| | 31 |
| | 10,077 |
| | 687 |
| | 33 |
| | 7 |
|
Foreign corporate | 4,882 |
| | 189 |
| | 1,266 |
| | 99 |
| | 4,217 |
| | 176 |
| | 952 |
| | 109 |
|
RMBS | 3,693 |
| | 48 |
| | 2,856 |
| | 187 |
| | 8,194 |
| | 291 |
| | 1,675 |
| | 227 |
|
CMBS | 1,046 |
| | 20 |
| | 364 |
| | 14 |
| | 2,022 |
| | 74 |
| | 221 |
| | 15 |
|
ABS | 2,612 |
| | 18 |
| | 467 |
| | 28 |
| | 1,701 |
| | 28 |
| | 530 |
| | 88 |
|
State and political subdivision | 66 |
| | 1 |
| | 180 |
| | 18 |
| | 737 |
| | 44 |
| | 92 |
| | 32 |
|
Foreign government | 364 |
| | 27 |
| | 372 |
| | 67 |
| | 763 |
| | 94 |
| | 54 |
| | 13 |
|
Total fixed maturity securities | $ | 28,098 |
| | $ | 480 |
| | $ | 9,298 |
| | $ | 634 |
| | $ | 36,223 |
| | $ | 1,820 |
| | $ | 5,505 |
| | $ | 758 |
|
Equity securities | | | | | | | | | | | | | | | |
Common stock | $ | 38 |
| | $ | 2 |
| | $ | 1 |
| | $ | — |
| | $ | 37 |
| | $ | 3 |
| | $ | — |
| | $ | — |
|
Non-redeemable preferred stock | 133 |
| | 1 |
| | 150 |
| | 27 |
| | 222 |
| | 41 |
| | 125 |
| | 36 |
|
Total equity securities | $ | 171 |
| | $ | 3 |
| | $ | 151 |
| | $ | 27 |
| | $ | 259 |
| | $ | 44 |
| | $ | 125 |
| | $ | 36 |
|
Total number of securities in an unrealized loss position | 1,649 |
| | | | 722 |
| | | | 2,211 |
| | | | 469 |
| | |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Evaluation of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities
As described more fully in Notes 1 and 8 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report, the Company performs a regular evaluation of all investment classes for impairment, including fixed maturity securities, equity securities and perpetual hybrid securities, in accordance with its impairment policy, in order to evaluate whether such investments are other-than-temporarily impaired.
Current Period Evaluation
Based on the Company’s current evaluation of its AFS securities in an unrealized loss position in accordance with its impairment policy, and the Company’s current intentions and assessments (as applicable to the type of security) about holding, selling and any requirements to sell these securities, the Company has concluded that these securities are not other-than-temporarily impaired at September 30, 2014. Future OTTI will depend primarily on economic fundamentals, issuer performance (including changes in the present value of future cash flows expected to be collected), and changes in credit ratings, collateral valuation, interest rates and credit spreads. If economic fundamentals deteriorate or if there are adverse changes in the above factors, OTTI may be incurred in upcoming periods.
Gross unrealized losses on fixed maturity securities decreased $1.5 billion during the nine months ended September 30, 2014 from $2.6 billion to $1.1 billion. The decrease in gross unrealized losses for the nine months ended September 30, 2014, was primarily attributable to a decrease in interest rates, and to a lesser extent narrowing credit spreads.
At September 30, 2014, $75 million of the total $1.1 billion of gross unrealized losses were from 31 fixed maturity securities with an unrealized loss position of 20% or more of amortized cost for six months or greater.
Investment Grade Fixed Maturity Securities
Of the $75 million of gross unrealized losses on fixed maturity securities with an unrealized loss of 20% or more of amortized cost for six months or greater, $33 million, or 44%, are related to gross unrealized losses on 18 investment grade fixed maturity securities. Unrealized losses on investment grade fixed maturity securities are principally related to widening credit spreads and, with respect to fixed-rate fixed maturity securities, rising interest rates since purchase.
Below Investment Grade Fixed Maturity Securities
Of the $75 million of gross unrealized losses on fixed maturity securities with an unrealized loss of 20% or more of amortized cost for six months or greater, $42 million, or 56%, are related to gross unrealized losses on 13 below investment grade fixed maturity securities. Unrealized losses on below investment grade fixed maturity securities are principally related to non-agency RMBS (primarily alternative residential mortgage loans) and ABS (primarily foreign ABS) and are the result of significantly wider credit spreads resulting from higher risk premiums since purchase, largely due to economic and market uncertainties including concerns over valuations of residential real estate supporting non-agency RMBS. Management evaluates non-agency RMBS and ABS based on actual and projected cash flows after considering the quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms of the underlying assets backing a particular security, and the payment priority within the tranche structure of the security.
Equity Securities
Gross unrealized losses on equity securities decreased $50 million during the nine months ended September 30, 2014 from $80 million to $30 million. Of the $30 million, $21 million were from six equity securities with gross unrealized losses of 20% or more of cost for 12 months or greater, all of which were financial services industry investment grade non-redeemable preferred stock, of which 29% were rated A or better.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Mortgage Loans
Mortgage Loans by Portfolio Segment
Mortgage loans are summarized as follows at:
|
| | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| Carrying Value | | % of Total | | Carrying Value | | % of Total |
| (In millions) | | | | (In millions) | | |
Mortgage loans held-for-investment: | | | | | | | |
Commercial | $ | 32,309 |
| | 68.3 | % | | $ | 33,072 |
| | 71.9 | % |
Agricultural | 10,607 |
| | 22.4 |
| | 11,025 |
| | 24.0 |
|
Residential | 4,395 |
| | 9.3 |
| | 1,858 |
| | 4.0 |
|
Subtotal (1) | 47,311 |
| | 100.0 |
| | 45,955 |
| | 99.9 |
|
Valuation allowances | (262 | ) | | (0.6 | ) | | (272 | ) | | (0.6 | ) |
Subtotal mortgage loans held-for-investment, net | 47,049 |
| | 99.4 |
| | 45,683 |
| | 99.3 |
|
Residential — fair value option (“FVO”) | 298 |
| | 0.6 |
| | 338 |
| | 0.7 |
|
Total mortgage loans held-for-investment, net | 47,347 |
| | 100.0 |
| | 46,021 |
| | 100.0 |
|
Mortgage loans held-for-sale | — |
| | — |
| | 3 |
| | — |
|
Total mortgage loans, net | $ | 47,347 |
| | 100.0 | % | | $ | 46,024 |
| | 100.0 | % |
__________________
| |
(1) | Purchases of mortgage loans were $2.1 billion and $3.5 billion for the three months and nine months ended September 30, 2014, respectively. Purchases of mortgage loans were $676 million and $1.6 billion for the three months and nine months ended September 30, 2013, respectively. |
Mortgage Loans and Valuation Allowance by Portfolio Segment
The carrying value prior to valuation allowance (“recorded investment”) in mortgage loans held-for-investment, by portfolio segment, by method of evaluation of credit loss, and the related valuation allowances, by type of credit loss, were as follows at:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| Commercial | | Agricultural | | Residential | | Total | | Commercial | | Agricultural | | Residential | | Total |
| (In millions) |
Mortgage loans: | | | | | | | | | | | | | | | |
Evaluated individually for credit losses | $ | 170 |
| | $ | 59 |
| | $ | 24 |
| | $ | 253 |
| | $ | 415 |
| | $ | 96 |
| | $ | 4 |
| | $ | 515 |
|
Evaluated collectively for credit losses | 32,139 |
| | 10,548 |
| | 4,371 |
| | 47,058 |
| | 32,657 |
| | 10,929 |
| | 1,854 |
| | 45,440 |
|
Total mortgage loans | 32,309 |
| | 10,607 |
| | 4,395 |
| | 47,311 |
| | 33,072 |
| | 11,025 |
| | 1,858 |
| | 45,955 |
|
Valuation allowances: | | | | | | | | | | | | | | | |
Specific credit losses | 24 |
| | 2 |
| | — |
| | 26 |
| | 49 |
| | 7 |
| | — |
| | 56 |
|
Non-specifically identified credit losses | 163 |
| | 32 |
| | 41 |
| | 236 |
| | 164 |
| | 33 |
| | 19 |
| | 216 |
|
Total valuation allowances | 187 |
| | 34 |
| | 41 |
| | 262 |
| | 213 |
| | 40 |
| | 19 |
| | 272 |
|
Mortgage loans, net of valuation allowance | $ | 32,122 |
| | $ | 10,573 |
| | $ | 4,354 |
| | $ | 47,049 |
| | $ | 32,859 |
| | $ | 10,985 |
| | $ | 1,839 |
| | $ | 45,683 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Valuation Allowance Rollforward by Portfolio Segment
The changes in the valuation allowance, by portfolio segment, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2014 | | 2013 |
| Commercial | | Agricultural | | Residential | | Total | | Commercial | | Agricultural | | Residential | | Total |
| (In millions) |
Balance, beginning of period | $ | 182 |
| | $ | 37 |
| | $ | 22 |
| | $ | 241 |
| | $ | 206 |
| | $ | 45 |
| | $ | 9 |
| | $ | 260 |
|
Provision (release) | 4 |
| | (2 | ) | | 21 |
| | 23 |
| | 12 |
| | 1 |
| | 6 |
| | 19 |
|
Charge-offs, net of recoveries | 1 |
| | (1 | ) | | (2 | ) | | (2 | ) | | — |
| | — |
| | — |
| | — |
|
Balance, end of period | $ | 187 |
| | $ | 34 |
| | $ | 41 |
| | $ | 262 |
| | $ | 218 |
| | $ | 46 |
| | $ | 15 |
| | $ | 279 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2014 |
| 2013 |
| Commercial |
| Agricultural |
| Residential |
| Total |
| Commercial |
| Agricultural |
| Residential |
| Total |
| (In millions) |
Balance, beginning of period | $ | 213 |
|
| $ | 40 |
|
| $ | 19 |
|
| $ | 272 |
|
| $ | 256 |
|
| $ | 48 |
|
| $ | — |
|
| $ | 304 |
|
Provision (release) | (3 | ) |
| (5 | ) |
| 25 |
|
| 17 |
|
| (38 | ) |
| 7 |
|
| 15 |
|
| (16 | ) |
Charge-offs, net of recoveries | (23 | ) |
| (1 | ) |
| (3 | ) |
| (27 | ) |
| — |
|
| (9 | ) |
| — |
|
| (9 | ) |
Balance, end of period | $ | 187 |
|
| $ | 34 |
|
| $ | 41 |
|
| $ | 262 |
|
| $ | 218 |
|
| $ | 46 |
|
| $ | 15 |
|
| $ | 279 |
|
Credit Quality of Commercial Mortgage Loans
The credit quality of commercial mortgage loans held-for-investment were as follows at:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded Investment | | Estimated Fair Value | | % of Total |
| Debt Service Coverage Ratios | | | | % of Total | |
| > 1.20x | | 1.00x - 1.20x | | < 1.00x | | Total | |
| (In millions) | | | | (In millions) | | |
September 30, 2014 | | | | | | | | | | | | | |
Loan-to-value ratios: | | | | | | | | | | | | | |
Less than 65% | $ | 25,770 |
| | $ | 516 |
| | $ | 658 |
| | $ | 26,944 |
| | 83.4 | % | | $ | 28,287 |
| | 84.0 | % |
65% to 75% | 3,731 |
| | 610 |
| | 57 |
| | 4,398 |
| | 13.6 |
| | 4,473 |
| | 13.3 |
|
76% to 80% | 69 |
| | 158 |
| | 57 |
| | 284 |
| | 0.9 |
| | 284 |
| | 0.8 |
|
Greater than 80% | 232 |
| | 250 |
| | 201 |
| | 683 |
| | 2.1 |
| | 627 |
| | 1.9 |
|
Total | $ | 29,802 |
| | $ | 1,534 |
| | $ | 973 |
| | $ | 32,309 |
| | 100.0 | % | | $ | 33,671 |
| | 100.0 | % |
| | | | | | | | | | | | | |
December 31, 2013 | | | | | | | | | | | | | |
Loan-to-value ratios: | | | | | | | | | | | | | |
Less than 65% | $ | 24,585 |
| | $ | 476 |
| | $ | 596 |
| | $ | 25,657 |
| | 77.6 | % | | $ | 26,900 |
| | 78.4 | % |
65% to 75% | 5,219 |
| | 438 |
| | 104 |
| | 5,761 |
| | 17.4 |
| | 5,852 |
| | 17.1 |
|
76% to 80% | 444 |
| | 157 |
| | 189 |
| | 790 |
| | 2.4 |
| | 776 |
| | 2.3 |
|
Greater than 80% | 583 |
| | 205 |
| | 76 |
| | 864 |
| | 2.6 |
| | 769 |
| | 2.2 |
|
Total | $ | 30,831 |
| | $ | 1,276 |
| | $ | 965 |
| | $ | 33,072 |
| | 100.0 | % | | $ | 34,297 |
| | 100.0 | % |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Credit Quality of Agricultural Mortgage Loans
The credit quality of agricultural mortgage loans held-for-investment were as follows at:
|
| | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| Recorded Investment | | % of Total | | Recorded Investment | | % of Total |
| (In millions) | | | | (In millions) | | |
Loan-to-value ratios: | | | | | | | |
Less than 65% | $ | 10,023 |
| | 94.5 | % | | $ | 10,165 |
| | 92.2 | % |
65% to 75% | 454 |
| | 4.3 |
| | 659 |
| | 6.0 |
|
76% to 80% | 52 |
| | 0.5 |
| | 84 |
| | 0.8 |
|
Greater than 80% | 78 |
| | 0.7 |
| | 117 |
| | 1.0 |
|
Total | $ | 10,607 |
| | 100.0 | % | | $ | 11,025 |
| | 100.0 | % |
The estimated fair value of agricultural mortgage loans held-for-investment was $10.9 billion and $11.3 billion at September 30, 2014 and December 31, 2013, respectively.
Credit Quality of Residential Mortgage Loans
The credit quality of residential mortgage loans held-for-investment were as follows at:
|
| | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| Recorded Investment | | % of Total | | Recorded Investment | | % of Total |
| (In millions) | | | | (In millions) | | |
Performance indicators: | | | | | | | |
Performing | $ | 4,286 |
| | 97.5 | % | | $ | 1,812 |
| | 97.5 | % |
Nonperforming | 109 |
| | 2.5 |
| | 46 |
| | 2.5 |
|
Total | $ | 4,395 |
| | 100.0 | % | | $ | 1,858 |
| | 100.0 | % |
The estimated fair value of residential mortgage loans held-for-investment was $4.5 billion and $1.8 billion at September 30, 2014 and December 31, 2013, respectively.
Past Due and Interest Accrual Status of Mortgage Loans
The Company has a high quality, well performing mortgage loan portfolio, with 99% of all mortgage loans classified as performing at both September 30, 2014 and December 31, 2013. The Company defines delinquency consistent with industry practice, when mortgage loans are past due as follows: commercial and residential mortgage loans — 60 days and agricultural mortgage loans — 90 days. The past due and accrual status of mortgage loans at recorded investment, prior to valuation allowances, by portfolio segment, were as follows at:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Past Due | | Greater than 90 Days Past Due and Still Accruing Interest | | Nonaccrual Status |
| September 30, 2014 | | December 31, 2013 | | September 30, 2014 | | December 31, 2013 | | September 30, 2014 | | December 31, 2013 |
| (In millions) |
Commercial | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 85 |
| | $ | 169 |
|
Agricultural | 17 |
| | 44 |
| | 1 |
| | — |
| | 42 |
| | 47 |
|
Residential | 109 |
| | 46 |
| | — |
| | — |
| | 109 |
| | 46 |
|
Total | $ | 126 |
| | $ | 90 |
| | $ | 1 |
| | $ | — |
| | $ | 236 |
| | $ | 262 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Impaired Mortgage Loans
Impaired mortgage loans held-for-investment, including those modified in a troubled debt restructuring, by portfolio segment, were as follows at:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans with a Valuation Allowance | | Loans without a Valuation Allowance | | All Impaired Loans |
| Unpaid Principal Balance | | Recorded Investment | | Valuation Allowances | | Carrying Value | | Unpaid Principal Balance | | Recorded Investment | | Unpaid Principal Balance | | Carrying Value |
| (In millions) |
September 30, 2014 | | | | | | | | | | | | | | | |
Commercial | $ | 85 |
| | $ | 85 |
| | $ | 24 |
| | $ | 61 |
| | $ | 86 |
| | $ | 85 |
| | $ | 171 |
| | $ | 146 |
|
Agricultural | 46 |
| | 44 |
| | 2 |
| | 42 |
| | 15 |
| | 15 |
| | 61 |
| | 57 |
|
Residential | — |
| | — |
| | — |
| | — |
| | 26 |
| | 24 |
| | 26 |
| | 24 |
|
Total | $ | 131 |
| | $ | 129 |
| | $ | 26 |
| | $ | 103 |
| | $ | 127 |
| | $ | 124 |
| | $ | 258 |
| | $ | 227 |
|
| | | | | | | | | | | | | | | |
December 31, 2013 | | | | | | | | | | | | | | | |
Commercial | $ | 173 |
| | $ | 169 |
| | $ | 49 |
| | $ | 120 |
| | $ | 247 |
| | $ | 246 |
| | $ | 420 |
| | $ | 366 |
|
Agricultural | 64 |
| | 62 |
| | 7 |
| | 55 |
| | 35 |
| | 34 |
| | 99 |
| | 89 |
|
Residential | — |
| | — |
| | — |
| | — |
| | 5 |
| | 4 |
| | 5 |
| | 4 |
|
Total | $ | 237 |
| | $ | 231 |
| | $ | 56 |
| | $ | 175 |
| | $ | 287 |
| | $ | 284 |
| | $ | 524 |
| | $ | 459 |
|
Unpaid principal balance is generally prior to any charge-offs.
The average recorded investment in impaired mortgage loans held-for-investment, including those modified in a troubled debt restructuring, and the related interest income, which is primarily recognized on a cash basis, by portfolio segment, was:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired Mortgage Loans |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 |
| 2013 |
| Average Recorded Investment | | Interest Income | | Average Recorded Investment | | Interest Income | | Average Recorded Investment |
| Interest Income |
| Average Recorded Investment |
| Interest Income |
| (In millions) |
Commercial | $ | 249 |
| | $ | — |
| | $ | 427 |
| | $ | 4 |
| | $ | 333 |
| | $ | 6 |
| | $ | 433 |
| | $ | 9 |
|
Agricultural | 65 |
| | 1 |
| | 161 |
| | 5 |
| | 81 |
| | 6 |
| | 165 |
| | 8 |
|
Residential | 17 |
| | 1 |
| | 1 |
| | — |
| | 12 |
| | 1 |
| | 1 |
| | — |
|
Total | $ | 331 |
| | $ | 2 |
| | $ | 589 |
| | $ | 9 |
| | $ | 426 |
| | $ | 13 |
| | $ | 599 |
| | $ | 17 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Mortgage Loans Modified in a Troubled Debt Restructuring
The number of mortgage loans and carrying value after specific valuation allowance of mortgage loans modified during the period in a troubled debt restructuring were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2014 | | 2013 |
| Number of Mortgage Loans | | Carrying Value after Specific Valuation Allowance | | Number of Mortgage Loans | | Carrying Value after Specific Valuation Allowance |
| | | Pre- Modification | | Post- Modification | | | | Pre- Modification | | Post- Modification |
| | | (In millions) | | | | (In millions) |
Commercial | — |
| | $ | — |
| | $ | — |
| | 1 |
| | $ | 49 |
| | $ | 49 |
|
Agricultural | — |
| | — |
| | — |
| | 2 |
| | 24 |
| | 24 |
|
Residential | 57 |
| | 15 |
| | 13 |
| | 5 |
| | 1 |
| | 1 |
|
Total | 57 |
| | $ | 15 |
| | $ | 13 |
| | 8 |
| | $ | 74 |
| | $ | 74 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2014 |
| 2013 |
| Number of Mortgage Loans |
| Carrying Value after Specific Valuation Allowance |
| Number of Mortgage Loans |
| Carrying Value after Specific Valuation Allowance |
| |
| Pre- Modification |
| Post- Modification |
| |
| Pre- Modification |
| Post- Modification |
| |
| (In millions) |
| |
| (In millions) |
Commercial | — |
|
| $ | — |
|
| $ | — |
|
| 1 |
|
| $ | 49 |
|
| $ | 49 |
|
Agricultural | 1 |
|
| 1 |
|
| 1 |
|
| 2 |
|
| 24 |
|
| 24 |
|
Residential | 101 |
|
| 24 |
|
| 20 |
|
| 11 |
|
| 2 |
|
| 2 |
|
Total | 102 |
|
| $ | 25 |
|
| $ | 21 |
|
| 14 |
|
| $ | 75 |
|
| $ | 75 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
During the three months and nine months ended September 30, 2014 and 2013, the Company held no commercial or agricultural mortgage loans that were modified in a troubled debt restructuring during the 12 months before September 30, 2014 and 2013, respectively, and became subject to a payment default after the restructuring. The number of residential mortgage loans and carrying value of residential mortgage loans with subsequent payment defaults that were modified in a troubled debt restructuring during the previous 12 months were as follows:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2014 | | 2013 |
| Number of Mortgage Loans | | Carrying Value | | Number of Mortgage Loans | | Carrying Value |
| | | (In millions) | | | | (In millions) |
Residential (1) | 2 |
| | $ | — | | | — |
| | $ | — | |
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2014 |
| 2013 |
| Number of Mortgage Loans |
| Carrying Value |
| Number of Mortgage Loans |
| Carrying Value |
|
|
| (In millions) |
|
|
| (In millions) |
Residential | 4 |
| | $ | 1 | | | — |
| | $ | — | |
__________________ | |
(1) | Residential mortgage loans for the three months ended September 30, 2014 had a carrying value of less than $1 million. |
Payment default is determined in the same manner as delinquency status as described above.
Cash Equivalents
The carrying value of cash equivalents, which includes securities and other investments with an original or remaining maturity of three months or less at the time of purchase, was $1.0 billion and $790 million at September 30, 2014 and December 31, 2013, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Net Unrealized Investment Gains (Losses)
The components of net unrealized investment gains (losses), included in AOCI, were as follows:
|
| | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| (In millions) |
Fixed maturity securities | $ | 13,649 |
| | $ | 8,521 |
|
Fixed maturity securities with noncredit OTTI losses in AOCI | (60 | ) | | (149 | ) |
Total fixed maturity securities | 13,589 |
| | 8,372 |
|
Equity securities | 221 |
| | 83 |
|
Derivatives | 1,133 |
| | 361 |
|
Other | 54 |
| | 5 |
|
Subtotal | 14,997 |
| | 8,821 |
|
Amounts allocated from: | | | |
Insurance liability loss recognition | (1,220 | ) | | (610 | ) |
DAC and VOBA related to noncredit OTTI losses recognized in AOCI | 2 |
| | 5 |
|
DAC and VOBA | (854 | ) | | (721 | ) |
Policyholder dividend obligation | (2,825 | ) | | (1,771 | ) |
Subtotal | (4,897 | ) | | (3,097 | ) |
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in AOCI | 18 |
| | 51 |
|
Deferred income tax benefit (expense) | (3,560 | ) | | (2,070 | ) |
Net unrealized investment gains (losses) | 6,558 |
| | 3,705 |
|
Net unrealized investment gains (losses) attributable to noncontrolling interests | (1 | ) | | (1 | ) |
Net unrealized investment gains (losses) attributable to Metropolitan Life Insurance Company | $ | 6,557 |
| | $ | 3,704 |
|
The changes in fixed maturity securities with noncredit OTTI losses included in AOCI were as follows:
|
| | | | | | | |
| Nine Months Ended September 30, 2014 | | Year Ended December 31, 2013 |
| (In millions) |
Balance, beginning of period | $ | (149 | ) | | $ | (256 | ) |
Noncredit OTTI losses and subsequent changes recognized (1) | 9 |
| | 47 |
|
Securities sold with previous noncredit OTTI loss | 33 |
| | 114 |
|
Subsequent changes in estimated fair value | 47 |
| | (54 | ) |
Balance, end of period | $ | (60 | ) | | $ | (149 | ) |
__________________
| |
(1) | Noncredit OTTI losses and subsequent changes recognized, net of DAC, were $4 million and $40 million for the nine months ended September 30, 2014 and the year ended December 31, 2013, respectively. |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
The changes in net unrealized investment gains (losses) were as follows:
|
| | | |
| Nine Months Ended September 30, 2014 |
| (In millions) |
Balance, beginning of period | $ | 3,704 |
|
Fixed maturity securities on which noncredit OTTI losses have been recognized | 89 |
|
Unrealized investment gains (losses) during the period | 6,087 |
|
Unrealized investment gains (losses) relating to: | |
Insurance liability gain (loss) recognition | (610 | ) |
DAC and VOBA related to noncredit OTTI losses recognized in AOCI | (3 | ) |
DAC and VOBA | (133 | ) |
Policyholder dividend obligation | (1,054 | ) |
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in AOCI | (33 | ) |
Deferred income tax benefit (expense) | (1,490 | ) |
Net unrealized investment gains (losses) | 6,557 |
|
Net unrealized investment gains (losses) attributable to noncontrolling interests | — |
|
Balance, end of period | $ | 6,557 |
|
Change in net unrealized investment gains (losses) | $ | 2,853 |
|
Change in net unrealized investment gains (losses) attributable to noncontrolling interests | — |
|
Change in net unrealized investment gains (losses) attributable to Metropolitan Life Insurance Company | $ | 2,853 |
|
Concentrations of Credit Risk
There were no investments in any counterparty that were greater than 10% of the Company’s equity, other than the U.S. government and its agencies, at both September 30, 2014 and December 31, 2013.
Securities Lending
Elements of the securities lending program are presented below at:
|
| | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| (In millions) |
Securities on loan: (1) | | | |
Amortized cost | $ | 19,255 |
| | $ | 18,829 |
|
Estimated fair value | $ | 20,761 |
| | $ | 19,153 |
|
Cash collateral on deposit from counterparties (2) | $ | 21,259 |
| | $ | 19,673 |
|
Security collateral on deposit from counterparties (3) | $ | 27 |
| | $ | — |
|
Reinvestment portfolio — estimated fair value | $ | 21,566 |
| | $ | 19,822 |
|
__________________
| |
(1) | Included within fixed maturity securities, cash and cash equivalents, short-term investments and equity securities. |
| |
(2) | Included within payables for collateral under securities loaned and other transactions. |
| |
(3) | Security collateral on deposit from counterparties may not be sold or repledged, unless the counterparty is in default, and is not reflected in the consolidated financial statements. |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Invested Assets on Deposit and Pledged as Collateral
Invested assets on deposit and pledged as collateral are presented below at estimated fair value for cash and cash equivalents, short-term investments, fixed maturity and equity securities and trading and FVO securities, and at carrying value for mortgage loans at:
|
| | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| (In millions) |
Invested assets on deposit (regulatory deposits) | $ | 1,395 |
| | $ | 1,338 |
|
Invested assets pledged as collateral (1) | 19,601 |
| | 19,555 |
|
Total invested assets on deposit and pledged as collateral | $ | 20,996 |
| | $ | 20,893 |
|
__________________
| |
(1) | The Company has pledged invested assets in connection with various agreements and transactions, including funding agreements (see Note 4 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report) and derivative transactions (see Note 6). |
See “— Securities Lending” for securities on loan and Note 4 for investments designated to the closed block.
Variable Interest Entities
The Company has invested in certain structured transactions (including consolidated securitization entities (“CSEs”)) that are VIEs. In certain instances, the Company holds both the power to direct the most significant activities of the entity, as well as an economic interest in the entity and, as such, is deemed to be the primary beneficiary or consolidator of the entity.
The determination of the VIE’s primary beneficiary requires an evaluation of the contractual and implied rights and obligations associated with each party’s relationship with or involvement in the entity, an estimate of the entity’s expected losses and expected residual returns and the allocation of such estimates to each party involved in the entity. The Company generally uses a qualitative approach to determine whether it is the primary beneficiary. However, for VIEs that are investment companies or apply measurement principles consistent with those utilized by investment companies, the primary beneficiary is based on a risks and rewards model and is defined as the entity that will absorb a majority of a VIE’s expected losses, receive a majority of a VIE’s expected residual returns if no single entity absorbs a majority of expected losses, or both. The Company reassesses its involvement with VIEs on a quarterly basis. The use of different methodologies, assumptions and inputs in the determination of the primary beneficiary could have a material effect on the amounts presented within the consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Consolidated VIEs
The following table presents the total assets and total liabilities relating to VIEs for which the Company has concluded that it is the primary beneficiary and which are consolidated at September 30, 2014 and December 31, 2013. Creditors or beneficial interest holders of VIEs where the Company is the primary beneficiary have no recourse to the general credit of the Company, as the Company’s obligation to the VIEs is limited to the amount of its committed investment.
|
| | | | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| Total Assets | | Total Liabilities | | Total Assets | | Total Liabilities |
| (In millions) |
Real estate joint ventures (1) | $ | 9 |
| | $ | 15 |
| | $ | 1,181 |
| | $ | 443 |
|
Fixed maturity securities (2) | 164 |
| | 81 |
| | 159 |
| | 80 |
|
Other invested assets | 59 |
| | — |
| | 82 |
| | 7 |
|
Other limited partnership interests | 61 |
| | — |
| | 61 |
| | — |
|
CSEs (assets (primarily securities) and liabilities (primarily debt)) (3) | 18 |
| | 18 |
| | 23 |
| | 22 |
|
Total | $ | 311 |
| | $ | 114 |
| | $ | 1,506 |
| | $ | 552 |
|
__________________
| |
(1) | At December 31, 2013, the Company consolidated an open ended core real estate fund formed in the fourth quarter of 2013 (the “MetLife Core Property Fund”), which represented the majority of the balances at December 31, 2013. As a result of the quarterly reassessment in the first quarter of 2014, the Company no longer consolidates the MetLife Core Property Fund, effective March 31, 2014, based on the terms of the revised partnership agreement. The Company accounts for its retained interest in the real estate fund under the equity method. Assets of the real estate fund are a real estate investment trust which holds primarily traditional core income-producing real estate which has associated liabilities that are primarily non-recourse debt secured by certain real estate assets of the fund. The assets of these entities can only be used to settle their respective liabilities, and under no circumstances is the Company liable for any principal or interest shortfalls should any arise. The Company’s exposure was limited to that of its investment in the real estate fund of $178 million at carrying value at December 31, 2013. The long-term debt bore interest primarily at fixed rates ranging from 1.39% to 4.45%, payable primarily on a monthly basis. |
| |
(2) | The Company consolidates certain fixed maturity securities purchased in an investment vehicle which was partially funded with affiliated long-term debt. The long-term debt bears interest primarily at variable rates, payable on a bi-annual basis. Interest expense related to these obligations, included in other expenses, was less than $1 million and $1 million for the three months and nine months ended September 30, 2014 and 2013, respectively. |
| |
(3) | The Company consolidates entities that are structured as collateralized loan obligations. The assets of these entities can only be used to settle their respective liabilities, and under no circumstances is the Company liable for any principal or interest shortfalls should any arise. The Company’s exposure was limited to that of its remaining investment in these entities of less than $1 million at estimated fair value at September 30, 2014 and December 31, 2013, respectively. The long-term debt bears interest primarily at variable rates, payable on a bi-annual basis. Interest expense related to these obligations, included in other expenses, was less than $1 million and $1 million for the three months and nine months ended September 30, 2014, respectively, and less than $1 million and $2 million for the three months and nine months ended September 30, 2013, respectively. |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Unconsolidated VIEs
The carrying amount and maximum exposure to loss relating to VIEs in which the Company holds a significant variable interest but is not the primary beneficiary and which have not been consolidated were as follows at:
|
| | | | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| Carrying Amount | | Maximum Exposure to Loss (1) | | Carrying Amount | | Maximum Exposure to Loss (1) |
| (In millions) |
Fixed maturity securities AFS: | | | | | | | |
Structured securities (RMBS, CMBS and ABS) (2) | $ | 45,001 |
| | $ | 45,001 |
| | $ | 40,910 |
| | $ | 40,910 |
|
U.S. and foreign corporate | 1,968 |
| | 1,968 |
| | 2,251 |
| | 2,251 |
|
Other limited partnership interests | 2,904 |
| | 3,796 |
| | 3,168 |
| | 4,273 |
|
Other invested assets | 1,581 |
| | 1,770 |
| | 1,498 |
| | 1,852 |
|
Real estate joint ventures | 27 |
| | 27 |
| | 31 |
| | 31 |
|
Total | $ | 51,481 |
| | $ | 52,562 |
| | $ | 47,858 |
| | $ | 49,317 |
|
__________________
| |
(1) | The maximum exposure to loss relating to fixed maturity securities AFS is equal to their carrying amounts or the carrying amounts of retained interests. The maximum exposure to loss relating to other limited partnership interests and real estate joint ventures is equal to the carrying amounts plus any unfunded commitments of the Company. For certain of its investments in other invested assets, the Company’s return is in the form of income tax credits which are guaranteed by creditworthy third parties. For such investments, the maximum exposure to loss is equal to the carrying amounts plus any unfunded commitments, reduced by income tax credits guaranteed by third parties of $224 million and $257 million at September 30, 2014 and December 31, 2013, respectively. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee. |
| |
(2) | For these variable interests, the Company’s involvement is limited to that of a passive investor in mortgage-backed or asset-backed securities issued by trusts that do not have substantial equity. |
As described in Note 11, the Company makes commitments to fund partnership investments in the normal course of business. Excluding these commitments, the Company did not provide financial or other support to investees designated as VIEs during the nine months ended September 30, 2014 and 2013.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Net Investment Income
The components of net investment income were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
Investment income: | | | | | | | |
Fixed maturity securities | $ | 2,038 |
| | $ | 2,074 |
| | $ | 6,158 |
| | $ | 6,219 |
|
Equity securities | 18 |
| | 19 |
| | 63 |
| | 54 |
|
Trading and FVO securities — Actively Traded Securities and FVO general account securities (1) | (10 | ) | | 13 |
| | 25 |
| | 16 |
|
Mortgage loans | 631 |
| | 582 |
| | 1,782 |
| | 1,751 |
|
Policy loans | 112 |
| | 113 |
| | 336 |
| | 330 |
|
Real estate and real estate joint ventures | 187 |
| | 180 |
| | 556 |
| | 517 |
|
Other limited partnership interests | 194 |
| | 102 |
| | 575 |
| | 443 |
|
Cash, cash equivalents and short-term investments | 8 |
| | 7 |
| | 20 |
| | 24 |
|
International joint ventures | 1 |
| | 5 |
| | — |
| | (3 | ) |
Other | 22 |
| | (5 | ) | | 37 |
| | 31 |
|
Subtotal | 3,201 |
| | 3,090 |
| | 9,552 |
| | 9,382 |
|
Less: Investment expenses | 211 |
| | 215 |
| | 622 |
| | 620 |
|
Subtotal, net | 2,990 |
| | 2,875 |
| | 8,930 |
| | 8,762 |
|
FVO CSEs - interest income: | | | | | | | |
Securities | — |
| | — |
| | 1 |
| | 2 |
|
Subtotal | — |
| | — |
| | 1 |
| | 2 |
|
Net investment income | $ | 2,990 |
| | $ | 2,875 |
| | $ | 8,931 |
| | $ | 8,764 |
|
__________________
| |
(1) | Changes in estimated fair value subsequent to purchase for securities still held as of the end of the respective periods included in net investment income were as follows: |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
Actively Traded Securities and FVO general account securities | $ | (19 | ) | | $ | — |
| | $ | (2 | ) | | $ | (17 | ) |
See “— Related Party Investment Transactions” for discussion of affiliated net investment income and investment expenses.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Net Investment Gains (Losses)
Components of Net Investment Gains (Losses)
The components of net investment gains (losses) were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
Total gains (losses) on fixed maturity securities: | | | | | | | |
Total OTTI losses recognized — by sector and industry: | | | | | | | |
U.S. and foreign corporate securities — by industry: | | | | | | | |
Utility | $ | — |
| | $ | — |
| | $ | — |
| | $ | (32 | ) |
Consumer | — |
| | (3 | ) | | (6 | ) | | (12 | ) |
Finance | — |
| | — |
| | — |
| | (4 | ) |
Communications | — |
| | — |
| | — |
| | (2 | ) |
Total U.S. and foreign corporate securities | — |
| | (3 | ) | | (6 | ) | | (50 | ) |
RMBS | (11 | ) | | (19 | ) | | (18 | ) | | (56 | ) |
OTTI losses on fixed maturity securities recognized in earnings | (11 | ) | | (22 | ) | | (24 | ) | | (106 | ) |
Fixed maturity securities — net gains (losses) on sales and disposals | — |
| | (60 | ) | | (97 | ) | | 111 |
|
Total gains (losses) on fixed maturity securities | (11 | ) | | (82 | ) | | (121 | ) | | 5 |
|
Total gains (losses) on equity securities: | | | | |
| |
|
Total OTTI losses recognized — by sector: | | | | |
| |
|
Non-redeemable preferred stock | — |
| | — |
| | (15 | ) | | (17 | ) |
Common stock | — |
| | — |
| | (4 | ) | | (1 | ) |
OTTI losses on equity securities recognized in earnings | — |
| | — |
| | (19 | ) | | (18 | ) |
Equity securities — net gains (losses) on sales and disposals | 5 |
| | (2 | ) | | 41 |
| | (17 | ) |
Total gains (losses) on equity securities | 5 |
| | (2 | ) | | 22 |
| | (35 | ) |
Trading and FVO securities — FVO general account securities | 1 |
| | — |
| | 1 |
| | 6 |
|
Mortgage loans | (36 | ) | | (8 | ) | | (28 | ) | | 28 |
|
Real estate and real estate joint ventures | 80 |
| | 2 |
| | 153 |
| | (21 | ) |
Other limited partnership interests | (13 | ) | | — |
| | (47 | ) | | (24 | ) |
Other investment portfolio gains (losses) | (15 | ) | | 4 |
| | (12 | ) | | — |
|
Subtotal — investment portfolio gains (losses) | 11 |
| | (86 | ) | | (32 | ) | | (41 | ) |
FVO CSEs: | | | | | | | |
Securities | — |
| | 1 |
| | — |
| | 1 |
|
Long-term debt — related to securities | — |
| | (1 | ) | | (1 | ) | | (1 | ) |
Non-investment portfolio gains (losses) | 152 |
| | (13 | ) | | 107 |
| | 30 |
|
Subtotal FVO CSEs and non-investment portfolio gains (losses) | 152 |
| | (13 | ) | | 106 |
| | 30 |
|
Total net investment gains (losses) | $ | 163 |
| | $ | (99 | ) | | $ | 74 |
| | $ | (11 | ) |
__________________
See “— Related Party Investment Transactions” for discussion of affiliated net investment gains (losses) related to transfers of invested assets to affiliates.
Gains (losses) from foreign currency transactions included within net investment gains (losses) were $125 million and $37 million for the three months and nine months ended September 30, 2014, respectively, and ($8) million and $15 million for the three months and nine months ended September 30, 2013, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Sales or Disposals and Impairments of Fixed Maturity and Equity Securities
Proceeds from sales or disposals of fixed maturity and equity securities and the components of fixed maturity and equity securities net investment gains (losses) are as shown in the tables below. Investment gains and losses on sales of securities are determined on a specific identification basis.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
| Fixed Maturity Securities | | Equity Securities | | Total |
| (In millions) |
Proceeds | $ | 11,083 |
| | $ | 11,768 |
| | $ | 50 |
| | $ | 23 |
| | $ | 11,133 |
| | $ | 11,791 |
|
Gross investment gains | $ | 77 |
| | $ | 74 |
| | $ | 8 |
| | $ | — |
| | $ | 85 |
| | $ | 74 |
|
Gross investment losses | (77 | ) | | (134 | ) | | (3 | ) | | (2 | ) | | (80 | ) | | (136 | ) |
Total OTTI losses | | | | | | | | | | | |
Credit-related | (11 | ) | | (22 | ) | | — |
| | — |
| | (11 | ) | | (22 | ) |
Other (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total OTTI losses | (11 | ) | | (22 | ) | | — |
| | — |
| | (11 | ) | | (22 | ) |
Net investment gains (losses) | $ | (11 | ) | | $ | (82 | ) | | $ | 5 |
| | $ | (2 | ) | | $ | (6 | ) | | $ | (84 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2014 |
| 2013 |
| 2014 |
| 2013 |
| 2014 |
| 2013 |
| Fixed Maturity Securities |
| Equity Securities |
| Total |
| (In millions) |
Proceeds | $ | 31,886 |
|
| $ | 38,898 |
|
| $ | 119 |
|
| $ | 102 |
|
| $ | 32,005 |
|
| $ | 39,000 |
|
Gross investment gains | $ | 182 |
|
| $ | 397 |
|
| $ | 45 |
|
| $ | 2 |
|
| $ | 227 |
|
| $ | 399 |
|
Gross investment losses | (279 | ) |
| (286 | ) |
| (4 | ) |
| (19 | ) |
| (283 | ) |
| (305 | ) |
Total OTTI losses |
|
|
|
|
|
|
|
|
|
|
|
Credit-related | (24 | ) |
| (93 | ) |
| — |
|
| — |
|
| (24 | ) |
| (93 | ) |
Other (1) | — |
|
| (13 | ) |
| (19 | ) |
| (18 | ) |
| (19 | ) |
| (31 | ) |
Total OTTI losses | (24 | ) |
| (106 | ) |
| (19 | ) |
| (18 | ) |
| (43 | ) |
| (124 | ) |
Net investment gains (losses) | $ | (121 | ) |
| $ | 5 |
|
| $ | 22 |
|
| $ | (35 | ) |
| $ | (99 | ) |
| $ | (30 | ) |
__________________
| |
(1) | Other OTTI losses recognized in earnings include impairments on (i) equity securities, (ii) perpetual hybrid securities classified within fixed maturity securities where the primary reason for the impairment was the severity and/or the duration of an unrealized loss position and (iii) fixed maturity securities where there is an intent to sell or it is more likely than not that the Company will be required to sell the security before recovery of the decline in estimated fair value. |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
Credit Loss Rollforward
The table below presents a rollforward of the cumulative credit loss component of OTTI loss recognized in earnings on fixed maturity securities still held for which a portion of the OTTI loss was recognized in other comprehensive income (loss) (“OCI”):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
Balance, beginning of period | $ | 268 |
| | $ | 281 |
| | $ | 277 |
| | $ | 285 |
|
Additions: |
| |
| | | | |
Initial impairments — credit loss OTTI recognized on securities not previously impaired | — |
| | 3 |
| | — |
| | 4 |
|
Additional impairments — credit loss OTTI recognized on securities previously impaired | 8 |
| | 15 |
| | 13 |
| | 49 |
|
Reductions: |
| |
| | | | |
Sales (maturities, pay downs or prepayments) during the period of securities previously impaired as credit loss OTTI | (8 | ) | | (17 | ) | | (22 | ) | | (56 | ) |
Increase in cash flows accretion of previous credit loss OTTI | — |
| | (1 | ) | | — |
| | (1 | ) |
Balance, end of period | $ | 268 |
| | $ | 281 |
| | $ | 268 |
| | $ | 281 |
|
Related Party Investment Transactions
The Company transfers invested assets, primarily consisting of fixed maturity securities and other invested assets, to and from affiliates. Invested assets transferred to and from affiliates were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) | | (In millions) |
Estimated fair value of invested assets transferred to affiliates | $ | — |
| | $ | — |
| | $ | — |
| | $ | 30 |
|
Amortized cost of invested assets transferred to affiliates | $ | — |
| | $ | — |
| | $ | — |
| | $ | 35 |
|
Net investment gains (losses) recognized on transfers | $ | — |
| | $ | — |
| | $ | — |
| | $ | (5 | ) |
Estimated fair value of invested assets transferred from affiliates | $ | 437 |
| | $ | 30 |
| | $ | 882 |
| | $ | 43 |
|
Below is a summary of certain affiliated loans, which are more fully described in Note 8 of the Notes of the Consolidated Financial Statements included in the 2013 Annual Report.
The Company has a loan outstanding to Exeter Reassurance Company, Ltd. (“Exeter”), an affiliate, which is included in other invested assets, totaling $75 million at both September 30, 2014 and December 31, 2013. Net investment income from this loan was $1 million and $4 million for both the three months and nine months ended September 30, 2014 and 2013, respectively.
The Company has affiliated loans outstanding to MetLife, Inc., which are included in other invested assets, totaling $2.0 billion and $1.5 billion at September 30, 2014 and December 31, 2013, respectively. In connection with an affiliate merger transaction, in July 2014, the Company purchased additional MetLife, Inc. affiliated loans with an unpaid principal balance of $400 million at estimated fair value of $437 million from certain affiliates. For additional information on the affiliate merger transaction, see Note 12. The unpaid principal balances on these acquired loans, which bear interest at fixed rates, payable semiannually are due as follows: $295 million due July 15, 2021 at 5.64% and $105 million due December 16, 2021 at 5.86%. Net investment income from affiliated loans was $24 million and $69 million for the three months and nine months ended September 30, 2014, respectively, and $23 million and $68 million for the three months and nine months ended September 30, 2013, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
5. Investments (continued)
The Company provides investment administrative services to certain affiliates. The related investment administrative service charges were $45 million and $128 million for the three months and nine months ended September 30, 2014, respectively, and $45 million and $129 million for the three months and nine months ended September 30, 2013, respectively. Additional affiliated net investment income was $1 million and $3 million for the three months and nine months ended September 30, 2014, respectively, and $1 million and $2 million for the three months and nine months ended September 30, 2013, respectively.
6. Derivatives
Accounting for Derivatives
Freestanding Derivatives
Freestanding derivatives are carried on the Company’s balance sheet either as assets within other invested assets or as liabilities within other liabilities at estimated fair value. The Company does not offset the fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement.
Accruals on derivatives are generally recorded in accrued investment income or within other liabilities. However, accruals that are not scheduled to settle within one year are included with the derivatives carrying value in other invested assets or other liabilities.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the estimated fair value of the derivative are reported in net derivative gains (losses) except as follows:
|
| | |
Statement of Operations Presentation: | Derivative: |
Net investment income | • | Economic hedges of equity method investments in joint ventures |
| • | All derivatives held in relation to trading portfolios |
Hedge Accounting
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge. Hedge designation and financial statement presentation of changes in estimated fair value of the hedging derivatives are as follows:
| |
• | Fair value hedge (a hedge of the estimated fair value of a recognized asset or liability) - in net derivative gains (losses), consistent with the change in fair value of the hedged item attributable to the designated risk being hedged. |
| |
• | Cash flow hedge (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) - effectiveness in OCI (deferred gains or losses on the derivative are reclassified into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item); ineffectiveness in net derivative gains (losses). |
The changes in estimated fair values of the hedging derivatives are exclusive of any accruals that are separately reported on the statement of operations within interest income or interest expense to match the location of the hedged item.
In its hedge 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 that 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 at least quarterly 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 Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item; (ii) the derivative expires, is sold, terminated, or exercised; (iii) it is no longer probable that the hedged forecasted transaction will occur; or (iv) the derivative is de-designated as a hedging instrument.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
6. Derivatives (continued)
When hedge accounting is discontinued because it is determined that the derivative is not highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item, the derivative continues to be carried on the balance sheet at its estimated fair value, with changes in estimated fair value recognized in net derivative gains (losses). The carrying value of the hedged recognized asset or liability under a fair value hedge is no longer adjusted for changes in its estimated fair value due to the hedged risk, and the cumulative adjustment to its carrying value is amortized into income over the remaining life of the hedged item. Provided the hedged forecasted transaction is still probable of occurrence, the changes in estimated fair value of derivatives recorded in OCI related to discontinued cash flow hedges are released into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
When hedge accounting is discontinued because it is no longer probable that the forecasted transactions will occur on the anticipated date or within two months of that date, the derivative continues to be carried on the balance sheet at its estimated fair value, with changes in estimated fair value recognized currently in net derivative gains (losses). Deferred gains and losses of a derivative recorded in OCI pursuant to the discontinued cash flow hedge of a forecasted transaction that is no longer probable are recognized immediately in net derivative gains (losses).
In all other situations in which hedge accounting is discontinued, the derivative is carried at its estimated fair value on the balance sheet, with changes in its estimated fair value recognized in the current period as net derivative gains (losses).
Embedded Derivatives
The Company purchases certain securities, issues certain insurance products and investment contracts and is a party to certain reinsurance agreements that have embedded derivatives. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated. The embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative if:
| |
• | the combined instrument is not accounted for in its entirety at fair value with changes in fair value recorded in earnings; |
| |
• | the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract; and |
| |
• | a separate instrument with the same terms as the embedded derivative would qualify as a derivative instrument. |
Such embedded derivatives are carried on the balance sheet at estimated fair value with the host contract and changes in their estimated fair value are generally reported in net derivative gains (losses). If the Company is unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income. Additionally, the Company may elect to carry an entire contract on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income if that contract contains an embedded derivative that requires bifurcation. At inception, the Company attributes to the embedded derivative a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits. Any additional fees represent “excess” fees and are reported in universal life and investment-type product policy fees.
See Note 7 for information about the fair value hierarchy for derivatives.
Derivative Strategies
The Company is exposed to various risks relating to its ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. The Company uses a variety of strategies to manage these risks, including the use of derivatives.
Derivatives are financial instruments whose values are derived from interest rates, foreign currency exchange rates, credit spreads and/or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter (“OTC”) market. Certain of the Company’s OTC derivatives are cleared and settled through central clearing counterparties (“OTC-cleared”), while others are bilateral contracts between two counterparties (“OTC-bilateral”). The types of derivatives the Company uses include swaps, forwards, futures and option contracts. To a lesser extent, the Company uses credit default swaps and structured interest rate swaps to synthetically replicate investment risks and returns which are not readily available in the cash market.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
6. Derivatives (continued)
Interest Rate Derivatives
The Company uses a variety of interest rate derivatives to reduce its exposure to changes in interest rates, including interest rate swaps, caps, floors, swaptions and forwards.
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 amount. The Company utilizes interest rate swaps in fair value, cash flow and non-qualifying hedging relationships.
The Company uses structured interest rate swaps 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 instrument such as a U.S. Treasury, agency, or other fixed maturity security. Structured interest rate swaps are included in interest rate swaps. Structured interest rate swaps are not designated as hedging instruments.
The Company purchases interest rate caps and floors primarily to protect its floating rate liabilities against rises in interest rates above a specified level, and against interest rate exposure arising from mismatches between assets and liabilities, as well as to protect its minimum rate guarantee liabilities against declines in interest rates below a specified level, respectively. In certain instances, the Company locks in the economic impact of existing purchased caps and floors by entering into offsetting written caps and floors. The Company utilizes interest rate caps and floors in non-qualifying hedging relationships.
Swaptions are used by the Company to hedge interest rate risk associated with the Company’s long-term liabilities and invested assets. A swaption is an option to enter into a swap with a forward starting effective date. In certain instances, the Company locks in the economic impact of existing purchased swaptions by entering into offsetting written swaptions. The Company pays a premium for purchased swaptions and receives a premium for written swaptions. The Company utilizes swaptions in non-qualifying hedging relationships. Swaptions are included in interest rate options.
The Company enters into interest rate forwards to buy and sell securities. The price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. The Company utilizes interest rate forwards in cash flow hedging relationships.
To a lesser extent, the Company uses interest rate futures in non-qualifying hedging relationships.
Foreign Currency Exchange Rate Derivatives
The Company uses foreign currency exchange rate derivatives including foreign currency swaps and foreign currency forwards to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies.
In a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a fixed exchange rate, generally set at inception, calculated by reference to an agreed upon notional amount. The notional amount of each currency is exchanged at the inception and termination of the currency swap by each party. The Company utilizes foreign currency swaps in fair value, cash flow and non-qualifying hedging relationships.
In a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. The Company utilizes foreign currency forwards in non-qualifying hedging relationships.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
6. Derivatives (continued)
Credit Derivatives
The Company enters into purchased credit default swaps to hedge against credit-related changes in the value of its investments. In a credit default swap transaction, the Company agrees with another party to pay, at specified intervals, a premium to hedge credit risk. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the delivery of par quantities of the referenced investment equal to the specified swap notional in exchange for the payment of cash amounts by the counterparty equal to the par value of the investment surrendered. Credit events vary by type of issuer but typically include bankruptcy, failure to pay debt obligations, repudiation, moratorium, or involuntary restructuring. In each case, payout on a credit default swap is triggered only after the Credit Derivatives Determinations Committee of the International Swaps and Derivatives Association, Inc. (“ISDA”) deems that a credit event has occurred. The Company utilizes credit default swaps in non-qualifying hedging relationships.
The Company enters into written credit default swaps to synthetically create credit investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and one or more cash instruments, such as U.S. Treasury securities, agency securities or other fixed maturity securities. These credit default swaps are not designated as hedging instruments.
The Company also enters into certain purchased and written credit default swaps held in relation to trading portfolios for the purpose of generating profits on short-term differences in price. These credit default swaps are not designated as hedging instruments.
The Company enters into forwards to lock in the price to be paid for forward purchases of certain securities. The price is agreed upon at the time of the contract and payment for the contract is made at a specified future date. When the primary purpose of entering into these transactions is to hedge against the risk of changes in purchase price due to changes in credit spreads, the Company designates these as credit forwards. The Company utilizes credit forwards in cash flow hedging relationships.
Equity Derivatives
To a lesser extent, the Company uses equity index options in non-qualifying hedging relationships.
Primary Risks Managed by Derivatives
The following table presents the gross notional amount, estimated fair value and primary underlying risk exposure of the Company’s derivatives, excluding embedded derivatives, held at:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | September 30, 2014 | | December 31, 2013 |
| | Primary Underlying Risk Exposure | | Notional Amount | | Estimated Fair Value | | Notional Amount | | Estimated Fair Value |
| | Assets | | Liabilities | | Assets | | Liabilities |
| | | | (In millions) |
Derivatives Designated as Hedging Instruments | | | | | | | | | | | | |
Fair value hedges: | | | | | | | | | | | | | | |
Interest rate swaps | | Interest rate | | $ | 5,797 |
| | $ | 1,717 |
| | $ | 22 |
| | $ | 5,940 |
| | $ | 1,277 |
| | $ | 68 |
|
Foreign currency swaps | | Foreign currency exchange rate | | 1,772 |
| | 116 |
| | 41 |
| | 2,591 |
| | 252 |
| | 122 |
|
Subtotal | | | | 7,569 |
| | 1,833 |
| | 63 |
| | 8,531 |
| | 1,529 |
| | 190 |
|
Cash flow hedges: | | | | | | | | | | | | | | |
Interest rate swaps | | Interest rate | | 2,281 |
| | 268 |
| | 4 |
| | 2,584 |
| | 77 |
| | 109 |
|
Interest rate forwards | | Interest rate | | 125 |
| | 21 |
| | — |
| | 205 |
| | 3 |
| | 3 |
|
Foreign currency swaps | | Foreign currency exchange rate | | 14,684 |
| | 389 |
| | 433 |
| | 10,560 |
| | 374 |
| | 500 |
|
Subtotal | | | | 17,090 |
| | 678 |
| | 437 |
| | 13,349 |
| | 454 |
| | 612 |
|
Total qualifying hedges | | | | 24,659 |
| | 2,511 |
| | 500 |
| | 21,880 |
| | 1,983 |
| | 802 |
|
Derivatives Not Designated or Not Qualifying as Hedging Instruments | | | | | | | | | | | | |
Interest rate swaps | | Interest rate | | 52,523 |
| | 1,408 |
| | 623 |
| | 59,022 |
| | 1,320 |
| | 732 |
|
Interest rate floors | | Interest rate | | 38,941 |
| | 284 |
| | 131 |
| | 38,220 |
| | 323 |
| | 234 |
|
Interest rate caps | | Interest rate | | 28,704 |
| | 103 |
| | — |
| | 29,809 |
| | 141 |
| | — |
|
Interest rate futures | | Interest rate | | — |
| | — |
| | — |
| | 105 |
| | — |
| | — |
|
Interest rate options | | Interest rate | | 5,299 |
| | 202 |
| | 9 |
| | 4,849 |
| | 120 |
| | 8 |
|
Synthetic GICs | | Interest rate | | 4,315 |
| | — |
| | — |
| | 4,409 |
| | — |
| | — |
|
Foreign currency swaps | | Foreign currency exchange rate | | 8,559 |
| | 201 |
| | 235 |
| | 7,267 |
| | 79 |
| | 492 |
|
Foreign currency forwards | | Foreign currency exchange rate | | 4,452 |
| | 88 |
| | 83 |
| | 4,261 |
| | 44 |
| | 32 |
|
Credit default swaps — purchased | | Credit | | 1,098 |
| | 9 |
| | 12 |
| | 1,506 |
| | 7 |
| | 21 |
|
Credit default swaps — written | | Credit | | 7,633 |
| | 105 |
| | 5 |
| | 6,600 |
| | 124 |
| | 1 |
|
Equity options | | Equity market | | 991 |
| | 3 |
| | — |
| | 1,147 |
| | — |
| | — |
|
Total non-designated or non-qualifying derivatives | | 152,515 |
| | 2,403 |
| | 1,098 |
| | 157,195 |
| | 2,158 |
| | 1,520 |
|
Total | | | | $ | 177,174 |
| | $ | 4,914 |
| | $ | 1,598 |
| | $ | 179,075 |
| | $ | 4,141 |
| | $ | 2,322 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
6. Derivatives (continued)
Based on notional amounts, a substantial portion of the Company’s derivatives was not designated or did not qualify as part of a hedging relationship at both September 30, 2014 and December 31, 2013. The Company’s use of derivatives includes (i) derivatives that serve as macro hedges of the Company’s exposure to various risks and that generally do not qualify for hedge accounting due to the criteria required under the portfolio hedging rules; (ii) derivatives that economically hedge insurance liabilities that contain mortality or morbidity risk and that generally do not qualify for hedge accounting because the lack of these risks in the derivatives cannot support an expectation of a highly effective hedging relationship; and (iii) written credit default swaps that are used to synthetically create credit investments and that do not qualify for hedge accounting because they do not involve a hedging relationship. For these non-qualified derivatives, changes in market factors can lead to the recognition of fair value changes on the statement of operations without an offsetting gain or loss recognized in earnings for the item being hedged.
Net Derivative Gains (Losses)
The components of net derivative gains (losses) were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
Derivatives and hedging gains (losses) (1) | $ | 296 |
| | $ | (517 | ) | | $ | 634 |
| | $ | (1,148 | ) |
Embedded derivatives | 258 |
| | (56 | ) | | (17 | ) | | 215 |
|
Total net derivative gains (losses) | $ | 554 |
| | $ | (573 | ) | | $ | 617 |
| | $ | (933 | ) |
__________________
| |
(1) | Includes foreign currency transaction gains (losses) on hedged items in cash flow and non-qualifying hedging relationships, which are not presented elsewhere in this note. |
The following table presents earned income on derivatives:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
Qualifying hedges: | | | | | | | |
Net investment income | $ | 45 |
| | $ | 28 |
| | $ | 113 |
| | $ | 96 |
|
Interest credited to policyholder account balances | 24 |
| | 39 |
| | 89 |
| | 108 |
|
Non-qualifying hedges: | | | | | | | |
Net investment income | (1 | ) | | (1 | ) | | (3 | ) | | (4 | ) |
Net derivative gains (losses) | 121 |
| | 128 |
| | 357 |
| | 330 |
|
Total | $ | 189 |
| | $ | 194 |
| | $ | 556 |
| | $ | 530 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
6. Derivatives (continued)
Non-Qualifying Derivatives and Derivatives for Purposes Other Than Hedging
The following table presents the amount and location of gains (losses) recognized in income for derivatives that were not designated or qualifying as hedging instruments:
|
| | | | | | | |
| Net Derivative Gains (Losses) | | Net Investment Income (1) |
| (In millions) |
Three Months Ended September 30, 2014 | | | |
Interest rate derivatives | $ | (37 | ) | | $ | — |
|
Foreign currency exchange rate derivatives | 406 |
| | — |
|
Credit derivatives — purchased | 4 |
| | 1 |
|
Credit derivatives — written | (26 | ) | | — |
|
Equity derivatives | — |
| | (1 | ) |
Total | $ | 347 |
| | $ | — |
|
Three Months Ended September 30, 2013 | | | |
Interest rate derivatives | $ | (378 | ) | | $ | — |
|
Foreign currency exchange rate derivatives | (415 | ) | | — |
|
Credit derivatives — purchased | (2 | ) | | (5 | ) |
Credit derivatives — written | 35 |
| | 1 |
|
Equity derivatives | — |
| | (9 | ) |
Total | $ | (760 | ) | | $ | (13 | ) |
Nine Months Ended September 30, 2014 | | | |
Interest rate derivatives | $ | 14 |
| | $ | — |
|
Foreign currency exchange rate derivatives | 297 |
| | — |
|
Credit derivatives — purchased | (5 | ) | | 1 |
|
Credit derivatives — written | (14 | ) | | — |
|
Equity derivatives | — |
| | (7 | ) |
Total | $ | 292 |
| | $ | (6 | ) |
Nine Months Ended September 30, 2013 | | | |
Interest rate derivatives | $ | (1,497 | ) | | $ | — |
|
Foreign currency exchange rate derivatives | (19 | ) | | — |
|
Credit derivatives — purchased | (1 | ) | | (9 | ) |
Credit derivatives — written | 53 |
| | 1 |
|
Equity derivatives | — |
| | (18 | ) |
Total | $ | (1,464 | ) | | $ | (26 | ) |
__________________
| |
(1) | Changes in estimated fair value related to economic hedges of equity method investments in joint ventures and changes in estimated fair value related to derivatives held in relation to trading portfolios. |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
6. Derivatives (continued)
Fair Value Hedges
The Company designates and accounts for the following as fair value hedges when they have met the requirements of fair value hedging: (i) interest rate swaps to convert fixed rate assets and liabilities to floating rate assets and liabilities; and (ii) foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated assets and liabilities.
The Company recognizes gains and losses on derivatives and the related hedged items in fair value hedges within net derivative gains (losses). The following table presents the amount of such net derivative gains (losses):
|
| | | | | | | | | | | | | | |
Derivatives in Fair Value Hedging Relationships | | Hedged Items in Fair Value Hedging Relationships | | Net Derivative Gains (Losses) Recognized for Derivatives | | Net Derivative Gains (Losses) Recognized for Hedged Items | | Ineffectiveness Recognized in Net Derivative Gains (Losses) |
| | | | (In millions) |
Three Months Ended September 30, 2014 | | | | | | |
Interest rate swaps: | | Fixed maturity securities | | $ | 7 |
| | $ | (7 | ) | | $ | — |
|
| | Policyholder liabilities (1) | | 39 |
| | (40 | ) | | (1 | ) |
Foreign currency swaps: | | Foreign-denominated fixed maturity securities | | 12 |
| | (11 | ) | | 1 |
|
| | Foreign-denominated PABs (2) | | (135 | ) | | 129 |
| | (6 | ) |
Total | | $ | (77 | ) | | $ | 71 |
| | $ | (6 | ) |
Three Months Ended September 30, 2013 | | | | | | |
Interest rate swaps: | | Fixed maturity securities | | $ | (1 | ) | | $ | 1 |
| | $ | — |
|
| | Policyholder liabilities (1) | | (97 | ) | | 100 |
| | 3 |
|
Foreign currency swaps: | | Foreign-denominated fixed maturity securities | | (7 | ) | | 8 |
| | 1 |
|
| | Foreign-denominated PABs (2) | | 96 |
| | (94 | ) | | 2 |
|
Total | | $ | (9 | ) | | $ | 15 |
| | $ | 6 |
|
Nine Months Ended September 30, 2014 | | | | | | |
Interest rate swaps: | | Fixed maturity securities | | $ | 6 |
| | $ | (4 | ) | | $ | 2 |
|
| | Policyholder liabilities (1) | | 370 |
| | (360 | ) | | 10 |
|
Foreign currency swaps: | | Foreign-denominated fixed maturity securities | | 5 |
| | (4 | ) | | 1 |
|
| | Foreign-denominated PABs (2) | | (161 | ) | | 158 |
| | (3 | ) |
Total | | $ | 220 |
| | $ | (210 | ) | | $ | 10 |
|
Nine Months Ended September 30, 2013 | | | | | | |
Interest rate swaps: | | Fixed maturity securities | | $ | 29 |
| | $ | (27 | ) | | $ | 2 |
|
| | Policyholder liabilities (1) | | (615 | ) | | 616 |
| | 1 |
|
Foreign currency swaps: | | Foreign-denominated fixed maturity securities | | 10 |
| | (9 | ) | | 1 |
|
| | Foreign-denominated PABs (2) | | (90 | ) | | 95 |
| | 5 |
|
Total | | $ | (666 | ) | | $ | 675 |
| | $ | 9 |
|
__________________
| |
(1) | Fixed rate liabilities reported in PABs or future policy benefits. |
| |
(2) | Fixed rate or floating rate liabilities. |
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
6. Derivatives (continued)
Cash Flow Hedges
The Company designates and accounts for the following as cash flow hedges when they have met the requirements of cash flow hedging: (i) interest rate swaps to convert floating rate assets and liabilities to fixed rate assets and liabilities; (ii) foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated assets and liabilities; (iii) interest rate forwards and credit forwards to lock in the price to be paid for forward purchases of investments; (iv) interest rate swaps and interest rate forwards to hedge the forecasted purchases of fixed-rate investments; and (v) interest rate forwards to hedge forecasted fixed-rate borrowings.
In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions were no longer probable of occurring. Because certain of the forecasted transactions also were not probable of occurring within two months of the anticipated date, the Company reclassified certain amounts from AOCI into net derivative gains (losses). These amounts were ($11) million and ($15) million for the three months and nine months ended September 30, 2014, respectively, and were not significant for both the three months and nine months ended September 30, 2013.
At both September 30, 2014 and December 31, 2013, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions did not exceed seven years.
At September 30, 2014 and December 31, 2013, the balance in AOCI associated with cash flow hedges was $1.1 billion and $361 million, respectively.
The following table presents the effects of derivatives in cash flow hedging relationships on the consolidated statements of operations and comprehensive income (loss) and the consolidated statements of equity:
|
| | | | | | | | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Amount of Gains (Losses) Deferred in AOCI on Derivatives | | Amount and Location of Gains (Losses) Reclassified from AOCI into Income (Loss) | | Amount and Location of Gains (Losses) Recognized in Income (Loss) on Derivatives |
| | (Effective Portion) | | (Effective Portion) | | (Ineffective Portion) |
| | | | Net Derivative Gains (Losses) | | Net Investment Income | | Net Derivative Gains (Losses) |
| | | | (In millions) | | |
Three Months Ended September 30, 2014 | | | | | | | | |
Interest rate swaps | | $ | 80 |
| | $ | 1 |
| | $ | 2 |
| | $ | 5 |
|
Interest rate forwards | | 3 |
| | (10 | ) | | 1 |
| | — |
|
Foreign currency swaps | | 7 |
| | (427 | ) | | — |
| | 2 |
|
Credit forwards | | — |
| | — |
| | — |
| | — |
|
Total | | $ | 90 |
| | $ | (436 | ) | | $ | 3 |
| | $ | 7 |
|
Three Months Ended September 30, 2013 | | | | | | | | |
Interest rate swaps | | $ | (90 | ) | | $ | 3 |
| | $ | 1 |
| | $ | (2 | ) |
Interest rate forwards | | (9 | ) | | 1 |
| | — |
| | (1 | ) |
Foreign currency swaps | | (156 | ) | | 172 |
| | — |
| | (2 | ) |
Credit forwards | | — |
| | — |
| | 1 |
| | — |
|
Total | | $ | (255 | ) | | $ | 176 |
| | $ | 2 |
| | $ | (5 | ) |
Nine Months Ended September 30, 2014 | | | | | | | | |
Interest rate swaps | | $ | 368 |
| | $ | 28 |
| | $ | 6 |
| | $ | 5 |
|
Interest rate forwards | | 25 |
| | (9 | ) | | 2 |
| | — |
|
Foreign currency swaps | | 55 |
| | (350 | ) | | (1 | ) | | 1 |
|
Credit forwards | | — |
| | — |
| | — |
| | — |
|
Total | | $ | 448 |
| | $ | (331 | ) | | $ | 7 |
| | $ | 6 |
|
Nine Months Ended September 30, 2013 | | | | | | | | |
Interest rate swaps | | $ | (410 | ) | | $ | 17 |
| | $ | 5 |
| | $ | — |
|
Interest rate forwards | | (36 | ) | | 1 |
| | 1 |
| | — |
|
Foreign currency swaps | | (67 | ) | | (39 | ) | | (2 | ) | | 3 |
|
Credit forwards | | (3 | ) | | — |
| | 1 |
| | — |
|
Total | | $ | (516 | ) | | $ | (21 | ) | | $ | 5 |
| | $ | 3 |
|
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
At September 30, 2014, $102 million of deferred net gains (losses) on derivatives in AOCI was expected to be reclassified to earnings within the next 12 months.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
6. Derivatives (continued)
Credit Derivatives
In connection with synthetically created credit investment transactions and credit default swaps held in relation to the trading portfolio, the Company writes credit default swaps for which it receives a premium to insure credit risk. Such credit derivatives are included within the non-qualifying derivatives and derivatives for purposes other than hedging table. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the Company paying the counterparty the specified swap notional amount in exchange for the delivery of par quantities of the referenced credit obligation. The Company’s maximum amount at risk, assuming the value of all referenced credit obligations is zero, was $7.6 billion and $6.6 billion at September 30, 2014 and December 31, 2013, respectively. The Company can terminate these contracts at any time through cash settlement with the counterparty at an amount equal to the then current fair value of the credit default swaps. At September 30, 2014 and December 31, 2013, the Company would have received $100 million and $123 million, respectively, to terminate all of these contracts.
The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps at:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
Rating Agency Designation of Referenced Credit Obligations (1) | | Estimated Fair Value of Credit Default Swaps | | Maximum Amount of Future Payments under Credit Default Swaps (2) | | Weighted Average Years to Maturity (3) | | Estimated Fair Value of Credit Default Swaps | | Maximum Amount of Future Payments under Credit Default Swaps (2) | | Weighted Average Years to Maturity (3) |
| | (In millions) | | | | (In millions) | | |
Aaa/Aa/A | | | | | | | | | | | | |
Single name credit default swaps (corporate) | | $ | 6 |
| | $ | 460 |
| | 2.3 |
| | $ | 6 |
| | $ | 395 |
| | 2.6 |
|
Credit default swaps referencing indices | | 7 |
| | 2,275 |
| | 2.0 |
| | 20 |
| | 2,089 |
| | 1.6 |
|
Subtotal | | 13 |
| | 2,735 |
| | 2.0 |
| | 26 |
| | 2,484 |
| | 1.7 |
|
Baa | | | | | | | | | | | | |
Single name credit default swaps (corporate) | | 16 |
| | 1,084 |
| | 2.9 |
| | 16 |
| | 874 |
| | 3.2 |
|
Credit default swaps referencing indices | | 50 |
| | 3,193 |
| | 4.5 |
| | 52 |
| | 2,898 |
| | 4.7 |
|
Subtotal | | 66 |
| | 4,277 |
| | 4.1 |
| | 68 |
| | 3,772 |
| | 4.4 |
|
Ba | | | | | | | | | | | | |
Single name credit default swaps (corporate) | | — |
| | 55 |
| | 3.0 |
| | — |
| | 5 |
| | 3.8 |
|
Credit default swaps referencing indices | | — |
| | 100 |
| | 2.5 |
| | — |
| | — |
| | — |
|
Subtotal | | — |
| | 155 |
| | 2.7 |
| | — |
| | 5 |
| | 3.8 |
|
B | | | | | | | | | | | | |
Single name credit default swaps (corporate) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Credit default swaps referencing indices | | 21 |
| | 466 |
| | 4.1 |
| | 29 |
| | 339 |
| | 4.9 |
|
Subtotal | | 21 |
| | 466 |
| | 4.1 |
| | 29 |
| | 339 |
| | 4.9 |
|
Total | | $ | 100 |
| | $ | 7,633 |
| | 3.3 |
| | $ | 123 |
| | $ | 6,600 |
| | 3.4 |
|
__________________
| |
(1) | The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s Investors Service (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) and Fitch Ratings. If no rating is available from a rating agency, then an internally developed rating is used. |
| |
(2) | Assumes the value of the referenced credit obligations is zero. |
| |
(3) | The weighted average years to maturity of the credit default swaps is calculated based on weighted average notional amounts. |
The Company has also entered into credit default swaps to purchase credit protection on certain of the referenced credit obligations in the table above. As a result, the maximum amounts of potential future recoveries available to offset the $7.6 billion and $6.6 billion from the table above were $60 million and $70 million at September 30, 2014 and December 31, 2013, respectively.
Written credit default swaps held in relation to the trading portfolio amounted to $45 million in notional and $2 million in fair value at September 30, 2014. Written credit default swaps held in relation to the trading portfolio amounted to $10 million in notional and $0 in fair value at December 31, 2013.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
6. Derivatives (continued)
Credit Risk on Freestanding Derivatives
The Company may be exposed to credit-related losses in the event of nonperformance by counterparties to derivatives. Generally, the current credit exposure of the Company’s derivatives is limited to the net positive estimated fair value of derivatives at the reporting date after taking into consideration the existence of master netting or similar agreements and any collateral received pursuant to such agreements.
The Company manages its credit risk related to derivatives by entering into transactions with creditworthy counterparties and establishing and monitoring exposure limits. The Company’s OTC-bilateral derivative transactions are generally governed by ISDA Master Agreements which provide for legally enforceable set-off and close-out netting of exposures to specific counterparties in the event of early termination of a transaction, which includes, but is not limited to, events of default and bankruptcy. In the event of an early termination, the Company is permitted to set off receivables from the counterparty against payables to the same counterparty arising out of all included transactions. Substantially all of the Company’s ISDA Master Agreements also include Credit Support Annex provisions which require both the pledging and accepting of collateral in connection with its OTC-bilateral derivatives.
The Company’s OTC-cleared derivatives are effected through central clearing counterparties and its exchange-traded derivatives are effected through regulated exchanges. Such positions are marked to market and margined on a daily basis (both initial margin and variation margin), and the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivatives.
See Note 7 for a description of the impact of credit risk on the valuation of derivatives.
The estimated fair values of the Company’s net derivative assets and net derivative liabilities after the application of master netting agreements and collateral were as follows at:
|
| | | | | | | | | | | | | | | | |
| | September 30, 2014 | | December 31, 2013 |
Derivatives Subject to a Master Netting Arrangement or a Similar Arrangement | | Assets | | Liabilities | | Assets | | Liabilities |
| | (In millions) |
Gross estimated fair value of derivatives: | | | | | | | | |
OTC-bilateral (1) | | $ | 4,791 |
| | $ | 1,279 |
| | $ | 4,026 |
| | $ | 2,232 |
|
OTC-cleared (1) | | 213 |
| | 348 |
| | 251 |
| | 117 |
|
Exchange-traded | | — |
| | — |
| | — |
| | — |
|
Total gross estimated fair value of derivatives (1) | | 5,004 |
| | 1,627 |
| | 4,277 |
| | 2,349 |
|
Amounts offset on the consolidated balance sheets | | — |
| | — |
| | — |
| | — |
|
Estimated fair value of derivatives presented on the consolidated balance sheets (1) | | 5,004 |
| | 1,627 |
| | 4,277 |
| | 2,349 |
|
Gross amounts not offset on the consolidated balance sheets: | | | | | | | | |
Gross estimated fair value of derivatives: (2) | | | | | | | | |
OTC-bilateral | | (1,115 | ) | | (1,115 | ) | | (1,844 | ) | | (1,844 | ) |
OTC-cleared | | (148 | ) | | (148 | ) | | (114 | ) | | (114 | ) |
Exchange-traded | | — |
| | — |
| | — |
| | — |
|
Cash collateral: (3), (4) | | | | | | | | |
OTC-bilateral | | (1,787 | ) | | (2 | ) | | (1,143 | ) | | (3 | ) |
OTC-cleared | | (62 | ) | | (200 | ) | | (128 | ) | | (3 | ) |
Exchange-traded | | — |
| | — |
| | — |
| | — |
|
Securities collateral: (5) | | | | | | | | |
OTC-bilateral | | (1,769 | ) | | (139 | ) | | (1,024 | ) | | (319 | ) |
OTC-cleared | | — |
| | — |
| | — |
| | — |
|
Exchange-traded | | — |
| | — |
| | — |
| | — |
|
Net amount after application of master netting agreements and collateral | | $ | 123 |
| | $ | 23 |
| | $ | 24 |
| | $ | 66 |
|
__________________
| |
(1) | At September 30, 2014 and December 31, 2013, derivative assets include income or expense accruals reported in accrued investment income or in other liabilities of $90 million and $136 million, respectively, and derivative liabilities include income or expense accruals reported in accrued investment income or in other liabilities of $29 million and $27 million, respectively. |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
6. Derivatives (continued)
| |
(2) | Estimated fair value of derivatives is limited to the amount that is subject to set-off and includes income or expense accruals. |
| |
(3) | Cash collateral received by the Company for OTC-bilateral and OTC-cleared derivatives is included in cash and cash equivalents, short-term investments or in fixed maturity securities, and the obligation to return it is included in payables for collateral under securities loaned and other transactions on the balance sheet. In certain instances, cash collateral pledged to the Company as initial margin for OTC-bilateral derivatives is held in separate custodial accounts and is not recorded on the Company’s balance sheet because the account title is in the name of the counterparty (but ring-fenced for the benefit of the Company). The amount of this off-balance sheet collateral was $133 million and $0 at September 30, 2014 and December 31, 2013, respectively. |
| |
(4) | The receivable for the return of cash collateral provided by the Company is inclusive of initial margin on exchange-traded and OTC-cleared derivatives and is included in premiums, reinsurance and other receivables on the balance sheet. The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements. At September 30, 2014 and December 31, 2013, the Company received excess cash collateral of $18 million (all of which is off-balance sheet cash collateral held in separate custodial accounts) and $47 million, respectively, and provided excess cash collateral of $3 million and $3 million, respectively, which is not included in the table above due to the foregoing limitation. |
| |
(5) | Securities collateral received by the Company is held in separate custodial accounts and is not recorded on the balance sheet. Subject to certain constraints, the Company is permitted by contract to sell or repledge this collateral, but at September 30, 2014 none of the collateral had been sold or repledged. Securities collateral pledged by the Company is reported in fixed maturity securities on the balance sheet. Subject to certain constraints, the counterparties are permitted by contract to sell or repledge this collateral. The amount of securities collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements and cash collateral. At September 30, 2014 and December 31, 2013, the Company received excess securities collateral with an estimated fair value of $202 million and $106 million, respectively, for its OTC-bilateral derivatives, which are not included in the table above due to the foregoing limitation. At September 30, 2014 and December 31, 2013, the Company provided excess securities collateral with an estimated fair value of $13 million and $25 million, respectively, for its OTC-bilateral derivatives, and $96 million and $106 million, respectively, for its OTC-cleared derivatives, which are not included in the table above due to the foregoing limitation. At both September 30, 2014 and December 31, 2013, the Company did not pledge any securities collateral for its exchange-traded derivatives. |
The Company’s collateral arrangements for its OTC-bilateral derivatives generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the fair value of that counterparty’s derivatives reaches a pre-determined threshold. Certain of these arrangements also include financial strength-contingent provisions that provide for a reduction of these thresholds (on a sliding scale that converges toward zero) in the event of downgrades in the financial strength ratings of the Company and/or the credit ratings of the counterparty. In addition, certain of the Company’s netting agreements for derivatives contain provisions that require both the Company and the counterparty to maintain a specific investment grade financial strength or credit rating from each of Moody’s and S&P. If a party’s financial strength or credit ratings were to fall below that specific investment grade financial strength or credit rating, that party would be in violation of these provisions, and the other party to the derivatives could terminate the transactions and demand immediate settlement and payment based on such party’s reasonable valuation of the derivatives.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
6. Derivatives (continued)
The following table presents the estimated fair value of the Company’s OTC-bilateral derivatives that are in a net liability position after considering the effect of netting agreements, together with the estimated fair value and balance sheet location of the collateral pledged. The table also presents the incremental collateral that the Company would be required to provide if there was a one notch downgrade in the Company’s financial strength rating at the reporting date or if the Company’s financial strength rating sustained a downgrade to a level that triggered full overnight collateralization or termination of the derivative position at the reporting date. OTC-bilateral derivatives that are not subject to collateral agreements are excluded from this table.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Estimated Fair Value of Collateral Provided | | Fair Value of Incremental Collateral Provided Upon |
| | Estimated Fair Value of Derivatives in Net Liability Position (1) | | Fixed Maturity Securities | | Cash | | One Notch Downgrade in the Company’s Financial Strength Rating | | Downgrade in the Company’s Financial Strength Rating to a Level that Triggers Full Overnight Collateralization or Termination of the Derivative Position |
| | (In millions) |
September 30, 2014 | | | | | | | | | | |
Derivatives subject to financial strength-contingent provisions | | $ | 143 |
| | $ | 152 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
Derivatives not subject to financial strength-contingent provisions | | 3 |
| | — |
| | 3 |
| | — |
| | — |
|
Total | | $ | 146 |
| | $ | 152 |
| | $ | 3 |
| | $ | — |
| | $ | 1 |
|
December 31, 2013 | | | | | | | | | | |
Derivatives subject to financial strength-contingent provisions | | $ | 354 |
| | $ | 344 |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
Derivatives not subject to financial strength-contingent provisions | | 4 |
| | — |
| | 3 |
| | — |
| | — |
|
Total | | $ | 358 |
| | $ | 344 |
| | $ | 3 |
| | $ | — |
| | $ | 5 |
|
__________________
| |
(1) | After taking into consideration the existence of netting agreements. |
Embedded Derivatives
The Company issues certain products or purchases certain investments that contain embedded derivatives that are required to be separated from their host contracts and accounted for as freestanding derivatives. These host contracts principally include: variable annuities with guaranteed minimum benefits, including GMWBs, guaranteed minimum accumulation benefits (“GMABs”) and certain GMIBs; affiliated ceded reinsurance of guaranteed minimum benefits related to GMWBs, GMABs and certain GMIBs; funds withheld on ceded reinsurance and affiliated funds withheld on ceded reinsurance; funding agreements with equity or bond indexed crediting rates; and certain debt and equity securities.
The following table presents the estimated fair value and balance sheet location of the Company’s embedded derivatives that have been separated from their host contracts at:
|
| | | | | | | | | | |
| | Balance Sheet Location | | September 30, 2014 | | December 31, 2013 |
| | | | (In millions) |
Net embedded derivatives within asset host contracts: | | | | | | |
Ceded guaranteed minimum benefits | | Premiums, reinsurance and other receivables | | $ | 482 |
| | $ | (62 | ) |
Options embedded in debt or equity securities | | Investments | | (122 | ) | | (106 | ) |
Net embedded derivatives within asset host contracts | | $ | 360 |
| | $ | (168 | ) |
| | | | | | |
Net embedded derivatives within liability host contracts: | | | | | | |
Direct guaranteed minimum benefits | | PABs | | $ | (731 | ) | | $ | (868 | ) |
Assumed guaranteed minimum benefits | | Other policy-related balances | | 3 |
| | — |
|
Funds withheld on ceded reinsurance | | Other liabilities | | 1,105 |
| | 758 |
|
Other | | PABs | | 7 |
| | 4 |
|
Net embedded derivatives within liability host contracts | | $ | 384 |
| | $ | (106 | ) |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
6. Derivatives (continued)
The following table presents changes in estimated fair value related to embedded derivatives:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
Net derivative gains (losses) (1), (2) | $ | 258 |
| | $ | (56 | ) | | $ | (17 | ) | | $ | 215 |
|
__________________
| |
(1) | The valuation of direct guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses), in connection with this adjustment, were $5 million for both the three months and nine months ended September 30, 2014, respectively, and ($9) million and ($41) million for the three months and nine months ended September 30, 2013, respectively. In addition, the valuation of ceded guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses) in connection with this adjustment were ($21) million and ($22) million for the three months and nine months ended September 30, 2014, respectively, and $49 million and $114 million for the three months and nine months ended September 30, 2013, respectively. |
| |
(2) | See Note 12 for discussion of affiliated net derivative gains (losses) included in the table above. |
7. Fair Value
Considerable judgment is often required in interpreting market data to develop estimates of fair value, and the use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
Recurring Fair Value Measurements
The assets and liabilities measured at estimated fair value on a recurring basis and their corresponding placement in the fair value hierarchy, including those items for which the Company has elected the FVO, are presented below.
|
| | | | | | | | | | | | | | | |
| September 30, 2014 |
| Fair Value Hierarchy | | |
| Level 1 | | Level 2 | | Level 3 | | Total Estimated Fair Value |
| (In millions) |
Assets | | | | | | | |
Fixed maturity securities: | | | | | | | |
U.S. corporate | $ | — |
| | $ | 61,166 |
| | $ | 5,317 |
| | $ | 66,483 |
|
U.S. Treasury and agency | 21,510 |
| | 16,126 |
| | — |
| | 37,636 |
|
Foreign corporate | — |
| | 26,042 |
| | 3,204 |
| | 29,246 |
|
RMBS | 1,434 |
| | 23,854 |
| | 3,336 |
| | 28,624 |
|
CMBS | — |
| | 7,742 |
| | 319 |
| | 8,061 |
|
ABS | — |
| | 6,080 |
| | 2,236 |
| | 8,316 |
|
State and political subdivision | — |
| | 6,241 |
| | 2 |
| | 6,243 |
|
Foreign government | — |
| | 3,619 |
| | 198 |
| | 3,817 |
|
Total fixed maturity securities | 22,944 |
| | 150,870 |
| | 14,612 |
| | 188,426 |
|
Equity securities: | | | | | | | |
Common stock | 586 |
| | 711 |
| | 55 |
| | 1,352 |
|
Non-redeemable preferred stock | — |
| | 547 |
| | 165 |
| | 712 |
|
Total equity securities | 586 |
| | 1,258 |
| | 220 |
| | 2,064 |
|
Trading and FVO securities: | | | | | | | |
Actively Traded Securities | — |
| | 664 |
| | 8 |
| | 672 |
|
FVO general account securities | — |
| | 22 |
| | 14 |
| | 36 |
|
FVO securities held by CSEs | — |
| | 6 |
| | 12 |
| | 18 |
|
Total trading and FVO securities | — |
| | 692 |
| | 34 |
| | 726 |
|
Short-term investments (1) | 712 |
| | 3,222 |
| | 120 |
| | 4,054 |
|
Residential mortgage loans — FVO | — |
| | — |
| | 298 |
| | 298 |
|
Derivative assets: (2) | | | | | | | |
Interest rate | — |
| | 3,982 |
| | 21 |
| | 4,003 |
|
Foreign currency exchange rate | — |
| | 782 |
| | 12 |
| | 794 |
|
Credit | — |
| | 102 |
| | 12 |
| | 114 |
|
Equity market | — |
| | 3 |
| | — |
| | 3 |
|
Total derivative assets | — |
| | 4,869 |
| | 45 |
| | 4,914 |
|
Net embedded derivatives within asset host contracts (3) | — |
| | — |
| | 482 |
| | 482 |
|
Separate account assets (4) | 28,009 |
| | 109,877 |
| | 1,623 |
| | 139,509 |
|
Total assets | $ | 52,251 |
| | $ | 270,788 |
| | $ | 17,434 |
| | $ | 340,473 |
|
Liabilities | | | | | | | |
Derivative liabilities: (2) | | | | | | | |
Interest rate | $ | — |
| | $ | 788 |
| | $ | 1 |
| | $ | 789 |
|
Foreign currency exchange rate | — |
| | 792 |
| | — |
| | 792 |
|
Credit | — |
| | 13 |
| | 4 |
| | 17 |
|
Total derivative liabilities | — |
| | 1,593 |
| | 5 |
| | 1,598 |
|
Net embedded derivatives within liability host contracts (3) | — |
| | 7 |
| | 377 |
| | 384 |
|
Long-term debt | — |
| | 88 |
| | 20 |
| | 108 |
|
Long-term debt of CSEs — FVO | — |
| | — |
| | 15 |
| | 15 |
|
Trading liabilities (5) | 118 |
| | 78 |
| | — |
| | 196 |
|
Total liabilities | $ | 118 |
| | $ | 1,766 |
| | $ | 417 |
| | $ | 2,301 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
|
| | | | | | | | | | | | | | | |
| December 31, 2013 |
| Fair Value Hierarchy | | |
| Level 1 | | Level 2 | | Level 3 | | Total Estimated Fair Value |
| (In millions) |
Assets | | | | | | | |
Fixed maturity securities: | | | | | | | |
U.S. corporate | $ | — |
| | $ | 58,960 |
| | $ | 5,269 |
| | $ | 64,229 |
|
U.S. Treasury and agency | 15,858 |
| | 14,624 |
| | 62 |
| | 30,544 |
|
Foreign corporate | — |
| | 25,558 |
| | 3,198 |
| | 28,756 |
|
RMBS | — |
| | 22,197 |
| | 2,513 |
| | 24,710 |
|
CMBS | — |
| | 7,946 |
| | 430 |
| | 8,376 |
|
ABS | — |
| | 5,298 |
| | 2,526 |
| | 7,824 |
|
State and political subdivision | — |
| | 5,777 |
| | — |
| | 5,777 |
|
Foreign government | — |
| | 3,256 |
| | 274 |
| | 3,530 |
|
Total fixed maturity securities | 15,858 |
| | 143,616 |
| | 14,272 |
| | 173,746 |
|
Equity securities: | | | | | | | |
Common stock | 361 |
| | 753 |
| | 50 |
| | 1,164 |
|
Non-redeemable preferred stock | — |
| | 450 |
| | 278 |
| | 728 |
|
Total equity securities | 361 |
| | 1,203 |
| | 328 |
| | 1,892 |
|
Trading and FVO securities: | | | | | | | |
Actively Traded Securities | 2 |
| | 648 |
| | 12 |
| | 662 |
|
FVO general account securities | — |
| | 24 |
| | 14 |
| | 38 |
|
FVO securities held by CSEs | — |
| | 23 |
| | — |
| | 23 |
|
Total trading and FVO securities | 2 |
| | 695 |
| | 26 |
| | 723 |
|
Short-term investments (1) | 1,387 |
| | 4,224 |
| | 175 |
| | 5,786 |
|
Residential mortgage loans — FVO | — |
| | — |
| | 338 |
| | 338 |
|
Derivative assets: (2) | | | | | | | |
Interest rate | — |
| | 3,258 |
| | 3 |
| | 3,261 |
|
Foreign currency exchange rate | — |
| | 735 |
| | 14 |
| | 749 |
|
Credit | — |
| | 108 |
| | 23 |
| | 131 |
|
Equity market | — |
| | — |
| | — |
| | — |
|
Total derivative assets | — |
| | 4,101 |
| | 40 |
| | 4,141 |
|
Net embedded derivatives within asset host contracts (3) | — |
| | — |
| | (62 | ) | | (62 | ) |
Separate account assets (4) | 28,422 |
| | 105,165 |
| | 1,209 |
| | 134,796 |
|
Total assets | $ | 46,030 |
| | $ | 259,004 |
| | $ | 16,326 |
| | $ | 321,360 |
|
Liabilities | | | | | | | |
Derivative liabilities: (2) | | | | | | | |
Interest rate | $ | — |
| | $ | 1,150 |
| | $ | 4 |
| | $ | 1,154 |
|
Foreign currency exchange rate | — |
| | 1,146 |
| | — |
| | 1,146 |
|
Credit | — |
| | 22 |
| | — |
| | 22 |
|
Total derivative liabilities | — |
| | 2,318 |
| | 4 |
| | 2,322 |
|
Net embedded derivatives within liability host contracts (3) | — |
| | 4 |
| | (110 | ) | | (106 | ) |
Long-term debt | — |
| | 79 |
| | 43 |
| | 122 |
|
Long-term debt of CSEs — FVO | — |
| | — |
| | 28 |
| | 28 |
|
Trading liabilities (5) | 260 |
| | 2 |
| | — |
| | 262 |
|
Total liabilities | $ | 260 |
| | $ | 2,403 |
| | $ | (35 | ) | | $ | 2,628 |
|
__________________
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
| |
(1) | Short-term investments as presented in the tables above differ from the amounts presented on the consolidated balance sheets because certain short-term investments are not measured at estimated fair value on a recurring basis. |
| |
(2) | Derivative assets are presented within other invested assets on the consolidated balance sheets and derivative liabilities are presented within other liabilities on the consolidated balance sheets. The amounts are presented gross in the tables above to reflect the presentation on the consolidated balance sheets, but are presented net for purposes of the rollforward in the Fair Value Measurements Using Significant Unobservable Inputs (Level 3) tables. |
| |
(3) | Net embedded derivatives within asset host contracts are presented primarily within premiums, reinsurance and other receivables on the consolidated balance sheets. Net embedded derivatives within liability host contracts are presented within PABs, other policy-related balances and other liabilities on the consolidated balance sheets. At September 30, 2014 and December 31, 2013, equity securities also included embedded derivatives of ($122) million and ($106) million, respectively. |
| |
(4) | Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders whose liability is reflected within separate account liabilities. Separate account liabilities are set equal to the estimated fair value of separate account assets. |
| |
(5) | Trading liabilities are presented within other liabilities on the consolidated balance sheets. |
The following describes the valuation methodologies used to measure assets and liabilities at fair value. The description includes the valuation techniques and key inputs for each category of assets or liabilities that are classified within Level 2 and Level 3 of the fair value hierarchy.
Investments
Valuation Controls and Procedures
On behalf of the Company and MetLife, Inc.’s Chief Investment Officer and Chief Financial Officer, a pricing and valuation committee that is independent of the trading and investing functions and comprised of senior management, provides oversight of control systems and valuation policies for securities, mortgage loans and derivatives. On a quarterly basis, this committee reviews and approves new transaction types and markets, ensures that observable market prices and market-based parameters are used for valuation, wherever possible, and determines that judgmental valuation adjustments, when applied, are based upon established policies and are applied consistently over time. This committee also provides oversight of the selection of independent third party pricing providers and the controls and procedures to evaluate third party pricing. Periodically, the Chief Accounting Officer reports to the Audit Committees of Metropolitan Life Insurance Company’s and MetLife, Inc.’s Boards of Directors regarding compliance with fair value accounting standards.
The Company reviews its valuation methodologies on an ongoing basis and revises those methodologies when necessary based on changing market conditions. Assurance is gained on the overall reasonableness and consistent application of input assumptions, valuation methodologies and compliance with fair value accounting standards through controls designed to ensure valuations represent an exit price. Several controls are utilized, including certain monthly controls, which include, but are not limited to, analysis of portfolio returns to corresponding benchmark returns, comparing a sample of executed prices of securities sold to the fair value estimates, comparing fair value estimates to management’s knowledge of the current market, reviewing the bid/ask spreads to assess activity, comparing prices from multiple independent pricing services and ongoing due diligence to confirm that independent pricing services use market-based parameters. The process includes a determination of the observability of inputs used in estimated fair values received from independent pricing services or brokers by assessing whether these inputs can be corroborated by observable market data. The Company ensures that prices received from independent brokers, also referred to herein as “consensus pricing,” represent a reasonable estimate of fair value by considering such pricing relative to the Company’s knowledge of the current market dynamics and current pricing for similar financial instruments. While independent non-binding broker quotations are utilized, they are not used for a significant portion of the portfolio. For example, fixed maturity securities priced using independent non-binding broker quotations represent 1% of the total estimated fair value of fixed maturity securities and 12% of the total estimated fair value of Level 3 fixed maturity securities.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
The Company also applies a formal process to challenge any prices received from independent pricing services that are not considered representative of estimated fair value. If prices received from independent pricing services are not considered reflective of market activity or representative of estimated fair value, independent non-binding broker quotations are obtained, or an internally developed valuation is prepared. Internally developed valuations of current estimated fair value, which reflect internal estimates of liquidity and nonperformance risks, compared with pricing received from the independent pricing services, did not produce material differences in the estimated fair values for the majority of the portfolio; accordingly, overrides were not material. This is, in part, because internal estimates of liquidity and nonperformance risks are generally based on available market evidence and estimates used by other market participants. In the absence of such market-based evidence, management’s best estimate is used.
Securities, Short-term Investments, Long-term Debt, Long-term Debt of CSEs — FVO and Trading Liabilities
When available, the estimated fair value of these financial instruments is based on quoted prices in active markets that are readily and regularly obtainable. Generally, these are the most liquid of the Company’s securities holdings and valuation of these securities does not involve management’s judgment.
When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies, giving priority to observable inputs. The significant inputs to the market standard valuation methodologies for certain types of securities with reasonable levels of price transparency are inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. When observable inputs are not available, the market standard valuation methodologies rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. These unobservable inputs can be based in large part on management’s judgment or estimation and cannot be supported by reference to market activity. Even though these inputs are unobservable, management believes they are consistent with what other market participants would use when pricing such securities and are considered appropriate given the circumstances.
The estimated fair value of FVO securities held by CSEs, long-term debt, long-term debt of CSEs — FVO and trading liabilities is determined on a basis consistent with the methodologies described herein for securities.
Level 2 Valuation Techniques and Key Inputs:
This level includes securities priced principally by independent pricing services using observable inputs. Trading and FVO securities and short-term investments within this level are of a similar nature and class to the Level 2 fixed maturity securities and equity securities.
U.S. corporate and foreign corporate securities
These securities are principally valued using the market and income approaches. Valuations are based primarily on quoted prices in markets that are not active, or using matrix pricing or other similar techniques that use standard market observable inputs such as benchmark yields, spreads off benchmark yields, new issuances, issuer rating, duration, and trades of identical or comparable securities. Privately-placed securities are valued using matrix pricing methodologies using standard market observable inputs, and inputs derived from, or corroborated by, market observable data including market yield curve, duration, call provisions, observable prices and spreads for similar publicly traded or privately traded issues that incorporate the credit quality and industry sector of the issuer, and in certain cases, delta spread adjustments to reflect specific credit-related issues.
U.S. Treasury and agency securities
These securities are principally valued using the market approach. Valuations are based primarily on quoted prices in markets that are not active, or using matrix pricing or other similar techniques using standard market observable inputs such as a benchmark U.S. Treasury yield curve, the spread off the U.S. Treasury yield curve for the identical security and comparable securities that are actively traded.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
Structured securities comprised of RMBS, CMBS and ABS
These securities are principally valued using the market and income approaches. Valuations are based primarily on matrix pricing, discounted cash flow methodologies or other similar techniques using standard market inputs, including spreads for actively traded securities, spreads off benchmark yields, expected prepayment speeds and volumes, current and forecasted loss severity, rating, weighted average coupon, weighted average maturity, average delinquency rates, geographic region, debt-service coverage ratios and issuance-specific information, including, but not limited to: collateral type, payment terms of the underlying assets, payment priority within the tranche, structure of the security, deal performance and vintage of loans.
State and political subdivision and foreign government securities
These securities are principally valued using the market approach. Valuations are based primarily on matrix pricing or other similar techniques using standard market observable inputs, including a benchmark U.S. Treasury yield or other yields, issuer ratings, broker-dealer quotes, issuer spreads and reported trades of similar securities, including those within the same sub-sector or with a similar maturity or credit rating.
Common and non-redeemable preferred stock
These securities are principally valued using the market approach. Valuations are based principally on observable inputs, including quoted prices in markets that are not considered active.
Level 3 Valuation Techniques and Key Inputs:
In general, securities classified within Level 3 use many of the same valuation techniques and inputs as described previously for Level 2. However, if key inputs are unobservable, or if the investments are less liquid and there is very limited trading activity, the investments are generally classified as Level 3. The use of independent non-binding broker quotations to value investments generally indicates there is a lack of liquidity or a lack of transparency in the process to develop the valuation estimates, generally causing these investments to be classified in Level 3.
Trading and FVO securities and short-term investments within this level are of a similar nature and class to the Level 3 securities described below; accordingly, the valuation techniques and significant market standard observable inputs used in their valuation are also similar to those described below.
U.S. corporate and foreign corporate securities
These securities, including financial services industry hybrid securities classified within fixed maturity securities, are principally valued using the market approach. Valuations are based primarily on matrix pricing or other similar techniques that utilize unobservable inputs or inputs that cannot be derived principally from, or corroborated by, observable market data, including illiquidity premium, delta spread adjustments to reflect specific credit-related issues, credit spreads; and inputs including quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2. Certain valuations are based on independent non-binding broker quotations.
Structured securities comprised of RMBS, CMBS and ABS
These securities are principally valued using the market and income approaches. Valuations are based primarily on matrix pricing, discounted cash flow methodologies or other similar techniques that utilize inputs that are unobservable or cannot be derived principally from, or corroborated by, observable market data, including credit spreads. Below investment grade securities and sub-prime RMBS included in this level are valued based on inputs including quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2. Certain of these valuations are based on independent non-binding broker quotations.
State and political subdivision, U.S. Treasury and agency and foreign government securities
These securities are principally valued using the market approach. Valuations are based primarily on independent non-binding broker quotations and inputs, including quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2. Certain valuations are based on matrix pricing that utilize inputs that are unobservable or cannot be derived principally from, or corroborated by, observable market data, including credit spreads.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
Common and non-redeemable preferred stock
These securities, including privately-held securities and financial services industry hybrid securities classified within equity securities, are principally valued using the market and income approaches. Valuations are based primarily on matrix pricing, discounted cash flow methodologies or other similar techniques using inputs such as comparable credit ratings and issuance structures. Certain of these securities are valued based on inputs including quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2 and independent non-binding broker quotations.
Mortgage Loans
The Company has elected the FVO for certain residential mortgage loans held-for-investment.
Level 3 Valuation Techniques and Key Inputs:
Residential mortgage loans — FVO
For these investments, the estimated fair values are based primarily on matrix pricing or other similar techniques that utilize inputs that are unobservable or cannot be derived principally from, or corroborated by, observable market data.
Separate Account Assets
Separate account assets are carried at estimated fair value and reported as a summarized total on the consolidated balance sheets. The estimated fair value of separate account assets is based on the estimated fair value of the underlying assets. Separate account assets include: mutual funds, fixed maturity securities, equity securities, derivatives, hedge funds, other limited partnership interests, short-term investments and cash and cash equivalents.
Level 2 Valuation Techniques and Key Inputs:
These assets are comprised of investments that are similar in nature to the instruments described under “— Securities, Short-term Investments, Long-term Debt of CSEs — FVO and Trading Liabilities” and “— Derivatives — Freestanding Derivatives.” Also included are certain mutual funds and hedge funds without readily determinable fair values as prices are not published publicly. Valuation of the mutual funds and hedge funds is based upon quoted prices or reported net asset value (“NAV”) provided by the fund managers.
Level 3 Valuation Techniques and Key Inputs:
These assets are comprised of investments that are similar in nature to the instruments described under “— Securities, Short-term Investments, Long-term Debt of CSEs — FVO and Trading Liabilities” and “— Derivatives — Freestanding Derivatives.” Also included are other limited partnership interests, which are valued giving consideration to the value of the underlying holdings of the partnerships and by applying a premium or discount, if appropriate, for factors such as liquidity, bid/ask spreads, the performance record of the fund manager or other relevant variables that may impact the exit value of the particular partnership interest.
Derivatives
The estimated fair value of derivatives is determined through the use of quoted market prices for exchange-traded derivatives, or through the use of pricing models for OTC-bilateral and OTC-cleared derivatives. The determination of estimated fair value, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models. The valuation controls and procedures for derivatives are described in “— Investments.”
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
The significant inputs to the pricing models for most OTC-bilateral and OTC-cleared derivatives are inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. Significant inputs that are observable generally include: interest rates, foreign currency exchange rates, interest rate curves, credit curves and volatility. However, certain OTC-bilateral and OTC-cleared derivatives may rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant inputs that are unobservable generally include references to emerging market currencies and inputs that are outside the observable portion of the interest rate curve, credit curve, volatility or other relevant market measure. These unobservable inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and management believes they are consistent with what other market participants would use when pricing such instruments.
Most inputs for OTC-bilateral and OTC-cleared derivatives are mid-market inputs but, in certain cases, liquidity adjustments are made when they are deemed more representative of exit value. Market liquidity, as well as the use of different methodologies, assumptions and inputs, may have a material effect on the estimated fair values of the Company’s derivatives and could materially affect net income.
The credit risk of both the counterparty and the Company are considered in determining the estimated fair value for all OTC-bilateral and OTC-cleared derivatives, and any potential credit adjustment is based on the net exposure by counterparty after taking into account the effects of netting agreements and collateral arrangements. The Company values its OTC-bilateral and OTC-cleared derivatives using standard swap curves which may include a spread to the risk-free rate, depending upon specific collateral arrangements. This credit spread is appropriate for those parties that execute trades at pricing levels consistent with similar collateral arrangements. As the Company and its significant derivative counterparties generally execute trades at such pricing levels and hold sufficient collateral, additional credit risk adjustments are not currently required in the valuation process. The Company’s ability to consistently execute at such pricing levels is in part due to the netting agreements and collateral arrangements that are in place with all of its significant derivative counterparties. An evaluation of the requirement to make additional credit risk adjustments is performed by the Company each reporting period.
Freestanding Derivatives
Level 2 Valuation Techniques and Key Inputs:
This level includes all types of derivatives utilized by the Company with the exception of exchange-traded derivatives included within Level 1 and those derivatives with unobservable inputs as described in Level 3. These derivatives are principally valued using the income approach.
Interest rate
Non-option-based. Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve and basis curves.
Option-based. Valuations are based on option pricing models, which utilize significant inputs that may include the swap yield curve, basis curves and interest rate volatility.
Foreign currency exchange rate
Non-option-based. Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve, basis curves, currency spot rates and cross currency basis curves.
Credit
Non-option-based. Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve, credit curves and recovery rates.
Equity market
Option-based. Valuations are based on option pricing models, which utilize significant inputs that may include the swap yield curve, spot equity index levels, dividend yield curves and equity volatility.
Level 3 Valuation Techniques and Key Inputs:
These derivatives are principally valued using the income approach. Valuations of non-option-based derivatives utilize present value techniques, whereas valuations of option-based derivatives utilize option pricing models. These valuation methodologies generally use the same inputs as described in the corresponding sections above for Level 2 measurements of derivatives. However, these derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data.
Interest rate
Non-option-based. Significant unobservable inputs may include the extrapolation beyond observable limits of the swap yield curve and basis curves.
Foreign currency exchange rate
Non-option-based. Significant unobservable inputs may include the extrapolation beyond observable limits of the swap yield curve, basis curves, cross currency basis curves and currency correlation.
Credit
Non-option-based. Significant unobservable inputs may include credit spreads, repurchase rates and the extrapolation beyond observable limits of the swap yield curve and credit curves. Certain of these derivatives are valued based on independent non-binding broker quotations.
Embedded Derivatives
Embedded derivatives principally include certain direct variable annuity guarantees, certain affiliated ceded reinsurance agreements related to such variable annuity guarantees, equity or bond indexed crediting rates within certain funding agreements and those related to ceded funds withheld on reinsurance. Embedded derivatives are recorded at estimated fair value with changes in estimated fair value reported in net income.
The Company issues certain variable annuity products with guaranteed minimum benefits. GMWBs, GMABs and certain GMIBs contain embedded derivatives, which are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within PABs on the consolidated balance sheets.
The fair value of these embedded derivatives, estimated as the present value of projected future benefits minus the present value of projected future fees using actuarial and capital market assumptions including expectations concerning policyholder behavior, is calculated by the Company’s actuarial department. The calculation is based on in-force business, and is performed using standard actuarial valuation software which projects future cash flows from the embedded derivative over multiple risk neutral stochastic scenarios using observable risk-free rates.
Capital market assumptions, such as risk-free rates and implied volatilities, are based on market prices for publicly traded instruments to the extent that prices for such instruments are observable. Implied volatilities beyond the observable period are extrapolated based on observable implied volatilities and historical volatilities. Actuarial assumptions, including mortality, lapse, withdrawal and utilization, are unobservable and are reviewed at least annually based on actuarial studies of historical experience.
The valuation of these guarantee liabilities includes nonperformance risk adjustments and adjustments for a risk margin related to non-capital market inputs. The nonperformance adjustment is determined by taking into consideration publicly available information relating to spreads in the secondary market for MetLife, Inc.’s debt, including related credit default swaps. These observable spreads are then adjusted, as necessary, to reflect the priority of these liabilities and the claims paying ability of the issuing insurance subsidiaries compared to MetLife, Inc.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of such actuarial assumptions as annuitization, premium persistency, partial withdrawal and surrenders. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees. These guarantees may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates; changes in nonperformance risk; and variations in actuarial assumptions regarding policyholder behavior, mortality and risk margins related to non-capital market inputs, may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income.
The Company ceded the risk associated with certain of the GMIBs, GMABs and GMWBs previously described. In addition to ceding risks associated with guarantees that are accounted for as embedded derivatives, the Company also ceded directly written GMIBs that are accounted for as insurance (i.e., not as embedded derivatives) but where the reinsurance agreement contains an embedded derivative. These embedded derivatives are included within premiums, reinsurance and other receivables on the consolidated balance sheets with changes in estimated fair value reported in net derivative gains (losses). The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with that described previously for the guarantees directly written by the Company with the exception of the input for nonperformance risk that reflects the credit of the reinsurer.
The estimated fair value of the embedded derivatives within funds withheld related to certain ceded reinsurance is determined based on the change in estimated fair value of the underlying assets held by the Company in a reference portfolio backing the funds withheld liability. The estimated fair value of the underlying assets is determined as previously described in “— Investments — Securities, Short-term Investments, Long-term Debt of CSEs — FVO and Trading Liabilities.” The estimated fair value of these embedded derivatives is included, along with their funds withheld hosts, in other liabilities on the consolidated balance sheets with changes in estimated fair value recorded in net derivative gains (losses). Changes in the credit spreads on the underlying assets, interest rates and market volatility may result in significant fluctuations in the estimated fair value of these embedded derivatives that could materially affect net income.
The estimated fair value of the embedded equity and bond indexed derivatives contained in certain funding agreements is determined using market standard swap valuation models and observable market inputs, including a nonperformance risk adjustment. The estimated fair value of these embedded derivatives are included, along with their funding agreements host, within PABs with changes in estimated fair value recorded in net derivative gains (losses). Changes in equity and bond indices, interest rates and the Company’s credit standing may result in significant fluctuations in the estimated fair value of these embedded derivatives that could materially affect net income.
Embedded Derivatives Within Asset and Liability Host Contracts
Level 3 Valuation Techniques and Key Inputs:
Direct guaranteed minimum benefits
These embedded derivatives are principally valued using the income approach. Valuations are based on option pricing techniques, which utilize significant inputs that may include swap yield curve, currency exchange rates and implied volatilities. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include: the extrapolation beyond observable limits of the swap yield curve and implied volatilities, actuarial assumptions for policyholder behavior and mortality and the potential variability in policyholder behavior and mortality, nonperformance risk and cost of capital for purposes of calculating the risk margin.
Reinsurance ceded on certain guaranteed minimum benefits
These embedded derivatives are principally valued using the income approach. The valuation techniques and significant market standard unobservable inputs used in their valuation are similar to those described above in “— Direct guaranteed minimum benefits” and also include counterparty credit spreads.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
Embedded derivatives within funds withheld related to certain ceded reinsurance
These embedded derivatives are principally valued using the income approach. The valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve and the fair value of assets within the reference portfolio. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include the fair value of certain assets within the reference portfolio which are not observable in the market and cannot be derived principally from, or corroborated by, observable market data.
Transfers between Levels
Overall, transfers between levels occur when there are changes in the observability of inputs and market activity. Transfers into or out of any level are assumed to occur at the beginning of the period.
Transfers between Levels 1 and 2:
For assets and liabilities measured at estimated fair value and still held at September 30, 2014, there were no transfers between Levels 1 and 2. For assets and liabilities measured at estimated fair value and still held at December 31, 2013, transfers between Levels 1 and 2 were not significant.
Transfers into or out of Level 3:
Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity, a specific event, or one or more significant input(s) becoming observable.
Transfers into Level 3 for fixed maturity securities and separate account assets were due primarily to a lack of trading activity, decreased liquidity and credit ratings downgrades (e.g., from investment grade to below investment grade) which have resulted in decreased transparency of valuations and an increased use of independent non-binding broker quotations and unobservable inputs, such as illiquidity premiums, delta spread adjustments, or credit spreads.
Transfers out of Level 3 for fixed maturity securities and separate account assets resulted primarily from increased transparency of both new issuances that, subsequent to issuance and establishment of trading activity, became priced by independent pricing services and existing issuances that, over time, the Company was able to obtain pricing from, or corroborate pricing received from, independent pricing services with observable inputs (such as observable spreads used in pricing securities) or increases in market activity and upgraded credit ratings.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
The following table presents certain quantitative information about the significant unobservable inputs used in the fair value measurement, and the sensitivity of the estimated fair value to changes in those inputs, for the more significant asset and liability classes measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | September 30, 2014 | | December 31, 2013 | | Impact of Increase in Input on Estimated Fair Value (2) |
| Valuation Techniques | | Significant Unobservable Inputs | | Range | | Weighted Average (1) | | Range | | Weighted Average (1) | |
Fixed maturity securities (3) | | | | | | | | | | | | | | | | | |
U.S. corporate and foreign corporate | • | Matrix pricing | | • | Delta spread adjustments (4) | | (20) | - | 250 | | 45 | | (10) | - | 240 | | 38 | | Decrease |
| | | | • | Illiquidity premium (4) | | 30 | - | 30 | | 30 | | 30 | - | 30 | | 30 | | Decrease |
| | | | • | Credit spreads (4) | | (1,471) | - | 3,117 | | 182 | | (1,489) | - | 876 | | 193 | | Decrease |
| | | | • | Offered quotes (5) | | — | - | 100 | | 96 | | 4 | - | 104 | | 100 | | Increase |
| • | Market pricing |
| • | Quoted prices (5) |
| — | - | 656 |
| 131 |
|
|
|
|
|
|
| Increase |
| • | Consensus pricing | | • | Offered quotes (5) | |
|
|
| |
| | 33 | - | 140 | | 98 | | Increase |
RMBS | • | Matrix pricing and discounted cash flow | | • | Credit spreads (4) | | 45 | - | 413 | | 228 | | (136) | - | 3,609 | | 286 | | Decrease (6) |
| • | Market pricing | | • | Quoted prices (5) | | 22 | - | 120 | | 95 | | 22 | - | 100 | | 98 | | Increase (6) |
| • | Consensus pricing | | • | Offered quotes (5) | | 1 | - | 116 | | 93 | | 69 | - | 101 | | 93 | | Increase (6) |
CMBS | • | Matrix pricing and discounted cash flow | | • | Credit spreads (4) | |
|
|
| |
| | 215 | - | 2,025 | | 475 | | Decrease (6) |
| • | Market pricing | | • | Quoted prices (5) | | 80 | - | 107 | | 100 | | 89 | - | 104 | | 99 | | Increase (6) |
| • | Consensus pricing | | • | Offered quotes (5) | |
|
|
| |
| | 90 | | 101 | | 96 | | Increase (6) |
ABS | • | Matrix pricing and discounted cash flow | | • | Credit spreads (4) | | 31 | - | 1,878 | | 148 | | 30 | - | 1,878 | | 119 | | Decrease (6) |
| • | Market pricing | | • | Quoted prices (5) | | — | - | 110 | | 100 | | — | - | 106 | | 101 | | Increase (6) |
| • | Consensus pricing | | • | Offered quotes (5) | | 100 | - | 100 | | 100 | | 56 | - | 106 | | 98 | | Increase (6) |
Foreign government | • | Market pricing | | • | Quoted prices (5) | | 97 | - | 143 | | 119 | | 77 | - | 108 | | 87 | | Increase |
| • | Consensus pricing | | • | Offered quotes (5) | |
|
|
| |
| | 104 | - | 140 | | 118 | | Increase |
Derivatives | | | | | | | | | | | | | | | | | | | |
Interest rate | • | Present value techniques | | • | Swap yield (7) | | 324 | - | 343 | | | | 401 | - | 450 | | | | Increase (11) |
Foreign currency exchange rate | • | Present value techniques | | • | Swap yield (7) | | 824 | - | 1,012 | | | | 580 | - | 767 | | | | Increase (11) |
| | | | • | Correlation (8) | | 43% | - | 55% | | | | 38% | - | 47% | | | |
|
Credit | • | Present value techniques | | • | Credit spreads (9) | | 98 | - | 101 | | | | 98 | - | 101 | | | | Decrease (9) |
| • | Consensus pricing | | • | Offered quotes (10) | | | | | | | | | | | | | | |
Embedded derivatives | | | | | | | | | | | | | | | | | |
Direct and ceded guaranteed minimum benefits | • | Option pricing techniques | | • | Mortality rates: | | | | | | | | | | | | | | |
| | | | | Ages 0 - 40 | | 0% | - | 0.10% | | | | 0% | - | 0.10% | | | | Decrease (12) |
| | | | | Ages 41 - 60 | | 0.04% | - | 0.65% | | | | 0.04% | - | 0.65% | | | | Decrease (12) |
| | | | | Ages 61 - 115 | | 0.26% | - | 100% | | | | 0.26% | - | 100% | | | | Decrease (12) |
| | | | • | Lapse rates: | | | | | | | | | | | | | | |
| | | | | Durations 1 - 10 | | 0.50% | - | 100% | | | | 0.50% | - | 100% | | | | Decrease (13) |
| | | | | Durations 11 - 20 | | 3% | - | 100% | | | | 3% | - | 100% | | | | Decrease (13) |
| | | | | Durations 21 - 116 | | 3% | - | 100% | | | | 3% | - | 100% | | | | Decrease (13) |
| | | | • | Utilization rates | | 20% | - | 50% | | | | 20% | - | 50% | | | | Increase (14) |
| | | | • | Withdrawal rates | | 0.07% | - | 10% | | | | 0.07% | - | 10% | | | | (15) |
| | | | • | Long-term equity volatilities | | 17.40% | - | 25% | | | | 17.40% | - | 25% | | | | Increase (16) |
| | | | • | Nonperformance risk spread | | 0.03% | - | 0.45% | | | | 0.03% | - | 0.44% | | | | Decrease (17) |
__________________
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
| |
(1) | The weighted average for fixed maturity securities is determined based on the estimated fair value of the securities. |
| |
(2) | The impact of a decrease in input would have the opposite impact on the estimated fair value. For embedded derivatives, changes to direct guaranteed minimum benefits are based on liability positions and changes to ceded guaranteed minimum benefits are based on asset positions. |
| |
(3) | Significant increases (decreases) in expected default rates in isolation would result in substantially lower (higher) valuations. |
| |
(4) | Range and weighted average are presented in basis points. |
| |
(5) | Range and weighted average are presented in accordance with the market convention for fixed maturity securities of dollars per hundred dollars of par. |
| |
(6) | Changes in the assumptions used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumptions used for prepayment rates. |
| |
(7) | Ranges represent the rates across different yield curves and are presented in basis points. The swap yield curve is utilized among different types of derivatives to project cash flows, as well as to discount future cash flows to present value. Since this valuation methodology uses a range of inputs across a yield curve to value the derivative, presenting a range is more representative of the unobservable input used in the valuation. |
| |
(8) | Ranges represent the different correlation factors utilized as components within the valuation methodology. Presenting a range of correlation factors is more representative of the unobservable input used in the valuation. Increases (decreases) in correlation in isolation will increase (decrease) the significance of the change in valuations. |
| |
(9) | Represents the risk quoted in basis points of a credit default event on the underlying instrument. Credit derivatives with significant unobservable inputs are primarily comprised of written credit default swaps. |
| |
(10) | At both September 30, 2014 and December 31, 2013, independent non-binding broker quotations were used in the determination of less than 1% of the total net derivative estimated fair value. |
| |
(11) | Changes are based on long U.S. dollar net asset positions and will be inversely impacted for short U.S. dollar net asset positions. |
| |
(12) | Mortality rates vary by age and by demographic characteristics such as gender. Mortality rate assumptions are based on company experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. |
| |
(13) | Base lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed values and the current policyholder account value, as well as other factors, such as the applicability of any surrender charges. A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in the money contracts are less likely to lapse. Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. For any given contract, lapse rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. |
| |
(14) | The utilization rate assumption estimates the percentage of contract holders with a GMIB or lifetime withdrawal benefit who will elect to utilize the benefit upon becoming eligible. The rates may vary by the type of guarantee, the amount by which the guaranteed amount is greater than the account value, the contract’s withdrawal history and by the age of the policyholder. For any given contract, utilization rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. |
| |
(15) | The withdrawal rate represents the percentage of account balance that any given policyholder will elect to withdraw from the contract each year. The withdrawal rate assumption varies by age and duration of the contract, and also by other factors such as benefit type. For any given contract, withdrawal rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. For GMWBs, any increase (decrease) in withdrawal rates results in an increase (decrease) in the estimated fair value of the guarantees. For GMABs and GMIBs, any increase (decrease) in withdrawal rates results in a decrease (increase) in the estimated fair value. |
| |
(16) | Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. For any given contract, long-term equity volatility rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. |
| |
(17) | Nonperformance risk spread varies by duration and by currency. For any given contract, multiple nonperformance risk spreads will apply, depending on the duration of the cash flow being discounted for purposes of valuing the embedded derivative. |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
The following is a summary of the valuation techniques and significant unobservable inputs used in the fair value measurement of assets and liabilities classified within Level 3 that are not included in the preceding table. Generally, all other classes of securities classified within Level 3, including those within separate account assets and embedded derivatives within funds withheld related to certain ceded reinsurance, use the same valuation techniques and significant unobservable inputs as previously described for Level 3 securities. This includes matrix pricing and discounted cash flow methodologies, inputs such as quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2, as well as independent non-binding broker quotations. The residential mortgage loans — FVO, long-term debt and long-term debt of CSEs—FVO are valued using independent non-binding broker quotations and internal models including matrix pricing and discounted cash flow methodologies using current interest rates. The sensitivity of the estimated fair value to changes in the significant unobservable inputs for these other assets and liabilities is similar in nature to that described in the preceding table. The valuation techniques and significant unobservable inputs used in the fair value measurement for the more significant assets measured at estimated fair value on a nonrecurring basis and determined using significant unobservable inputs (Level 3) are summarized in “— Nonrecurring Fair Value Measurements.”
The following tables summarize the change of all assets and (liabilities) measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Fixed Maturity Securities |
| U.S. Corporate | | U.S. Treasury and Agency | | Foreign Corporate | | RMBS | | CMBS | | ABS | | State and Political Subdivision | | Foreign Government |
| (In millions) |
Three Months Ended September 30, 2014 | | | | | | | | | | | | | | | |
Balance, beginning of period | $ | 5,253 |
| | $ | 320 |
| | $ | 3,336 |
| | $ | 3,347 |
| | $ | 314 |
| | $ | 2,302 |
| | $ | 2 |
| | $ | 154 |
|
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | | | | | |
Net income (loss): (1), (2) | | | | | | | | | | | | | | | |
Net investment income | 1 |
| | — |
| | — |
| | 9 |
| | — |
| | 1 |
| | — |
| | — |
|
Net investment gains (losses) | (2 | ) | | — |
| | (5 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Net derivative gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
OCI | (1 | ) | | — |
| | (111 | ) | | 22 |
| | 1 |
| | 1 |
| | — |
| | 3 |
|
Purchases (3) | 482 |
| | — |
| | 274 |
| | 610 |
| | 38 |
| | 729 |
| | — |
| | 5 |
|
Sales (3) | (158 | ) | | — |
| | (74 | ) | | (311 | ) | | (43 | ) | | (156 | ) | | — |
| | (1 | ) |
Issuances (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3 (4) | 7 |
| | — |
| | 69 |
| | — |
| | 22 |
| | 69 |
| | — |
| | 39 |
|
Transfers out of Level 3 (4) | (265 | ) | | (320 | ) | | (285 | ) | | (341 | ) | | (13 | ) | | (710 | ) | | — |
| | (2 | ) |
Balance, end of period | $ | 5,317 |
| | $ | — |
| | $ | 3,204 |
| | $ | 3,336 |
| | $ | 319 |
| | $ | 2,236 |
| | $ | 2 |
| | $ | 198 |
|
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | | | | | |
Net investment income | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 9 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
|
Net investment gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net derivative gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Equity Securities | | Trading and FVO Securities | | | | | | |
| Common Stock | | Non- redeemable Preferred Stock | | Actively Traded Securities | | FVO General Account Securities | | FVO Securities Held by CSEs | | Short-term Investments | | Residential Mortgage Loans - FVO | | Separate Account Assets (6) |
| (In millions) |
Three Months Ended September 30, 2014 | | | | | | | | | | | | | | | |
Balance, beginning of period | $ | 97 |
| | $ | 166 |
| | $ | 20 |
| | $ | 14 |
| | $ | 11 |
| | $ | 222 |
| | $ | 367 |
| | $ | 1,441 |
|
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | | | | | |
Net income (loss): (1), (2) | | | | | | | | | | | | | | | |
Net investment income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
|
Net investment gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 33 |
|
Net derivative gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
OCI | (35 | ) | | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Purchases (3) | 2 |
| | — |
| | 3 |
| | — |
| | — |
| | 98 |
| | 3 |
| | 98 |
|
Sales (3) | (9 | ) | | — |
| | (15 | ) | | — |
| | — |
| | (125 | ) | | (63 | ) | | (127 | ) |
Issuances (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Settlements (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13 | ) | | — |
|
Transfers into Level 3 (4) | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | 215 |
|
Transfers out of Level 3 (4) | — |
| | — |
| | — |
| | — |
| | — |
| | (75 | ) | | — |
| | (38 | ) |
Balance, end of period | $ | 55 |
| | $ | 165 |
| | $ | 8 |
| | $ | 14 |
| | $ | 12 |
| | $ | 120 |
| | $ | 298 |
| | $ | 1,623 |
|
Changes in unrealized gains (losses) included in net income (loss):(5) | | | | | | | | | | | | | | | |
Net investment income | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | — |
|
Net investment gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net derivative gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Net Derivatives (7) | | | | | | |
| Interest Rate | | Foreign Currency Exchange Rate | | Credit | | Net Embedded Derivatives (8) | | Long-term Debt | | Long-term Debt of CSEs — FVO |
| (In millions) |
Three Months Ended September 30, 2014 | | | | | | | | | | | |
Balance, beginning of period | $ | 13 |
| | $ | 15 |
| | $ | 15 |
| | $ | (168 | ) | | $ | (23 | ) | | $ | (15 | ) |
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | |
Net income (loss): (1), (2) | | | | | | | | | | | |
Net investment income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net investment gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Net derivative gains (losses) | (9 | ) | | (2 | ) | | (6 | ) | | 262 |
| | — |
| | — |
|
OCI | 13 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Purchases (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Sales (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances (3) | (1 | ) | | — |
| | (1 | ) | | — |
| | — |
| | — |
|
Settlements (3) | 4 |
| | (1 | ) | | — |
| | 11 |
| | 3 |
| | 1 |
|
Transfers into Level 3 (4) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 (4) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balance, end of period | $ | 20 |
| | $ | 12 |
| | $ | 8 |
| | $ | 105 |
| | $ | (20 | ) | | $ | (15 | ) |
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | |
Net investment income | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net investment gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) |
Net derivative gains (losses) | $ | — |
| | $ | (3 | ) | | $ | (5 | ) | | $ | 267 |
| | $ | — |
| | $ | — |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Fixed Maturity Securities |
| U.S. Corporate | | U.S. Treasury and Agency | | Foreign Corporate | | RMBS | | CMBS | | ABS | | State and Political Subdivision | | Foreign Government |
| (In millions) |
Three Months Ended September 30, 2013 | | | | | | | | | | | | | | | |
Balance, beginning of period | $ | 4,216 |
| | $ | 81 |
| | $ | 2,888 |
| | $ | 2,314 |
| | $ | 569 |
| | $ | 2,179 |
| | $ | 1 |
| | $ | 316 |
|
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | | | | | |
Net income (loss): (1), (2) | | | | | | | | | | | | | | | |
Net investment income | — |
| | — |
| | 1 |
| | 9 |
| | 2 |
| | — |
| | — |
| | — |
|
Net investment gains (losses) | 5 |
| | — |
| | (10 | ) | | 1 |
| | (1 | ) | | 2 |
| | — |
| | 2 |
|
Net derivative gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
OCI | (12 | ) | | — |
| | 73 |
| | (14 | ) | | (7 | ) | | (1 | ) | | — |
| | (20 | ) |
Purchases (3) | 203 |
| | — |
| | 359 |
| | 501 |
| | 96 |
| | 538 |
| | — |
| | 4 |
|
Sales (3) | (189 | ) | | (1 | ) | | (189 | ) | | (121 | ) | | (47 | ) | | (218 | ) | | — |
| | (42 | ) |
Issuances (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3 (4) | 117 |
| | — |
| | 105 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 (4) | (98 | ) | | (15 | ) | | (186 | ) | | (113 | ) | | (76 | ) | | — |
| | (1 | ) | | (19 | ) |
Balance, end of period | $ | 4,242 |
| | $ | 65 |
| | $ | 3,041 |
| | $ | 2,577 |
| | $ | 536 |
| | $ | 2,500 |
| | $ | — |
| | $ | 241 |
|
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | | | | | |
Net investment income | $ | — |
| | $ | — |
| | $ | — |
| | $ | 9 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
Net investment gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net derivative gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Equity Securities | | Trading and FVO Securities | | | | |
| Common Stock | | Non- redeemable Preferred Stock | | Actively Traded Securities | | FVO General Account Securities | | FVO Securities Held by CSEs | | Short-term Investments | | Residential Mortgage Loans - FVO | | Separate Account Assets (6) |
| (In millions) |
Three Months Ended September 30, 2013 | | | | | | | | | | | | | | | |
Balance, beginning of period | $ | 58 |
| | $ | 280 |
| | $ | 11 |
| | $ | 32 |
| | $ | — |
| | $ | 129 |
| | $ | 150 |
| | $ | 968 |
|
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | | | | | |
Net income (loss): (1), (2) | | | | | | | | | | | | | | | |
Net investment income | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | (2 | ) | | — |
|
Net investment gains (losses) | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) | | — |
| | 11 |
|
Net derivative gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
OCI | 5 |
| | 7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Purchases (3) | 5 |
| | 50 |
| | 6 |
| | — |
| | — |
| | 75 |
| | 67 |
| | 86 |
|
Sales (3) | (7 | ) | | (21 | ) | | (1 | ) | | — |
| | — |
| | (72 | ) | | — |
| | (46 | ) |
Issuances (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 51 |
|
Settlements (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (2 | ) |
Transfers into Level 3 (4) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 162 |
|
Transfers out of Level 3 (4) | (1 | ) | | (20 | ) | | (5 | ) | | — |
| | — |
| | — |
| | — |
| | (44 | ) |
Balance, end of period | $ | 60 |
| | $ | 294 |
| | $ | 11 |
| | $ | 32 |
| | $ | — |
| | $ | 131 |
| | $ | 212 |
| | $ | 1,186 |
|
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | | | | | |
Net investment income | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | (2 | ) | | $ | — |
|
Net investment gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net derivative gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Net Derivatives (7) | | | | | |
| Interest Rate | | Foreign Currency Exchange Rate | | Credit | | Net Embedded Derivatives (8) | | Long-term Debt | | Long-term Debt of CSEs — FVO |
| (In millions) |
Three Months Ended September 30, 2013 | | | | | | | | | | | |
Balance, beginning of period | $ | 21 |
| | $ | 22 |
| | $ | 19 |
| | $ | 166 |
| | $ | — |
| | $ | (31 | ) |
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | |
Net income (loss): (1), (2) | | | | | | | | | | | |
Net investment income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net investment gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net derivative gains (losses) | (1 | ) | | 1 |
| | 2 |
| | (61 | ) | | — |
| | — |
|
OCI | (9 | ) | | — |
| | (1 | ) | | — |
| | — |
| | — |
|
Purchases (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Sales (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances (3) | — |
| | — |
| | — |
| | — |
| | (25 | ) | | — |
|
Settlements (3) | (3 | ) | | — |
| | 3 |
| | 11 |
| | — |
| | 5 |
|
Transfers into Level 3 (4) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 (4) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balance, end of period | $ | 8 |
| | $ | 23 |
| | $ | 23 |
| | $ | 116 |
| | $ | (25 | ) | | $ | (26 | ) |
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | |
Net investment income | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net investment gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net derivative gains (losses) | $ | (1 | ) | | $ | 2 |
| | $ | 2 |
| | $ | (57 | ) | | $ | — |
| | $ | — |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Fixed Maturity Securities |
| U.S. Corporate | | U.S. Treasury and Agency | | Foreign Corporate | | RMBS | | CMBS | | ABS | | State and Political Subdivision | | Foreign Government |
| (In millions) |
Nine Months Ended September 30, 2014 | | | | | | | | | | | | | | | |
Balance, beginning of period | $ | 5,269 |
| | $ | 62 |
| | $ | 3,198 |
| | $ | 2,513 |
| | $ | 430 |
| | $ | 2,526 |
| | $ | — |
| | $ | 274 |
|
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | | | | | |
Net income (loss): (1), (2) | | | | | | | | | | | | | | | |
Net investment income | 1 |
| | — |
| | 2 |
| | 30 |
| | — |
| | 5 |
| | — |
| | — |
|
Net investment gains (losses) | (5 | ) | | — |
| | (4 | ) | | 6 |
| | — |
| | (41 | ) | | — |
| | — |
|
Net derivative gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
OCI | 211 |
| | — |
| | 56 |
| | 78 |
| | 4 |
| | 50 |
| | — |
| | 2 |
|
Purchases (3) | 858 |
| | — |
| | 431 |
| | 1,033 |
| | 49 |
| | 1,665 |
| | — |
| | 5 |
|
Sales (3) | (638 | ) | | — |
| | (160 | ) | | (387 | ) | | (59 | ) | | (479 | ) | | — |
| | (9 | ) |
Issuances (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3 (4) | 94 |
| | — |
| | 72 |
| | 132 |
| | 25 |
| | 36 |
| | 2 |
| | — |
|
Transfers out of Level 3 (4) | (473 | ) | | (62 | ) | | (391 | ) | | (69 | ) | | (130 | ) | | (1,526 | ) | | — |
| | (74 | ) |
Balance, end of period | $ | 5,317 |
| | $ | — |
| | $ | 3,204 |
| | $ | 3,336 |
| | $ | 319 |
| | $ | 2,236 |
| | $ | 2 |
| | $ | 198 |
|
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | | | | | |
Net investment income | $ | (1 | ) | | $ | — |
| | $ | 1 |
| | $ | 31 |
| | $ | (1 | ) | | $ | 1 |
| | $ | — |
| | $ | — |
|
Net investment gains (losses) | $ | (6 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net derivative gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Equity Securities | | Trading and FVO Securities | | | | | | |
| Common Stock | | Non- redeemable Preferred Stock | | Actively Traded Securities | | FVO General Account Securities | | FVO Securities Held by CSEs | | Short-term Investments | | Residential Mortgage Loans - FVO | | Separate Account Assets (6) |
| (In millions) |
Nine Months Ended September 30, 2014 | | | | | | | | | | | | | | | |
Balance, beginning of period | $ | 50 |
| | $ | 278 |
| | $ | 12 |
| | $ | 14 |
| | $ | — |
| | $ | 175 |
| | $ | 338 |
| | $ | 1,209 |
|
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | | | | | |
Net income (loss): (1), (2) | | | | | | | | | | | | | | | |
Net investment income | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 15 |
| | — |
|
Net investment gains (losses) | 4 |
| | 3 |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | 91 |
|
Net derivative gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
OCI | 2 |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Purchases (3) | 18 |
| | — |
| | 8 |
| | — |
| | — |
| | 98 |
| | 49 |
| | 439 |
|
Sales (3) | (19 | ) | | (38 | ) | | (7 | ) | | — |
| | (2 | ) | | (134 | ) | | (78 | ) | | (268 | ) |
Issuances (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 83 |
|
Settlements (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (26 | ) | | (28 | ) |
Transfers into Level 3 (4) | — |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| | — |
| | 144 |
|
Transfers out of Level 3 (4) | — |
| | (82 | ) | | (5 | ) | | — |
| | — |
| | (18 | ) | | — |
| | (47 | ) |
Balance, end of period | $ | 55 |
| | $ | 165 |
| | $ | 8 |
| | $ | 14 |
| | $ | 12 |
| | $ | 120 |
| | $ | 298 |
| | $ | 1,623 |
|
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | | | | | |
Net investment income | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15 |
| | $ | — |
|
Net investment gains (losses) | $ | (2 | ) | | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net derivative gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Net Derivatives (7) | | | | | | |
| Interest Rate | | Foreign Currency Exchange Rate | | Credit | | Net Embedded Derivatives (8) | | Long-term Debt | | Long-term Debt of CSEs — FVO |
| (In millions) |
Nine Months Ended September 30, 2014 | | | | | | | | | | | |
Balance, beginning of period | $ | (1 | ) | | $ | 14 |
| | $ | 23 |
| | $ | 48 |
| | $ | (43 | ) | | $ | (28 | ) |
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | |
Net income (loss): (1), (2) | | | | | | | | | | | |
Net investment income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net investment gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Net derivative gains (losses) | 1 |
| | (1 | ) | | (11 | ) | | 13 |
| | — |
| | — |
|
OCI | 31 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Purchases (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Sales (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances (3) | (1 | ) | | — |
| | (4 | ) | | — |
| | — |
| | — |
|
Settlements (3) | (10 | ) | | (1 | ) | | — |
| | 44 |
| | 5 |
| | 14 |
|
Transfers into Level 3 (4) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 (4) | — |
| | — |
| | — |
| | — |
| | 18 |
| | — |
|
Balance, end of period | $ | 20 |
| | $ | 12 |
| | $ | 8 |
| | $ | 105 |
| | $ | (20 | ) | | $ | (15 | ) |
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | |
Net investment income | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net investment gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) |
Net derivative gains (losses) | $ | — |
| | $ | (2 | ) | | $ | (9 | ) | | $ | 24 |
| | $ | — |
| | $ | — |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Fixed Maturity Securities |
| U.S. Corporate | | U.S. Treasury and Agency | | Foreign Corporate | | RMBS | | CMBS | | ABS | | State and Political Subdivision | | Foreign Government |
| (In millions) |
Nine Months Ended September 30, 2013 | | | | | | | | | | | | | | | |
Balance, beginning of period | $ | 5,460 |
| | $ | 71 |
| | $ | 3,054 |
| | $ | 1,702 |
| | $ | 402 |
| | $ | 1,923 |
| | $ | — |
| | $ | 282 |
|
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | | | | | |
Net income (loss): (1), (2) | | | | | | | | | | | | | | | |
Net investment income | 3 |
| | — |
| | 1 |
| | 19 |
| | (1 | ) | | — |
| | — |
| | 4 |
|
Net investment gains (losses) | (26 | ) | | — |
| | (22 | ) | | 4 |
| | — |
| | 4 |
| | — |
| | 2 |
|
Net derivative gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
OCI | 4 |
| | (2 | ) | | (27 | ) | | 101 |
| | 11 |
| | (23 | ) | | — |
| | (35 | ) |
Purchases (3) | 582 |
| | — |
| | 561 |
| | 1,002 |
| | 256 |
| | 1,005 |
| | — |
| | 27 |
|
Sales (3) | (680 | ) | | (4 | ) | | (469 | ) | | (184 | ) | | (64 | ) | | (365 | ) | | — |
| | (37 | ) |
Issuances (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3 (4) | 124 |
| | — |
| | 218 |
| | 4 |
| | 73 |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 (4) | (1,225 | ) | | — |
| | (275 | ) | | (71 | ) | | (141 | ) | | (44 | ) | | — |
| | (2 | ) |
Balance, end of period | $ | 4,242 |
| | $ | 65 |
| | $ | 3,041 |
| | $ | 2,577 |
| | $ | 536 |
| | $ | 2,500 |
| | $ | — |
| | $ | 241 |
|
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | | | | | |
Net investment income | $ | 2 |
| | $ | — |
| | $ | 1 |
| | $ | 25 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | 4 |
|
Net investment gains (losses) | $ | (34 | ) | | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net derivative gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Equity Securities | | Trading and FVO Securities | | | | |
| Common Stock | | Non- redeemable Preferred Stock | | Actively Traded Securities | | FVO General Account Securities | | FVO Securities Held by CSEs | | Short-term Investments | | Residential Mortgage Loans - FVO | | Separate Account Assets (6) |
| (In millions) |
Nine Months Ended September 30, 2013 | | | | | | | | | | | | | | | |
Balance, beginning of period | $ | 60 |
| | $ | 281 |
| | $ | 6 |
| | $ | 26 |
| | $ | — |
| | $ | 252 |
| | $ | — |
| | $ | 940 |
|
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | | | | | |
Net income (loss): (1), (2) | | | | | | | | | | | | | | | |
Net investment income | — |
| | — |
| | — |
| | 6 |
| | — |
| | 1 |
| | (2 | ) | | — |
|
Net investment gains (losses) | — |
| | (30 | ) | | — |
| | — |
| | — |
| | (24 | ) | | — |
| | 41 |
|
Net derivative gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
OCI | (1 | ) | | 66 |
| | — |
| | — |
| | — |
| | 19 |
| | — |
| | — |
|
Purchases (3) | 8 |
| | 51 |
| | 8 |
| | — |
| | — |
| | 131 |
| | 214 |
| | 184 |
|
Sales (3) | (8 | ) | | (74 | ) | | — |
| | — |
| | — |
| | (248 | ) | | — |
| | (141 | ) |
Issuances (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 71 |
|
Settlements (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3 (4) | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 161 |
|
Transfers out of Level 3 (4) | — |
| | — |
| | (3 | ) | | — |
| | — |
| | — |
| | — |
| | (70 | ) |
Balance, end of period | $ | 60 |
| | $ | 294 |
| | $ | 11 |
| | $ | 32 |
| | $ | — |
| | $ | 131 |
| | $ | 212 |
| | $ | 1,186 |
|
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | | | | | |
Net investment income | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 1 |
| | $ | (2 | ) | | $ | — |
|
Net investment gains (losses) | $ | — |
| | $ | (17 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | — |
|
Net derivative gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Net Derivatives (7) | | | | | |
| Interest Rate | | Foreign Currency Exchange Rate | | Credit | | Net Embedded Derivatives (8) | | Long-term Debt | | Long-term Debt of CSEs — FVO |
| (In millions) |
Nine Months Ended September 30, 2013 | | | | | | | | | | | |
Balance, beginning of period | $ | 58 |
| | $ | 37 |
| | $ | 33 |
| | $ | (109 | ) | | $ | — |
| | $ | (44 | ) |
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | |
Net income (loss): (1), (2) | | | | | | | | | | | |
Net investment income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net investment gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Net derivative gains (losses) | (4 | ) | | (15 | ) | | (10 | ) | | 181 |
| | — |
| | — |
|
OCI | (36 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Purchases (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Sales (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances (3) | — |
| | — |
| | — |
| | — |
| | (25 | ) | | — |
|
Settlements (3) | (10 | ) | | 1 |
| | — |
| | 44 |
| | — |
| | 19 |
|
Transfers into Level 3 (4) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 (4) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balance, end of period | $ | 8 |
| | $ | 23 |
| | $ | 23 |
| | $ | 116 |
| | $ | (25 | ) | | $ | (26 | ) |
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | |
Net investment income | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net investment gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) |
Net derivative gains (losses) | $ | — |
| | $ | (15 | ) | | $ | (9 | ) | | $ | 191 |
| | $ | — |
| | $ | — |
|
__________________
| |
(1) | Amortization of premium/accretion of discount is included within net investment income. Impairments charged to net income (loss) on securities are included in net investment gains (losses), while changes in estimated fair value of mortgage loans - FVO are included in net investment income. Lapses associated with net embedded derivatives are included in net derivative gains (losses). |
| |
(2) | Interest and dividend accruals, as well as cash interest coupons and dividends received, are excluded from the rollforward. |
| |
(3) | Items purchased/issued and then sold/settled in the same period are excluded from the rollforward. Fees attributed to embedded derivatives are included in settlements. |
| |
(4) | Gains and losses, in net income (loss) and OCI, are calculated assuming transfers into and/or out of Level 3 occurred at the beginning of the period. Items transferred into and then out of Level 3 in the same period are excluded from the rollforward. |
| |
(5) | Changes in unrealized gains (losses) included in net income (loss) relate to assets and liabilities still held at the end of the respective periods. |
| |
(6) | Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders within separate account liabilities. Therefore, such changes in estimated fair value are not recorded in net income. For the purpose of this disclosure, these changes are presented within net investment gains (losses). |
| |
(7) | Freestanding derivative assets and liabilities are presented net for purposes of the rollforward. |
| |
(8) | Embedded derivative assets and liabilities are presented net for purposes of the rollforward. |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
Fair Value Option
The following table presents information for residential mortgage loans, which are accounted for under the FVO, and were initially measured at fair value.
|
| | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| (In millions) |
Unpaid principal balance | $ | 438 |
| | $ | 508 |
|
Difference between estimated fair value and unpaid principal balance | (140 | ) | | (170 | ) |
Carrying value at estimated fair value (1) | $ | 298 |
| | $ | 338 |
|
Loans in non-accrual status | $ | 109 |
| | $ | — |
|
Loans more than 90 days past due | $ | 74 |
| | $ | 81 |
|
Loans in non-accrual status or more than 90 days past due, or both — difference between aggregate estimated fair value and unpaid principal balance | $ | (82 | ) | | $ | (82 | ) |
__________________
| |
(1) | Interest income, changes in estimated fair value and gains or losses on sales are recognized in net investment income. Changes in estimated fair value for these loans were due to the following: |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
Instrument-specific credit risk based on changes in credit spreads for non-agency loans and adjustments in individual loan quality | $ | 3 |
| | $ | — |
| | $ | 8 |
| | $ | — |
|
Other changes in estimated fair value | 1 |
| | (2 | ) | | 5 |
| | (2 | ) |
Total gains (losses) recognized in net investment income | $ | 4 |
| | $ | (2 | ) | | $ | 13 |
| | $ | (2 | ) |
The following table presents information for long-term debt, which is accounted for under the FVO, and was initially measured at fair value.
|
| | | | | | | | | | | | | | | |
| Long-term Debt | | Long-term Debt of CSEs |
| September 30, 2014 | | December 31, 2013 | | September 30, 2014 | | December 31, 2013 |
| (In millions) |
Contractual principal balance | $ | 111 |
| | $ | 123 |
| | $ | 28 |
| | $ | 42 |
|
Difference between estimated fair value and contractual principal balance | (3 | ) | | (1 | ) | | (13 | ) | | (14 | ) |
Carrying value at estimated fair value (1) | $ | 108 |
| | $ | 122 |
| | $ | 15 |
| | $ | 28 |
|
__________________
| |
(1) | Changes in estimated fair value are recognized in net investment gains (losses). Interest expense is recognized in other expenses. |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
Nonrecurring Fair Value Measurements
The following table presents information for assets measured at estimated fair value on a nonrecurring basis during the periods and still held at the reporting dates (for example, when there is evidence of impairment). The estimated fair values for these assets were determined using significant unobservable inputs (Level 3).
|
| | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
| Carrying Value After Measurement | | Gains (Losses) |
| (In millions) |
Mortgage loans, net (1) | $ | 103 |
| | $ | 187 |
| | $ | 3 |
| | $ | (4 | ) | | $ | 2 |
| | $ | 16 |
|
Other limited partnership interests (2) | $ | 83 |
| | $ | 66 |
| | $ | (13 | ) | | $ | — |
| | $ | (46 | ) | | $ | (34 | ) |
Real estate joint ventures (3) | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) |
__________________
| |
(1) | Estimated fair values for impaired mortgage loans are based on independent broker quotations or valuation models using unobservable inputs or, if the loans are in foreclosure or are otherwise determined to be collateral dependent, are based on the estimated fair value of the underlying collateral or the present value of the expected future cash flows. |
| |
(2) | For these cost method investments, estimated fair value is determined from information provided in the financial statements of the underlying entities including NAV data. These investments include private equity and debt funds that typically invest primarily in various strategies including domestic and international leveraged buyout funds; power, energy, timber and infrastructure development funds; venture capital funds; and below investment grade debt and mezzanine debt funds. Distributions will be generated from investment gains, from operating income from the underlying investments of the funds and from liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over the next two to 10 years. Unfunded commitments for these investments at both September 30, 2014 and 2013 were not significant. |
| |
(3) | For these cost method investments, estimated fair value is determined from information provided in the financial statements of the underlying entities including NAV data. These investments include several real estate funds that typically invest primarily in commercial real estate and mezzanine debt. Distributions will be generated from investment gains, from operating income from the underlying investments of the funds and from liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over the next one to 10 years. Unfunded commitments for these investments at both September 30, 2014 and 2013 were not significant. |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
Fair Value of Financial Instruments Carried at Other Than Fair Value
The following tables provide fair value information for financial instruments that are carried on the balance sheet at amounts other than fair value. These tables exclude the following financial instruments: cash and cash equivalents, accrued investment income, payables for collateral under securities loaned and other transactions, short-term debt and those short-term investments that are not securities, such as time deposits, and therefore are not included in the three level hierarchy table disclosed in the “— Recurring Fair Value Measurements” section. The estimated fair value of the excluded financial instruments, which are primarily classified in Level 2 and, to a lesser extent, in Level 1, approximates carrying value as they are short-term in nature such that the Company believes there is minimal risk of material changes in interest rates or credit quality. All remaining balance sheet amounts excluded from the table below are not considered financial instruments subject to this disclosure.
The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows at:
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2014 |
| | | Fair Value Hierarchy | | |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total Estimated Fair Value |
| (In millions) |
Assets | | | | | | | | | |
Mortgage loans | $ | 47,049 |
| | $ | — |
| | $ | — |
| | $ | 49,053 |
| | $ | 49,053 |
|
Policy loans | $ | 8,496 |
| | $ | — |
| | $ | 810 |
| | $ | 9,006 |
| | $ | 9,816 |
|
Real estate joint ventures | $ | 35 |
| | $ | — |
| | $ | — |
| | $ | 62 |
| | $ | 62 |
|
Other limited partnership interests | $ | 700 |
| | $ | — |
| | $ | — |
| | $ | 950 |
| | $ | 950 |
|
Other invested assets | $ | 2,362 |
| | $ | — |
| | $ | 2,195 |
| | $ | 225 |
| | $ | 2,420 |
|
Premiums, reinsurance and other receivables | $ | 15,128 |
| | $ | — |
| | $ | 939 |
| | $ | 14,994 |
| | $ | 15,933 |
|
Other assets | $ | 454 |
| | $ | — |
| | $ | 454 |
| | $ | — |
| | $ | 454 |
|
Liabilities | | | | | | | | | |
PABs | $ | 74,358 |
| | $ | — |
| | $ | — |
| | $ | 76,784 |
| | $ | 76,784 |
|
Long-term debt | $ | 2,017 |
| | $ | — |
| | $ | 2,023 |
| | $ | 399 |
| | $ | 2,422 |
|
Other liabilities | $ | 23,195 |
| | $ | — |
| | $ | 3,635 |
| | $ | 20,043 |
| | $ | 23,678 |
|
Separate account liabilities | $ | 61,557 |
| | $ | — |
| | $ | 61,557 |
| | $ | — |
| | $ | 61,557 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2013 |
| | | Fair Value Hierarchy | | |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total Estimated Fair Value |
| (In millions) |
Assets | | | | | | | | | |
Mortgage loans | $ | 45,686 |
| | $ | — |
| | $ | — |
| | $ | 47,369 |
| | $ | 47,369 |
|
Policy loans | $ | 8,421 |
| | $ | — |
| | $ | 786 |
| | $ | 8,767 |
| | $ | 9,553 |
|
Real estate joint ventures | $ | 47 |
| | $ | — |
| | $ | — |
| | $ | 70 |
| | $ | 70 |
|
Other limited partnership interests | $ | 865 |
| | $ | — |
| | $ | — |
| | $ | 1,013 |
| | $ | 1,013 |
|
Other invested assets | $ | 2,017 |
| | $ | 87 |
| | $ | 1,752 |
| | $ | 176 |
| | $ | 2,015 |
|
Premiums, reinsurance and other receivables | $ | 14,210 |
| | $ | — |
| | $ | 15 |
| | $ | 14,906 |
| | $ | 14,921 |
|
Other assets | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Liabilities | | | | | | | | | |
PABs | $ | 70,205 |
| | $ | — |
| | $ | — |
| | $ | 72,236 |
| | $ | 72,236 |
|
Long-term debt | $ | 2,655 |
| | $ | — |
| | $ | 2,956 |
| | $ | — |
| | $ | 2,956 |
|
Other liabilities | $ | 19,601 |
| | $ | — |
| | $ | 310 |
| | $ | 19,787 |
| | $ | 20,097 |
|
Separate account liabilities | $ | 57,935 |
| | $ | — |
| | $ | 57,935 |
| | $ | — |
| | $ | 57,935 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of financial instruments are summarized as follows:
Mortgage Loans
The estimated fair value of mortgage loans is primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar mortgage loans with similar credit risk, or is determined from pricing for similar loans.
Policy Loans
Policy loans with fixed interest rates are classified within Level 3. The estimated fair values for these loans are determined using a discounted cash flow model applied to groups of similar policy loans determined by the nature of the underlying insurance liabilities. Cash flow estimates are developed by applying a weighted-average interest rate to the outstanding principal balance of the respective group of policy loans and an estimated average maturity determined through experience studies of the past performance of policyholder repayment behavior for similar loans. These cash flows are discounted using current risk-free interest rates with no adjustment for borrower credit risk as these loans are fully collateralized by the cash surrender value of the underlying insurance policy. Policy loans with variable interest rates are classified within Level 2 and the estimated fair value approximates carrying value due to the absence of borrower credit risk and the short time period between interest rate resets, which presents minimal risk of a material change in estimated fair value due to changes in market interest rates.
Real Estate Joint Ventures and Other Limited Partnership Interests
The estimated fair values of these cost method investments are generally based on the Company’s share of the NAV as provided in the financial statements of the investees. In certain circumstances, management may adjust the NAV by a premium or discount when it has sufficient evidence to support applying such adjustments.
Other Invested Assets
These other invested assets are principally comprised of loans to affiliates. The estimated fair value of loans to affiliates is determined by discounting the expected future cash flows using market interest rates currently available for instruments with similar terms and remaining maturities.
Premiums, Reinsurance and Other Receivables
Premiums, reinsurance and other receivables are principally comprised of certain amounts recoverable under reinsurance agreements, amounts on deposit with financial institutions to facilitate daily settlements related to certain derivatives and amounts receivable for securities sold but not yet settled.
Amounts recoverable under ceded reinsurance agreements, which the Company has determined do not transfer significant risk such that they are accounted for using the deposit method of accounting, have been classified as Level 3. The valuation is based on discounted cash flow methodologies using significant unobservable inputs. The estimated fair value is determined using interest rates determined to reflect the appropriate credit standing of the assuming counterparty.
The amounts on deposit for derivative settlements, classified within Level 2, essentially represent the equivalent of demand deposit balances and amounts due for securities sold are generally received over short periods such that the estimated fair value approximates carrying value.
Other Assets
Other assets in the preceding table is primarily composed of a receivable or funds due but not yet settled and is short-term in nature, and therefore carrying value approximates fair value.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
7. Fair Value (continued)
PABs
These PABs include investment contracts. Embedded derivatives on investment contracts and certain variable annuity guarantees accounted for as embedded derivatives are excluded from this caption in the preceding tables as they are separately presented in “— Recurring Fair Value Measurements.”
The investment contracts primarily include certain funding agreements, fixed deferred annuities, modified guaranteed annuities, fixed term payout annuities and total control accounts. The valuation of these investment contracts is based on discounted cash flow methodologies using significant unobservable inputs. The estimated fair value is determined using current market risk-free interest rates adding a spread to reflect the nonperformance risk in the liability.
Long-term Debt
The estimated fair value of long-term debt is principally determined using market standard valuation methodologies. Capital leases, which are not required to be disclosed at estimated fair value, and debt carried at fair value are excluded from the preceding tables.
Valuations of instruments classified as Level 2 are based primarily on quoted prices in markets that are not active or using matrix pricing that use standard market observable inputs such as quoted prices in markets that are not active and observable yields and spreads in the market. Instruments valued using discounted cash flow methodologies use standard market observable inputs including market yield curve, duration, observable prices and spreads for similar publicly traded or privately traded issues.
Valuations of instruments classified as Level 3 are based primarily on discounted cash flow methodologies that utilize unobservable discount rates that can vary significantly based upon the specific terms of each individual arrangement.
Other Liabilities
Other liabilities consist primarily of interest payable, amounts due for securities purchased but not yet settled, funds withheld amounts payable, which are contractually withheld by the Company in accordance with the terms of the reinsurance agreements, and amounts payable under certain assumed reinsurance agreements, which are recorded using the deposit method of accounting. The Company evaluates the specific terms, facts and circumstances of each instrument to determine the appropriate estimated fair values, which are not materially different from the carrying values, with the exception of certain deposit type reinsurance payables. For such payables, the estimated fair value is determined as the present value of expected future cash flows, which are discounted using an interest rate determined to reflect the appropriate credit standing of the assuming counterparty.
Separate Account Liabilities
Separate account liabilities represent those balances due to policyholders under contracts that are classified as investment contracts.
Separate account liabilities classified as investment contracts primarily represent variable annuities with no significant mortality risk to the Company such that the death benefit is equal to the account balance, funding agreements related to group life contracts and certain contracts that provide for benefit funding.
Since separate account liabilities are fully funded by cash flows from the separate account assets which are recognized at estimated fair value as described in the section “— Recurring Fair Value Measurements,” the value of those assets approximates the estimated fair value of the related separate account liabilities. The valuation techniques and inputs for separate account liabilities are similar to those described for separate account assets.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
8. Equity
Stock-Based Compensation Plans
Performance Shares
For outstanding awards granted prior to the January 1, 2013 – December 31, 2015 performance period, vested Performance Shares will be multiplied by a performance factor of 0.0 to 2.0 based on MetLife, Inc.’s adjusted income, total shareholder return, and performance in change in annual net operating earnings and total shareholder return compared to the performance of its competitors, each measured with respect to the applicable three-year performance period or portions thereof.
For outstanding awards granted for the January 1, 2013 – December 31, 2015 and later performance periods, the vested Performance Shares will be multiplied by a performance factor of 0.00 to 1.75. Assuming that MetLife, Inc. has met threshold performance goals related to its adjusted income or total shareholder return, the MetLife, Inc. Compensation Committee will determine the performance factor in its discretion. In doing so, the Compensation Committee may consider MetLife, Inc.’s total shareholder return relative to the performance of its competitors and MetLife, Inc.’s operating return on equity relative to its financial plan. The estimated fair value of Performance Shares will be remeasured each quarter until they become payable.
Payout of 2011 – 2013 Performance Shares
Final Performance Shares are paid in shares of MetLife, Inc. common stock. The performance factor for the January 1, 2011 – December 31, 2013 performance period was 0.80. This factor has been applied to the 1,544,120 Performance Shares associated with that performance period that vested on December 31, 2013 and, as a result, 1,235,296 shares of MetLife, Inc.’s common stock (less withholding for taxes and other items, as applicable) were issued, aside from shares that payees choose to defer, in April 2014. The Company was allocated a pro rata share of expense for Performance Shares. See Note 13 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for further information.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
8. Equity (continued)
Accumulated Other Comprehensive Income (Loss)
Information regarding changes in the balances of each component of AOCI attributable to Metropolitan Life Insurance Company, net of income tax, was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2014 |
| Unrealized Investment Gains (Losses), Net of Related Offsets (1) | | Unrealized Gains (Losses) on Derivatives | | Foreign Currency Translation Adjustments | | Defined Benefit Plans Adjustment | | Total |
| (In millions) |
Balance, beginning of period | $ | 6,596 |
| | $ | 397 |
| | $ | 37 |
| | $ | (1,562 | ) | | $ | 5,468 |
|
OCI before reclassifications | (1,182 | ) | | 90 |
| | (6 | ) | | 29 |
| | (1,069 | ) |
Deferred income tax benefit (expense) | 412 |
| | (31 | ) | | — |
| | (10 | ) | | 371 |
|
OCI before reclassifications, net of income tax | 5,826 |
| | 456 |
| | 31 |
| | (1,543 | ) | | 4,770 |
|
Amounts reclassified from AOCI | (10 | ) | | 433 |
| | — |
| | 44 |
| | 467 |
|
Deferred income tax benefit (expense) | 3 |
| | (151 | ) | | — |
| | (13 | ) | | (161 | ) |
Amounts reclassified from AOCI, net of income tax | (7 | ) | | 282 |
| | — |
| | 31 |
| | 306 |
|
Balance, end of period | $ | 5,819 |
| | $ | 738 |
| | $ | 31 |
| | $ | (1,512 | ) | | $ | 5,076 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2013 |
| Unrealized Investment Gains (Losses), Net of Related Offsets (1) | | Unrealized Gains (Losses) on Derivatives | | Foreign Currency Translation Adjustments | | Defined Benefit Plans Adjustment | | Total |
| (In millions) |
Balance, beginning of period | $ | 3,598 |
| | $ | 639 |
| | $ | 10 |
| | $ | (2,282 | ) | | $ | 1,965 |
|
OCI before reclassifications | 616 |
| | (255 | ) | | 8 |
| | 2 |
| | 371 |
|
Deferred income tax benefit (expense) | (222 | ) | | 91 |
| | (2 | ) | | (1 | ) | | (134 | ) |
OCI before reclassifications, net of income tax | 3,992 |
| | 475 |
| | 16 |
| | (2,281 | ) | | 2,202 |
|
Amounts reclassified from AOCI | 110 |
| | (178 | ) | | — |
| | 50 |
| | (18 | ) |
Deferred income tax benefit (expense) | (38 | ) | | 61 |
| | — |
| | (17 | ) | | 6 |
|
Amounts reclassified from AOCI, net of income tax | 72 |
| | (117 | ) | | — |
| | 33 |
| | (12 | ) |
Balance, end of period | $ | 4,064 |
| | $ | 358 |
| | $ | 16 |
| | $ | (2,248 | ) | | $ | 2,190 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
8. Equity (continued)
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2014 |
| Unrealized Investment Gains (Losses), Net of Related Offsets (1) | | Unrealized Gains (Losses) on Derivatives | | Foreign Currency Translation Adjustments | | Defined Benefit Plans Adjustment | | Total |
| (In millions) |
Balance, beginning of period | $ | 3,468 |
| | $ | 236 |
| | $ | 31 |
| | $ | (1,577 | ) | | $ | 2,158 |
|
OCI before reclassifications | 3,627 |
| | 448 |
| | 7 |
| | (22 | ) | | 4,060 |
|
Deferred income tax benefit (expense) | (1,261 | ) | | (157 | ) | | (7 | ) | | (1 | ) | | (1,426 | ) |
OCI before reclassifications, net of income tax | 5,834 |
| | 527 |
| | 31 |
| | (1,600 | ) | | 4,792 |
|
Amounts reclassified from AOCI | (23 | ) | | 324 |
| | — |
| | 132 |
| | 433 |
|
Deferred income tax benefit (expense) | 8 |
| | (113 | ) | | — |
| | (44 | ) | | (149 | ) |
Amounts reclassified from AOCI, net of income tax | (15 | ) | | 211 |
| | — |
| | 88 |
| | 284 |
|
Balance, end of period | $ | 5,819 |
| | $ | 738 |
| | $ | 31 |
| | $ | (1,512 | ) | | $ | 5,076 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2013 |
| Unrealized Investment Gains (Losses), Net of Related Offsets (1) | | Unrealized Gains (Losses) on Derivatives | | Foreign Currency Translation Adjustments | | Defined Benefit Plans Adjustment | | Total |
| (In millions) |
Balance, beginning of period | $ | 5,655 |
| | $ | 684 |
| | $ | 18 |
| | $ | (2,349 | ) | | $ | 4,008 |
|
OCI before reclassifications | (2,470 | ) | | (516 | ) | | (1 | ) | | 4 |
| | (2,983 | ) |
Deferred income tax benefit (expense) | 857 |
| | 180 |
| | (1 | ) | | (1 | ) | | 1,035 |
|
OCI before reclassifications, net of income tax | 4,042 |
| | 348 |
| | 16 |
| | (2,346 | ) | | 2,060 |
|
Amounts reclassified from AOCI | 34 |
| | 16 |
| | — |
| | 151 |
| | 201 |
|
Deferred income tax benefit (expense) | (12 | ) | | (6 | ) | | — |
| | (53 | ) | | (71 | ) |
Amounts reclassified from AOCI, net of income tax | 22 |
| | 10 |
| | — |
| | 98 |
| | 130 |
|
Balance, end of period | $ | 4,064 |
| | $ | 358 |
| | $ | 16 |
| | $ | (2,248 | ) | | $ | 2,190 |
|
__________________
| |
(1) | See Note 5 for information on offsets to investments related to insurance liabilities, DAC and VOBA and the policyholder dividend obligation. |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
8. Equity (continued)
Information regarding amounts reclassified out of each component of AOCI was as follows:
|
| | | | | | | | | | | | | | | | | | |
AOCI Components | | Amounts Reclassified from AOCI | | Statement of Operations and Comprehensive Income (Loss) Location |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| | 2014 | | 2013 | | 2014 | | 2013 | | |
| | (In millions) | | |
Net unrealized investment gains (losses): | | | | | | | | | | |
Net unrealized investment gains (losses) | | $ | 2 |
| | $ | (111 | ) | | $ | (90 | ) | | $ | (28 | ) | | Net investment gains (losses) |
Net unrealized investment gains (losses) | | 10 |
| | 15 |
| | 66 |
| | 36 |
| | Net investment income |
Net unrealized investment gains (losses) | | 6 |
| | — |
| | 56 |
| | — |
| | Net derivative gains (losses) |
OTTI | | (8 | ) | | (14 | ) | | (9 | ) | | (42 | ) | | Net investment gains (losses) |
Net unrealized investment gains (losses), before income tax | | 10 |
| | (110 | ) | | 23 |
| | (34 | ) | | |
Income tax (expense) benefit | | (3 | ) | | 38 |
| | (8 | ) | | 12 |
| | |
Net unrealized investment gains (losses), net of income tax | | 7 |
| | (72 | ) | | 15 |
| | (22 | ) | | |
| | | | | | | | | | |
Unrealized gains (losses) on derivatives - cash flow hedges: | | | | | | | | | | |
Interest rate swaps | | 1 |
| | 3 |
| | 28 |
| | 17 |
| | Net derivative gains (losses) |
Interest rate swaps | | 2 |
| | 1 |
| | 6 |
| | 5 |
| | Net investment income |
Interest rate forwards | | (10 | ) | | 1 |
| | (9 | ) | | 1 |
| | Net derivative gains (losses) |
Interest rate forwards | | 1 |
| | — |
| | 2 |
| | 1 |
| | Net investment income |
Foreign currency swaps | | (427 | ) | | 172 |
| | (350 | ) | | (39 | ) | | Net derivative gains (losses) |
Foreign currency swaps | | — |
| | — |
| | (1 | ) | | (2 | ) | | Net investment income |
Credit forwards | | — |
| | 1 |
| | — |
| | 1 |
| | Net investment income |
Gains (losses) on cash flow hedges, before income tax | | (433 | ) | | 178 |
| | (324 | ) | | (16 | ) | | |
Income tax (expense) benefit | | 151 |
| | (61 | ) | | 113 |
| | 6 |
| | |
Gains (losses) on cash flow hedges, net of income tax | | (282 | ) | | 117 |
| | (211 | ) | | (10 | ) | | |
| | | | | | | | | | |
Defined benefit plans adjustment: (1) | | | | | | | | | | |
Amortization of net actuarial gains (losses) | | (45 | ) | | (66 | ) | | (132 | ) | | (198 | ) | | |
Amortization of prior service (costs) credit | | 1 |
| | 16 |
| | — |
| | 47 |
| | |
Amortization of defined benefit plan items, before income tax | | (44 | ) | | (50 | ) | | (132 | ) | | (151 | ) | | |
Income tax (expense) benefit | | 13 |
| | 17 |
| | 44 |
| | 53 |
| | |
Amortization of defined benefit plan items, net of income tax | | (31 | ) | | (33 | ) | | (88 | ) | | (98 | ) | | |
Total reclassifications, net of income tax | | $ | (306 | ) | | $ | 12 |
| | $ | (284 | ) | | $ | (130 | ) | | |
__________________
| |
(1) | These AOCI components are included in the computation of net periodic benefit costs. See Note 10. |
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
9. Other Expenses
Information on other expenses was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
Compensation | $ | 596 |
| | $ | 620 |
| | $ | 1,644 |
| | $ | 1,783 |
|
Pension, postretirement and postemployment benefit costs | 91 |
| | 91 |
| | 247 |
| | 273 |
|
Commissions | 192 |
| | 191 |
| | 583 |
| | 584 |
|
Volume-related costs | 60 |
| | 60 |
| | 25 |
| | 191 |
|
Affiliated interest costs on ceded and assumed reinsurance | 235 |
| | 242 |
| | 717 |
| | 757 |
|
Capitalization of DAC | (106 | ) | | (132 | ) | | (313 | ) | | (438 | ) |
Amortization of DAC and VOBA | 88 |
| | 71 |
| | 482 |
| | 231 |
|
Interest expense on debt | 38 |
| | 38 |
| | 114 |
| | 115 |
|
Premium taxes, licenses and fees | 85 |
| | 62 |
| | 248 |
| | 198 |
|
Professional services | 254 |
| | 231 |
| | 729 |
| | 638 |
|
Rent and related expenses, net of sublease income | 36 |
| | 33 |
| | 106 |
| | 107 |
|
Other | (105 | ) | | (66 | ) | | (310 | ) | | (160 | ) |
Total other expenses | $ | 1,464 |
| | $ | 1,441 |
| | $ | 4,272 |
| | $ | 4,279 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
9. Other Expenses (continued)
Affiliated Expenses
Commissions, capitalization of DAC and amortization of DAC and VOBA include the impact of affiliated reinsurance transactions. See Note 12 for a discussion of affiliated expenses included in the table above.
Restructuring Charges
MetLife, Inc. commenced in 2012 an enterprise-wide strategic initiative. This global strategy focuses on leveraging MetLife, Inc. and its subsidiaries’ scale to improve the value they provide to customers and shareholders in order to reduce costs, enhance revenues, achieve efficiencies and reinvest in their technology, platforms and functionality to improve their current operations and develop new capabilities.
These restructuring charges are included in other expenses. As the expenses relate to an enterprise-wide initiative, they are reported in Corporate & Other. Estimated restructuring costs may change as management continues to execute this enterprise-wide strategic initiative. Such restructuring charges which were allocated to the Company were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2014 | | 2013 |
| Severance | | Lease and Asset Impairment | | Total | | Severance | | Lease and Asset Impairment | | Total |
| (In millions) |
Balance, beginning of period | $ | 16 |
| | $ | 7 |
| | $ | 23 |
| | $ | 11 |
| | $ | 9 |
| | $ | 20 |
|
Restructuring charges | 16 |
| | 2 |
| | 18 |
| | 12 |
| | 2 |
| | 14 |
|
Cash payments | (18 | ) | | (2 | ) | | (20 | ) | | (10 | ) | | (4 | ) | | (14 | ) |
Balance, end of period | $ | 14 |
| | $ | 7 |
| | $ | 21 |
| | $ | 13 |
| | $ | 7 |
| | $ | 20 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2014 | | 2013 |
| Severance | | Lease and Asset Impairment | | Total | | Severance | | Lease and Asset Impairment | | Total |
| (In millions) |
Balance, beginning of period | $ | 39 |
| | $ | 6 |
| | $ | 45 |
| | $ | 22 |
| | $ | — |
| | $ | 22 |
|
Restructuring charges | 37 |
| | 7 |
| | 44 |
| | 45 |
| | 14 |
| | 59 |
|
Cash payments | (62 | ) | | (6 | ) | | (68 | ) | | (54 | ) | | (7 | ) | | (61 | ) |
Balance, end of period | $ | 14 |
| | $ | 7 |
| | $ | 21 |
| | $ | 13 |
| | $ | 7 |
| | $ | 20 |
|
Total restructuring charges incurred since inception of initiative | $ | 225 |
| | $ | 41 |
| | $ | 266 |
| | $ | 146 |
| | $ | 32 |
| | $ | 178 |
|
Management anticipates further restructuring charges including severance, as well as lease and asset impairments, through the year ending December 31, 2016. However, such restructuring plans were not sufficiently developed to enable management to make an estimate of such restructuring charges at September 30, 2014.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
10. Employee Benefit Plans
Pension and Other Postretirement Benefit Plans
The Company sponsors and administers various U.S. qualified and non-qualified defined benefit pension plans and other postretirement employee benefit plans covering employees and sales representatives who meet specified eligibility requirements. Participating affiliates are allocated a proportionate share of net expense related to the plans, as well as contributions made to the plans.
The Company also provides certain postemployment benefits and certain postretirement medical and life insurance benefits for retired employees. Participating affiliates are allocated a proportionate share of net expense and contributions related to the postemployment and other postretirement plans.
The components of net periodic benefit costs for the Company were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| Pension Benefits | | Other Postretirement Benefits | | Pension Benefits | | Other Postretirement Benefits | | Pension Benefits | | Other Postretirement Benefits | | Pension Benefits | | Other Postretirement Benefits |
| (In millions) |
Service costs | $ | 46 |
| | $ | 3 |
| | $ | 53 |
| | $ | 5 |
| | $ | 137 |
| | $ | 9 |
| | $ | 160 |
| | $ | 13 |
|
Interest costs | 102 |
| | 21 |
| | 92 |
| | 22 |
| | 308 |
| | 64 |
| | 275 |
| | 65 |
|
Settlement and curtailment costs | 14 |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| | — |
| | — |
|
Expected return on plan assets | (111 | ) | | (19 | ) | | (114 | ) | | (18 | ) | | (333 | ) | | (56 | ) | | (340 | ) | | (56 | ) |
Amortization of net actuarial (gains) losses | 42 |
| | 3 |
| | 55 |
| | 12 |
| | 124 |
| | 8 |
| | 164 |
| | 38 |
|
Amortization of prior service costs (credit) | — |
| | (1 | ) | | 1 |
| | (18 | ) | | 1 |
| | (1 | ) | | 4 |
| | (52 | ) |
Allocated to affiliates (1) | (9 | ) | | — |
| | (1 | ) | | — |
| | (28 | ) | | (2 | ) | | (8 | ) | | (1 | ) |
Net periodic benefit costs | $ | 84 |
| | $ | 7 |
| | $ | 86 |
| | $ | 3 |
| | $ | 223 |
| | $ | 22 |
| | $ | 255 |
| | $ | 7 |
|
__________________
| |
(1) | The prior year allocated pension and other postretirement benefit plan costs have been reclassified to conform to the current year presentation. |
As disclosed in Note 15 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report, no contributions are required to be made to the Company’s qualified pension plans during 2014; however, during the nine months ended September 30, 2014, $303 million of discretionary contributions were made by the Company to those plans.
11. 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 U.S. permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. This variability in pleadings, together with the actual experience of the Company in litigating or resolving through settlement numerous claims over an extended period of time, demonstrates to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
11. Contingencies, Commitments and Guarantees (continued)
Due to the vagaries of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time may normally be difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law in the context of the pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
The Company establishes liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been established for a number of the matters noted below. It is possible that some of the matters could require the Company to pay damages or make other expenditures or establish accruals in amounts that could not be estimated at September 30, 2014. 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 to management, management does not believe any such charges are likely to have a material effect on the Company’s financial position.
Matters as to Which an Estimate Can Be Made
For some of the matters disclosed below, the Company is able to estimate a reasonably possible range of loss. For such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made. As of September 30, 2014, the Company estimates the aggregate range of reasonably possible losses in excess of amounts accrued for these matters to be $0 to $290 million.
Matters as to Which an Estimate Cannot Be Made
For other matters disclosed below, the Company is not currently able to estimate the reasonably possible loss or range of loss. The Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. On a quarterly and annual basis, the Company reviews relevant information with respect to litigation contingencies and updates its accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.
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 individual or groups of claims or lawsuits under appropriate circumstances.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
11. Contingencies, Commitments and Guarantees (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. 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.
As reported in the 2013 Annual Report, Metropolitan Life Insurance Company received approximately 5,898 asbestos-related claims in 2013. During the nine months ended September 30, 2014 and 2013, Metropolitan Life Insurance Company received approximately 3,641 and 4,256 new asbestos-related claims, respectively. See Note 17 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for historical information concerning asbestos claims and Metropolitan Life Insurance Company’s increase in its recorded liability at December 31, 2013. The number of asbestos cases that may be brought, the aggregate amount of any liability that Metropolitan Life Insurance Company may incur, and the total amount paid in settlements in any given year are uncertain and may vary significantly from year to year.
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 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 effect on the Company’s financial position.
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 probable and reasonably estimable liability for asbestos claims already asserted against Metropolitan Life Insurance Company, including claims settled but not yet paid; (ii) the probable and reasonably 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 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. Based upon its reevaluation of its exposure from asbestos litigation, Metropolitan Life Insurance Company has updated its liability analysis for asbestos-related claims through September 30, 2014.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
11. Contingencies, Commitments and Guarantees (continued)
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 U.S. Securities and Exchange Commission (the “SEC”); federal governmental authorities, including congressional committees; and the Financial Industry Regulatory Authority (“FINRA”) seeking a broad range of information. The issues involved in information requests and regulatory matters vary widely. The Company cooperates in these inquiries.
In the Matter of Chemform, Inc. Site, Pompano Beach, Broward County, Florida
In July 2010, the Environmental Protection Agency (“EPA”) advised Metropolitan Life Insurance Company that it believed payments were due under two settlement agreements, known as “Administrative Orders on Consent,” that New England Mutual Life Insurance Company (“New England Mutual”) signed in 1989 and 1992 with respect to the cleanup of a Superfund site in Florida (the “Chemform Site”). The EPA originally contacted Metropolitan Life Insurance Company (as successor to New England Mutual) and a third party in 2001, and advised that they owed additional clean-up costs for the Chemform Site. The matter was not resolved at that time. The EPA is requesting payment of an amount under $1 million from Metropolitan Life Insurance Company and such third party for past costs and an additional amount for future environmental testing costs at the Chemform Site. In September 2012, the EPA, Metropolitan Life Insurance Company and the third party executed an Administrative Order on Consent under which Metropolitan Life Insurance Company and the third party have agreed to be responsible for certain environmental testing at the Chemform site. The Company estimates that its costs for the environmental testing will not exceed $100,000. The September 2012 Administrative Order on Consent does not resolve the EPA’s claim for past clean-up costs. The EPA may seek additional costs if the environmental testing identifies issues. The Company estimates that the aggregate cost to resolve this matter will not exceed $1 million.
Sales Practices Regulatory Matters.
Regulatory authorities in a small number of states and FINRA, and occasionally the SEC, have had investigations or inquiries relating to sales of individual life insurance policies or annuities or other products by Metropolitan Life Insurance Company, New England Life Insurance Company (“NELICO”), General American Life Insurance Company (“GALIC”), and New England Securities Corporation. These investigations often focus on the conduct of particular financial services representatives and the sale of unregistered or unsuitable products or the misuse of client assets. Over the past several years, these and a number of investigations by other regulatory authorities were resolved for monetary payments and certain other relief, including restitution payments. 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 these sales practices-related investigations or inquiries.
Unclaimed Property Inquiries and Related Litigation
On September 20, 2012, the West Virginia Treasurer filed an action against Metropolitan Life Insurance Company in West Virginia state court (West Virginia ex rel. John D. Perdue v. Metropolitan Life Insurance Company, Circuit Court of Putnam County, Civil Action No. 12-C-295) alleging that Metropolitan Life Insurance Company violated the West Virginia Uniform Unclaimed Property Act, seeking to compel compliance with the Act, and seeking payment of unclaimed property, interest, and penalties. On November 21, 2012 and January 9, 2013, the Treasurer filed substantially identical suits against NELICO and GALIC, respectively. On December 30, 2013, the court granted defendants’ motions to dismiss all of the West Virginia Treasurer’s actions. The Treasurer has filed a notice to appeal the dismissal order.
Total Asset Recovery Services, LLC on behalf of the State of Florida v. MetLife, Inc., et. al. (Cir. Ct. Leon County, FL, filed October 27, 2010)
Alleging that Metropolitan Life Insurance Company violated the Florida Disposition of Unclaimed Property law by failing to escheat to Florida benefits of 9,022 life insurance contracts, Total Asset Recovery Services, LLC (“Relator”) brought an action under the Florida False Claims Act seeking to recover damages on behalf of Florida. The Relator alleged that the aggregate damages attributable to Metropolitan Life Insurance Company, including statutory damages and treble damages, were $767 million. On August 20, 2013, the court granted Metropolitan Life Insurance Company’s motion to dismiss the action. On September 19, 2014, the District Court of Appeal affirmed the decision granting the dismissal.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
11. Contingencies, Commitments and Guarantees (continued)
Total Control Accounts Litigation
Metropolitan Life Insurance Company is a defendant in lawsuits related to its use of retained asset accounts, known as Total Control Accounts (“TCA”), as a settlement option for death benefits.
Keife, et al. v. Metropolitan Life Insurance Company (D. Nev., filed in state court on July 30, 2010 and removed to federal court on September 7, 2010); and Simon v. Metropolitan Life Insurance Company (D. Nev., filed November 3, 2011)
These putative class action lawsuits, which have been consolidated, raise breach of contract claims arising from Metropolitan Life Insurance Company’s use of the TCA to pay life insurance benefits under the Federal Employees’ Group Life Insurance program. On March 8, 2013, the court granted Metropolitan Life Insurance Company’s motion for summary judgment. Plaintiffs have appealed that decision to the United States Court of Appeals for the Ninth Circuit.
Owens v. Metropolitan Life Insurance Company (N.D. Ga., filed April 17, 2014)
This putative class action lawsuit alleges that Metropolitan Life Insurance Company’s use of the TCA as the settlement option for life insurance benefits under some group life insurance policies violates Metropolitan Life Insurance Company’s fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”). As damages, plaintiff seeks disgorgement of profits that Metropolitan Life Insurance Company realized on accounts owned by members of the putative class.
Other Litigation
McGuire v. Metropolitan Life Insurance Company (E.D. Mich., filed February 22, 2012)
This lawsuit was filed by the fiduciary for the Union Carbide Employees’ Pension Plan and alleges that Metropolitan Life Insurance Company, which issued annuity contracts to fund some of the benefits the plan provides, engaged in transactions that ERISA prohibits and violated duties under ERISA and federal common law by determining that no dividends were payable with respect to the contracts from and after 1999. On September 26, 2012, the court denied Metropolitan Life Insurance Company’s motion to dismiss the complaint. The trial has been scheduled for February 2015.
Sun Life Assurance Company of Canada Indemnity Claim
In 2006, Sun Life Assurance Company of Canada (“Sun Life”), as successor to the purchaser of Metropolitan Life Insurance Company’s Canadian operations, filed a lawsuit in Toronto, seeking a declaration that Metropolitan Life Insurance Company remains liable for “market conduct claims” related to certain individual life insurance policies sold by Metropolitan Life Insurance Company and that were transferred to Sun Life. Sun Life had asked that the court require Metropolitan Life Insurance Company to indemnify Sun Life for these claims pursuant to indemnity provisions in the sale agreement for the sale of Metropolitan Life Insurance Company’s Canadian operations entered into in June of 1998. In January 2010, the court found that Sun Life had given timely notice of its claim for indemnification but, because it found that Sun Life had not yet incurred an indemnifiable loss, granted Metropolitan Life Insurance Company’s motion for summary judgment. Both parties appealed but subsequently agreed to withdraw the appeal and consider the indemnity claim through arbitration. In September 2010, Sun Life notified Metropolitan Life Insurance Company that a purported class action lawsuit was filed against Sun Life in Toronto, Fehr v. Sun Life Assurance Co. (Super. Ct., Ontario, September 2010), alleging sales practices claims regarding the same individual policies sold by Metropolitan Life Insurance Company and transferred to Sun Life. An amended class action complaint in that case was served on Sun Life in May 2013, again without naming Metropolitan Life Insurance Company as a party. On August 30, 2011, Sun Life notified Metropolitan Life Insurance Company that a purported class action lawsuit was filed against Sun Life in Vancouver, Alamwala v. Sun Life Assurance Co. (Sup. Ct., British Columbia, August 2011), alleging sales practices claims regarding certain of the same policies sold by Metropolitan Life Insurance Company and transferred to Sun Life. Sun Life contends that Metropolitan Life Insurance Company is obligated to indemnify Sun Life for some or all of the claims in these lawsuits. These sales practices cases against Sun Life are ongoing, and the Company is unable to estimate the reasonably possible loss or range of loss arising from this litigation.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
11. Contingencies, Commitments and Guarantees (continued)
C-Mart, Inc. v. Metropolitan Life Ins. Co., et al. (S.D. Fla., January 10, 2013); Cadenasso v. Metropolitan Life Insurance Co., et al. (N.D. Cal., November 26, 2013, subsequently transferred to S.D. Fla.); and Fauley v. Metropolitan Life Insurance Co., et al. (Circuit Court of the 19th Judicial Circuit, Lake County, Ill., July 3, 2014).
Plaintiffs filed these lawsuits against defendants, including Metropolitan Life Insurance Company and a former MetLife financial services representative, alleging that the defendants sent unsolicited fax advertisements to plaintiff and others in violation of the Telephone Consumer Protection Act, as amended by the Junk Fax Prevention Act, 47 U.S.C. § 227. Metropolitan Life Insurance Company has agreed to pay up to $23 million to resolve claims as to fax ads sent between August 23, 2008 and the date of the court’s preliminary approval of the settlement. Following this agreement, the Fauley case was filed in Illinois, seeking certification of a nationwide class of plaintiffs and the C-Mart and Cadenasso cases were voluntarily dismissed. In August 2014, the Fauley court preliminarily approved the settlement, certified a nationwide settlement class, and scheduled the final approval hearing for November 2014.
Sales Practices Claims
Over the past several years, the Company has faced numerous claims, including class action lawsuits, alleging improper marketing or sales of individual life insurance policies, annuities, mutual funds or other products. Some of the current cases seek substantial damages, including punitive and treble damages and attorneys’ fees. The Company continues to vigorously defend against the claims in these matters. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for sales practices matters.
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.
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. 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 effect upon the Company’s financial position, based on information currently known by the Company’s management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on the Company’s net income or cash flows in particular quarterly or annual periods.
Commitments
Mortgage Loan Commitments
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $3.9 billion and $3.1 billion at September 30, 2014 and December 31, 2013, respectively.
Commitments to Fund Partnerships Investments, Bank Credit Facilities, Bridge Loans and Private Corporate Bond Investments
The Company commits to fund partnership investments and to lend funds under bank credit facilities, bridge loans and private corporate bond investments. The amounts of these unfunded commitments were $3.3 billion and $3.4 billion at September 30, 2014 and December 31, 2013, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
12. Related Party Transactions
Service Agreements
The Company has entered into various agreements with affiliates for services necessary to conduct its activities. Typical services provided under these agreements include personnel, policy administrative functions and distribution services. For certain agreements, charges are based on various performance measures or activity-based costing. The bases for such charges are modified and adjusted by management when necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by the Company and/or affiliate. Expenses and fees incurred with affiliates related to these agreements, recorded in other expenses, were $546 million and $1.7 billion for the three months and nine months ended September 30, 2014, respectively, and $562 million and $1.8 billion for the three months and nine months ended September 30, 2013, respectively. Revenues received from affiliates related to these agreements, recorded in universal life and investment-type product policy fees, were $35 million and $96 million for the three months and nine months ended September 30, 2014, respectively, and $33 million and $94 million for the three months and nine months ended September 30, 2013, respectively. Revenues received from affiliates related to these agreements, recorded in other revenues, were $48 million and $127 million for the three months and nine months ended September 30, 2014, respectively, and $31 million and $105 million for the three months and nine months ended September 30, 2013, respectively.
The Company also entered into agreements with affiliates to provide additional services necessary to conduct the affiliates’ activities. Typical services provided under these agreements include management, policy administrative functions, investment advice and distribution services. Expenses incurred by the Company related to these agreements, included in other expenses, were $276 million and $1.3 billion for the three months and nine months ended September 30, 2014, respectively, and $314 million and $977 million for the three months and nine months ended September 30, 2013, respectively, and were reimbursed to the Company by these affiliates.
The Company had net payables to affiliates, related to the items discussed above, of $189 million and $327 million at September 30, 2014 and December 31, 2013, respectively.
See Notes 5 and 10 for additional information on related party transactions.
Related Party Reinsurance Transactions
The Company has reinsurance agreements with certain of MetLife, Inc.’s subsidiaries, including Exeter, First MetLife Investors Insurance Company, MetLife Insurance Company of Connecticut (“MICC”), MetLife Investors USA Insurance Company (“MLI-USA”), MetLife Investors Insurance Company (“MLIIC”), MetLife Reinsurance Company of Charleston (“MRC”), MetLife Reinsurance Company of Vermont and Metropolitan Tower Life Insurance Company, all of which are related parties.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
12. Related Party Transactions (continued)
Information regarding the significant effects of affiliated reinsurance included on the consolidated statements of operations and comprehensive income (loss) was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
Premiums | | | | | | | |
Reinsurance assumed | $ | 146 |
| | $ | 117 |
| | $ | 515 |
| | $ | 322 |
|
Reinsurance ceded | (7 | ) | | (12 | ) | | (29 | ) | | (35 | ) |
Net premiums | $ | 139 |
| | $ | 105 |
| | $ | 486 |
| | $ | 287 |
|
Universal life and investment-type product policy fees | | | | | | | |
Reinsurance assumed | $ | 13 |
| | $ | 11 |
| | $ | 33 |
| | $ | 29 |
|
Reinsurance ceded | (94 | ) | | (58 | ) | | (231 | ) | | (158 | ) |
Net universal life and investment-type product policy fees | $ | (81 | ) | | $ | (47 | ) | | $ | (198 | ) | | $ | (129 | ) |
Other revenues | | | | | | | |
Reinsurance assumed | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | (2 | ) |
Reinsurance ceded | 169 |
| | 156 |
| | 491 |
| | 495 |
|
Net other revenues | $ | 166 |
| | $ | 156 |
| | $ | 491 |
| | $ | 493 |
|
Policyholder benefits and claims | | | | | | | |
Reinsurance assumed | $ | 122 |
| | $ | 90 |
| | $ | 477 |
| | $ | 297 |
|
Reinsurance ceded | (49 | ) | | (43 | ) | | (124 | ) | | (112 | ) |
Net policyholder benefits and claims | $ | 73 |
| | $ | 47 |
| | $ | 353 |
| | $ | 185 |
|
Interest credited to policyholder account balances | | | | | | | |
Reinsurance assumed | $ | 8 |
| | $ | 7 |
| | $ | 25 |
| | $ | 23 |
|
Reinsurance ceded | (27 | ) | | (26 | ) | | (79 | ) | | (76 | ) |
Net interest credited to policyholder account balances | $ | (19 | ) | | $ | (19 | ) | | $ | (54 | ) | | $ | (53 | ) |
Other expenses | | | | | | | |
Reinsurance assumed | $ | 51 |
| | $ | 87 |
| | $ | 218 |
| | $ | 249 |
|
Reinsurance ceded | 152 |
| | 152 |
| | 459 |
| | 474 |
|
Net other expenses | $ | 203 |
| | $ | 239 |
| | $ | 677 |
| | $ | 723 |
|
Information regarding the significant effects of affiliated reinsurance included on the consolidated balance sheets was as follows at:
|
| | | | | | | | | | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| Assumed | | Ceded | | Assumed | | Ceded |
| (In millions) |
Assets | | | | | | | |
Premiums, reinsurance and other receivables | $ | 202 |
| | $ | 16,432 |
| | $ | 109 |
| | $ | 15,748 |
|
Deferred policy acquisition costs and value of business acquired | 351 |
| | (257 | ) | | 309 |
| | (273 | ) |
Total assets | $ | 553 |
| | $ | 16,175 |
| | $ | 418 |
| | $ | 15,475 |
|
Liabilities | | | | | | | |
Future policy benefits | $ | 1,052 |
| | $ | — |
| | $ | 761 |
| | $ | — |
|
Policyholder account balances | 223 |
| | — |
| | 239 |
| | — |
|
Other policy-related balances | 226 |
| | 18 |
| | 67 |
| | (39 | ) |
Other liabilities | 6,856 |
| | 14,377 |
| | 6,606 |
| | 14,044 |
|
Total liabilities | $ | 8,357 |
| | $ | 14,395 |
| | $ | 7,673 |
| | $ | 14,005 |
|
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) — (Continued)
12. Related Party Transactions (continued)
The Company ceded two blocks of business to two affiliates on a 75% coinsurance with funds withheld basis. Certain contractual features of these agreements qualify as embedded derivatives, which are separately accounted for at estimated fair value on the Company’s consolidated balance sheets. The embedded derivatives related to the funds withheld associated with these reinsurance agreements are included within other liabilities and increased/(decreased) the funds withheld balance by $25 million and ($11) million at September 30, 2014 and December 31, 2013, respectively. Net derivative gains (losses) associated with these embedded derivatives were less than $1 million and ($36) million for the three months and nine months ended September 30, 2014, respectively, and $5 million and $38 million for the three months and nine months ended September 30, 2013, respectively.
The Company ceded risks to an affiliate related to guaranteed minimum benefit guarantees written directly by the Company. These ceded reinsurance agreements contain embedded derivatives and changes in their fair value are also included within net derivative gains (losses). The embedded derivatives associated with the cessions are included within premiums, reinsurance and other receivables and were $482 million and ($62) million at September 30, 2014 and December 31, 2013, respectively. Net derivative gains (losses) associated with the embedded derivatives were $218 million and $360 million for the three months and nine months ended September 30, 2014, respectively, and ($354) million and ($1.2) billion for the three months and nine months ended September 30, 2013, respectively.
Certain contractual features of the closed block agreement with MRC create an embedded derivative, which is separately accounted for at estimated fair value on the Company’s consolidated balance sheets. The embedded derivative related to the funds withheld associated with this reinsurance agreement was included within other liabilities and increased the funds withheld balance by $1.0 billion and $709 million at September 30, 2014 and December 31, 2013, respectively. Net derivative gains (losses) associated with the embedded derivative were $60 million and ($295) million for the three months and nine months ended September 30, 2014, respectively, and $74 million and $576 million for the three months and nine months ended September 30, 2013, respectively.
MICC received all regulatory approvals to merge three U.S.-based life insurance companies and a former offshore reinsurance subsidiary to create one larger U.S.-based and U.S.-regulated life insurance company (the “Mergers”). The Mergers are expected to occur in the fourth quarter of 2014. The companies to be merged are MICC, MLI-USA and MLIIC, each a U.S. insurance company that issues variable annuity products in addition to other products, and Exeter, a reinsurance company that mainly reinsures guarantees associated with variable annuity products. MICC, which is expected to be renamed and domiciled in Delaware, will be the surviving entity. In October 2014, MICC received regulatory approval from the Connecticut Insurance Department and the Delaware Department of Insurance to re-domesticate from Connecticut to Delaware immediately prior to the Mergers. Exeter, formerly a Cayman Islands company, was re-domesticated to Delaware in October 2013. Effective January 1, 2014, following receipt of New York State Department of Financial Services approval, MICC withdrew its license to issue insurance policies and annuity contracts in New York. Also effective January 1, 2014, MICC reinsured with Metropolitan Life Insurance Company all existing New York insurance policies and annuity contracts that include a separate account feature. As a result of the reinsurance agreements, the significant effects to Metropolitan Life Insurance Company were increases in funds withheld assets, included in other invested assets, of $192 million, in deposit liabilities, included in other liabilities, of $456 million, in assumed reserves, included in future policy benefits, of $128 million, in other reinsurance payables, included in other liabilities, of $116 million, and in cash and investments of $494 million received from MICC.
In anticipation of the Mergers, in October 2014, Metropolitan Life Insurance Company recaptured a block of universal life secondary guarantee business ceded to Exeter on a 75% coinsurance with funds withheld basis. As a result of this reinsurance transaction, the significant effects to Metropolitan Life Insurance Company were decreases in premiums, reinsurance and other receivables of $485 million, and in other liabilities of $425 million, as well as increases in deferred acquisition costs of $30 million and in other policy-related balances of $9 million. Also, in November 2014, Metropolitan Life Insurance Company partially recaptured risks related to guaranteed minimum benefit guarantees on certain variable annuities previously ceded to Exeter and assumed risks related to certain variable annuities, including the associated guaranteed minimum benefit guarantees, from certain affiliates.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Other Financial Information
For purposes of this discussion, “MLIC,” the “Company,” “we,” “our” and “us” refer to Metropolitan Life Insurance Company, a New York corporation incorporated in 1868, and its subsidiaries. Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc. Management's narrative analysis of the results of operations is presented pursuant to General Instruction H(2)(a) of Form 10-Q. This narrative analysis should be read in conjunction with Metropolitan Life Insurance Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Annual Report”), the cautionary language regarding forward-looking statements included below, the “Risk Factors” set forth in Part II, Item 1A, and the additional risk factors referred to therein, and the Company's interim condensed consolidated financial statements included elsewhere herein.
This narrative analysis may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning, or are tied to future periods, in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results. Any or all forward-looking statements may turn out to be wrong. Actual results could differ materially from those expressed or implied in the forward-looking statements. See “Note Regarding Forward-Looking Statements.”
This narrative analysis includes references to our performance measure, operating earnings, that is not based on accounting principles generally accepted in the United States of America (“GAAP”). Operating earnings is the measure of segment profit or loss we use to evaluate segment performance and allocate resources. Consistent with GAAP guidance for segment reporting, operating earnings is our measure of segment performance. See “— Non-GAAP and Other Financial Disclosures” for definitions of this and other measures.
Business
The Company is organized into three segments: Retail; Group, Voluntary & Worksite Benefits; and Corporate Benefit Funding. In addition, the Company reports certain of its results of operations in Corporate & Other. Management continues to evaluate the Company’s segment performance and allocated resources and may adjust related measurements in the future to better reflect segment profitability. See Note 2 of the Notes to the Interim Condensed Consolidated Financial Statements for further information on the Company’s segments and Corporate & Other.
MetLife Insurance Company of Connecticut (“MICC”) received all regulatory approvals to merge three U.S.-based life insurance companies and a former offshore reinsurance subsidiary to create one larger U.S.-based and U.S.-regulated life insurance company (the “Mergers”). The Mergers are expected to occur in the fourth quarter of 2014. The companies to be merged are MICC, MetLife Investors USA Insurance Company and MetLife Investors Insurance Company, each a U.S. insurance company that issues variable annuity products in addition to other products, and Exeter Reassurance Company, Ltd. (“Exeter”), a reinsurance company that mainly reinsures guarantees associated with variable annuity products. MICC, which is expected to be renamed and domiciled in Delaware, will be the surviving entity. In October 2014, MICC received regulatory approval from the Connecticut Insurance Department and the Delaware Department of Insurance to re-domesticate from Connecticut to Delaware immediately prior to the Mergers. Exeter, formerly a Cayman Islands company, was re-domesticated to Delaware in October 2013. Effective January 1, 2014, following receipt of New York State Department of Financial Services (the “Department of Financial Services”) approval, MICC withdrew its license to issue insurance policies and annuity contracts in New York. Also effective January 1, 2014, MICC reinsured with Metropolitan Life Insurance Company all existing New York insurance policies and annuity contracts that include a separate account feature. As a result of the reinsurance agreements, the significant effects to Metropolitan Life Insurance Company were increases in funds withheld assets, included in other invested assets, of $192 million, in deposit liabilities, included in other liabilities, of $456 million, in assumed reserves, included in future policy benefits, of $128 million, in other reinsurance payables, included in other liabilities, of $116 million, and in cash and investments of $494 million received from MICC.
In anticipation of the Mergers, in October 2014, Metropolitan Life Insurance Company recaptured a block of universal life secondary guarantee business ceded to Exeter on a 75% coinsurance with funds withheld basis. As a result of this reinsurance transaction, the significant effects to Metropolitan Life Insurance Company were decreases in premiums, reinsurance and other receivables of $485 million, and in other liabilities of $425 million, as well as increases in deferred acquisition costs of $30 million and in other policy-related balances of $9 million. Also, in November 2014, Metropolitan Life Insurance Company partially recaptured risks related to guaranteed minimum benefit guarantees on certain variable annuities previously ceded to Exeter and assumed risks related to certain variable annuities, including the associated guaranteed minimum benefit guarantees, from certain affiliates.
The Mergers (i) may mitigate to some degree the impact of any restrictions on the use of captive reinsurers that could be adopted by the Department of Financial Services or other state insurance regulators by reducing our exposure to and use of captive reinsurers; (ii) will reduce the reliance on MetLife, Inc. for cash to fund derivative collateral requirements; and (iii) will increase transparency relative to our capital allocation and variable annuity risk management. See Note 12 of the Notes to the Interim Condensed Consolidated Financial Statements included herein for further information on the Mergers and see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business — Regulatory Developments — Insurance Regulatory Examinations” included in Metropolitan Life Insurance Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Affiliated Captive Reinsurance Transactions” included in the 2013 Annual Report for information on our use of captive reinsurers.
Industry Trends
The following information on industry trends should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends” in Part II, Item 7, of the 2013 Annual Report and in Part I, Item 2, of Metropolitan Life Insurance Company’s Quarterly Report on Form 10‑Q for the quarters ended March 31, 2014 and June 30, 2014.
We continue to be impacted by the unstable global financial and economic environment that has been affecting the industry.
Financial and Economic Environment
Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility and disruptions in global capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities are sensitive to changing market factors. Global market factors, including interest rates, credit spreads, equity prices, real estate markets, foreign currency exchange rates, consumer spending, business investment, government spending, the volatility and strength of the capital markets, deflation and inflation, all affect the business and economic environment and, ultimately, the amount and profitability of our business. Disruptions in one market or asset class can also spread to other markets or asset classes. Upheavals in the financial markets can also affect our business through their effects on general levels of economic activity, employment and customer behavior. Financial markets have also been affected periodically by concerns over U.S. fiscal policy, although these concerns have abated since late 2013. However, unless long-term steps are taken to raise the debt ceiling and reduce the federal deficit, rating agencies have warned of the possibility of future downgrades of U.S. Treasury securities. These issues could, on their own, or combined with the possible slowing of the global economy generally, have severe repercussions to the U.S. and global credit and financial markets, further exacerbate concerns over sovereign debt of other countries and disrupt economic activity in the U.S. and elsewhere.
Concerns about the economic conditions, capital markets and the solvency of certain European Union (“EU”) member states, including Portugal, Ireland, Italy, Greece and Spain (“Europe’s perimeter region”), and of financial institutions that have significant direct or indirect exposure to debt issued by these countries, have been a cause of elevated levels of market volatility. However, after several tumultuous years, economic conditions in Europe’s perimeter region seem to be stabilizing or improving, as evidenced by the stabilization of credit ratings, particularly in Spain, Portugal and Ireland. This, combined with greater European Central Bank (“ECB”) support and gradually improving macroeconomic conditions at the country level, has reduced the risk of default on the sovereign debt of certain countries in Europe’s perimeter region and the risk of possible withdrawal of one or more countries from the Euro zone. See “Risk Factors — Economic Environment and Capital Markets-Related Risks — If Difficult Conditions in the Global Capital Markets and the Economy Generally Persist, They May Materially Adversely Affect Our Business and Results of Operations” included in the 2013 Annual Report for information regarding credit ratings downgrades, support programs for Europe's perimeter region and our exposure to obligations of European governments and private obligors.
The financial markets have also been affected by concerns that other EU member states could experience similar financial troubles or that some countries could default on their obligations, have to restructure their outstanding debt, or that financial institutions with significant holdings of sovereign or private debt issued by borrowers in Europe’s perimeter region could experience financial stress, any of which could have significant adverse effects on the European and global economies and on financial markets, generally. In September 2012, the ECB announced a new bond buying program, Outright Monetary Transactions (“OMT”), intended to stabilize the European financial crisis. This program involves the potential purchase by the ECB of unlimited quantities of sovereign bonds with maturities of one to three years. The OMT has not been activated to date, but the possibility of its use by the ECB succeeded in reducing investor concerns over the possible withdrawal of one or more countries from the Euro zone and helped to lower sovereign yields in Europe’s perimeter region. However, in October 2014, the Court of Justice of the EU heard arguments relating to a lawsuit challenging the legality of the OMT. While a decision is not expected until 2015, the outcome could affect the ECB’s plan to purchase sovereign bonds and undermine economic stability in Europe. Economic growth in the Euro zone continues to be weak, with concerns over low inflation becoming more pronounced as countries in Europe’s perimeter region in particular continue to pursue policies to reduce their relative cost of production and reduce macroeconomic imbalances. In addition, concerns about the political and economic stability of countries in regions outside the EU, including Ukraine, Russia, Argentina and the Middle East, have contributed to global market volatility. See “Risk Factors — Economic Environment and Capital Markets-Related Risks — We Are Exposed to Significant Financial and Capital Markets Risks Which May Adversely Affect Our Results of Operations, Financial Condition and Liquidity, and May Cause Our Net Investment Income to Vary from Period to Period,” and “Risk Factors — Economic Environment and Capital Markets-Related Risks — If Difficult Conditions in the Global Capital Markets and the Economy Generally Persist, They May Materially Adversely Affect Our Business and Results of Operations” included in the 2013 Annual Report.
Impact of a Sustained Low Interest Rate Environment
As a company with significant operations in the U.S., we are affected by the monetary policy of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Federal Reserve Board has taken a number of actions in recent years to spur economic activity by keeping interest rates low and may take further actions to influence interest rates in the future, which may have an impact on the pricing levels of risk-bearing investments, and may adversely impact the level of product sales.
On October 29, 2014, the Federal Reserve Board’s Federal Open Market Committee (“FOMC”), citing sufficient underlying strength in the economy to support progress toward maximum employment and the substantial improvement in the outlook for labor market conditions since the inception of the current asset purchase program, decided to conclude the program. The end of the Federal Reserve Board’s quantitative easing program could potentially increase U.S. interest rates from recent historically low levels, with uncertain impacts on U.S. risk markets, and may affect interest rates and risk markets in other developed and emerging economies. Even after the economy strengthens, the FOMC reaffirmed that it anticipates keeping the target range for the federal funds rate at 0 to 0.25% for a considerable time, subject to labor market conditions and inflation indicators and expectations.
In periods of declining interest rates, we may have to invest insurance cash flows and reinvest the cash flows we received as interest or return of principal on our investments in lower yielding instruments. Moreover, borrowers may prepay or redeem the fixed income securities, commercial, agricultural or residential mortgage loans and mortgage-backed securities in our investment portfolio with greater frequency in order to borrow at lower market rates. Therefore, some of our products expose us to the risk that a reduction in interest rates will reduce the difference between the amounts that we are required to credit on contracts in our general account and the rate of return we are able to earn on investments intended to support obligations under these contracts. This difference between interest earned and interest credited, or margin, is a key metric for the management of, and reporting for, many of our businesses.
Our expectations regarding future margins are an important component impacting the amortization of certain intangible assets such as deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”). Significantly lower margins may cause us to accelerate the amortization, thereby reducing net income in the affected reporting period. Additionally, lower margins may also impact the recoverability of intangible assets such as goodwill, require the establishment of additional liabilities or trigger loss recognition events on certain policyholder liabilities. We review this long-term margin assumption, along with other assumptions, as part of our annual assumption review.
Regulatory Developments
The U.S. life insurance industry is regulated primarily at the state level, with some products and services also subject to federal regulation. As life insurers introduce new and often more complex products, regulators refine capital requirements and introduce new reserving standards for the life insurance industry. Regulations recently adopted or currently under review can potentially impact the statutory reserve and capital requirements of the industry. In addition, regulators have undertaken market and sales practices reviews of several markets or products, including equity-indexed annuities, variable annuities and group products, as well as reviews of the utilization of affiliated captive reinsurers or offshore entities to reinsure insurance risks.
The regulation of the global financial services industry has received renewed scrutiny as a result of the disruptions in the financial markets. Significant regulatory reforms have been recently adopted and additional reforms proposed, and these or other reforms could be implemented. See “Risk Factors — Regulatory and Legal Risks — Our Insurance and Brokerage Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth” included elsewhere herein, as well as “Business — Regulation,” “Risk Factors — Risks Related to Our Business — Our Statutory Life Insurance Reserve Financings May Be Subject to Cost Increases and New Financings May Be Subject to Limited Market Capacity,” and “Risk Factors — Regulatory and Legal Risks — Changes in U.S. Federal and State Securities Laws and Regulations, and State Insurance Regulations Regarding Suitability of Annuity Product Sales, May Affect Our Operations and Our Profitability” included in the 2013 Annual Report. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was signed by President Obama in July 2010, effected the most far-reaching overhaul of financial regulation in the U.S. in decades. The full impact of Dodd-Frank on us will depend on the numerous rulemaking initiatives required or permitted by Dodd-Frank which are in various stages of implementation, many of which are not likely to be completed for some time.
NAIC
The National Association of Insurance Commissioners (“NAIC”) is an organization, the mission of which is to assist state insurance regulatory authorities in serving the public interest and achieving the insurance regulatory goals of its members, the state insurance regulatory officials. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight. The NAIC provides standardized insurance industry accounting and reporting guidance through its Accounting Practices and Procedures Manual (the “Manual”). However, statutory accounting principles continue to be established by individual state laws, regulations and permitted practices. Changes to the Manual or modifications by the various state insurance departments may impact the statutory capital and surplus of our U.S. insurance companies.
The NAIC currently has in place its “Solvency Modernization Initiative,” which is designed to review the U.S. financial regulatory system and all aspects of financial regulation affecting insurance companies. Though broad in scope, the NAIC has stated that the Solvency Modernization Initiative will focus on: (1) capital requirements; (2) corporate governance and risk management; (3) group supervision; (4) statutory accounting and financial reporting; and (5) reinsurance. In furtherance of this initiative, the NAIC adopted the Corporate Governance Annual Filing Model Act and Regulation at its August 2014 meeting. The new model, which requires insurers to make an annual confidential filing regarding their corporate governance policies, is expected to become effective in 2016. In addition, in September 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment Model Act (“ORSA”), which has been or is expected to be enacted by our insurance companies’ domiciliary states in the near future. ORSA requires that insurers maintain a risk management framework and conduct an internal own risk and solvency assessment of the insurer’s material risks in normal and stressed environments. The assessment must be documented in a confidential annual summary report, a copy of which must be made available to regulators as required or upon request. MetLife’s first ORSA summary report, which will be submitted on behalf of the enterprise, must be prepared beginning in 2015.
In December 2012, the NAIC approved a new valuation manual containing a principles-based approach to life insurance company reserves. Principles-based reserving is designed to better address reserving for products, including the current generation of products for which the current formulaic basis for reserve determination does not work effectively. The principles-based approach will not become effective unless it is enacted into law by a minimum number of state legislatures. Insurance commissioners of certain states oppose (e.g., New York) or do not actively support the principles-based reserve approach.
We cannot predict the additional capital requirements or compliance costs, if any, that may result from the above initiatives.
The NAIC adopted revisions to the NAIC Insurance Holding Company System Model Act and Insurance Holding Company System Model Regulation in December 2010. The revised models include a new requirement that the ultimate controlling person of a U.S. insurer file an annual enterprise risk report with the lead state of the insurer identifying risks likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. To date, several states where MetLife has domestic insurers have enacted a version of the revised NAIC model act, including the enterprise risk reporting requirement.
Regulation of Over-the-Counter Derivatives
Dodd-Frank includes a new framework of regulation of the over-the-counter (“OTC”) derivatives markets which requires clearing of certain types of transactions currently traded OTC and imposes additional costs, including new reporting and margin requirements, and will likely impose additional regulation on MLIC, including new capital requirements. Our costs of risk mitigation are increasing under Dodd-Frank. For example, Dodd-Frank imposes requirements, including the requirement to pledge initial margin (i) for “OTC-cleared” transactions (OTC derivatives that are cleared and settled through central clearing counterparties) entered into after June 10, 2013, and (ii) for “OTC-bilateral” transactions (OTC derivatives that are bilateral contracts between two counterparties) entered into after the phase-in period; these requirements would be applicable to us in 2019 if the Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation (“FDIC”), Farm Credit Administration and Federal Housing Finance Agency (collectively, the “Prudential Regulators”), U.S. Commodity Futures Trading Commission (“CFTC”) and the U.S. Securities and Exchange Commission adopt the final margin requirements for non-centrally cleared derivatives published by the Bank of International Settlements and International Organization of Securities Commissions in September 2013 and re-proposed by the Prudential Regulators and CFTC in September 2014. These increased margin requirements, combined with restrictions on securities that will qualify as eligible collateral, will require increased holdings of cash and highly liquid securities with lower yields causing a reduction in income. Centralized clearing of certain OTC derivatives exposes us to the risk of a default by a clearing member or clearinghouse with respect to our cleared derivative transactions. We use derivatives to mitigate a wide range of risks in connection with our businesses, including the impact of increased benefit exposures from our annuity products that offer guaranteed benefits. We have always been subject to the risk that hedging and other management procedures might prove ineffective in reducing the risks to which insurance policies expose us or that unanticipated policyholder behavior or mortality, combined with adverse market events, could produce economic losses beyond the scope of the risk management techniques employed. Any such losses could be increased by higher costs of writing derivatives (including customized derivatives) and the reduced availability of customized derivatives that might result from the implementation of Dodd-Frank and comparable international derivatives regulations.
Potential Regulation of MetLife, Inc. as a Non-Bank SIFI
On January 11, 2013, MetLife Bank, National Association (“MetLife Bank”) and MetLife, Inc. completed the sale of the depository business of MetLife Bank to GE Capital Retail Bank. Subsequently, MetLife Bank terminated its deposit insurance and MetLife, Inc. deregistered as a bank holding company. Additionally, in August 2013, MetLife Bank merged with and into MetLife Home Loans LLC, a non-bank affiliate. As a result, MetLife, Inc. is no longer regulated as a bank holding company or subject to enhanced supervision and prudential standards as a bank holding company with assets of $50 billion or more. However, if, in the future, MetLife, Inc. is designated by the Financial Stability Oversight Council (“FSOC”) as a non-bank systemically important financial institution (“non-bank SIFI”), it could once again be subject to regulation by the Federal Reserve Board and to enhanced supervision and prudential standards. See “— Enhanced Prudential Standards for Non-Bank SIFIs.” Regulation of MetLife, Inc. as a non-bank SIFI could affect our business. For example, enhanced capital requirements that would be applicable if MetLife, Inc. is designated as a non-bank SIFI, may adversely affect our ability to compete with other insurers that are not subject to those requirements, and our ability to issue guarantees could be constrained. In addition, if MetLife, Inc. is designated as a non-bank SIFI, it would need to obtain Federal Reserve Bank of New York (collectively, with the Federal Reserve Board, the “Federal Reserve”) approval before directly or indirectly acquiring, merging or consolidating with a financial company having more than $10 billion of assets or acquiring 5% or more of any voting class of securities of a bank or bank holding company and, depending on the extent of the combined company’s liabilities, could be subject to additional restrictions regarding its ability to merge. The Federal Reserve Board would also have the right to require any of MetLife, Inc.’s insurance companies, or insurance company affiliates, to take prompt action to correct any financial weaknesses.
On September 4, 2014, the FSOC notified MetLife, Inc. that it has been preliminarily designated as a non-bank SIFI. On October 3, 2014, MetLife, Inc. delivered notice to the FSOC requesting a written and oral evidentiary hearing to contest the FSOC’s proposed determination. In accordance with its regulations, the FSOC held an evidentiary hearing on November 3, 2014 and will make a final determination on MetLife, Inc.’s status as a non-bank SIFI within 60 days after the hearing.
If MetLife, Inc. is designated as a non-bank SIFI, it will be subject to a number of Dodd-Frank requirements that are also applicable to bank holding companies with assets of $50 billion or more, including responsibility to pay assessments and other charges equal to the total expenses the Federal Reserve Board thinks is necessary for its supervision of bank holding companies and savings and loan holding companies with assets of $50 billion or more and non-bank SIFIs, as well as enhanced prudential standards.
Enhanced Prudential Standards for Non-Bank SIFIs
Regulation of MetLife, Inc. as a non-bank SIFI could materially and adversely affect our business. In December 2011, in accordance with the requirements of section 165 of Dodd-Frank, the Federal Reserve Board proposed a set of prudential standards (“Regulation YY”) that would apply to non-bank SIFIs, including enhanced risk-based capital requirements, leverage limits, liquidity requirements, single counterparty exposure limits, governance requirements for risk management, stress test requirements, special debt-to-equity limits for certain companies, early remediation procedures, and recovery and resolution planning. The Federal Reserve Board’s proposal contemplates that these standards would be subject to the authority of the Federal Reserve Board to determine, on its own or in response to a recommendation by the FSOC, to tailor the application of the enhanced standards to different companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities, size, and any other risk-related factors that the Federal Reserve Board deems appropriate. As described below, the Federal Reserve Board has finalized a number of these requirements for bank holding companies and foreign banking organizations with total consolidated assets of $50 billion or more, but generally has not taken further action to implement most of these requirements for non-bank SIFIs.
In October 2013, the Federal Reserve Board proposed specific regulations relating to liquidity requirements for banking organizations and some non-bank SIFIs, although the rules would not apply to non-bank SIFIs with substantial insurance operations. On February 18, 2014, the Federal Reserve Board adopted amendments to Regulation YY to implement certain of the enhanced prudential standards for bank holding companies and foreign banking organizations with total consolidated assets of $50 billion or more. The enhanced prudential standards include risk-based and leverage capital requirements, liquidity standards, requirements for overall risk management (including establishing a risk committee), stress-test requirements, and a 15-to-1 debt-to-equity limit for these companies. The amendments also establish risk committee requirements and capital stress testing requirements for certain bank holding companies and foreign banking organizations with total consolidated assets of $10 billion or more. While Regulation YY, as originally proposed, would have applied to non-bank SIFIs, the final rule does not. The Federal Reserve Board indicated that it plans to apply enhanced prudential standards to non-bank SIFIs by rule or order, enabling it to more appropriately tailor the standards to non-bank SIFIs and will provide affected non-bank SIFIs with notice and the opportunity to comment prior to determination of their enhanced prudential standards. Accordingly, the manner in which MetLife, Inc. would be regulated, if it is designated as a non-bank SIFI, remains unclear.
The Federal Reserve Board has stated that it believes other provisions of Dodd-Frank, known as the Collins Amendment, constrain its ability to tailor capital standards for non-bank SIFIs. If the Federal Reserve Board requires insurers that are non-bank SIFIs to comply with capital standards or regimes (such as the Basel capital rules that were developed for banks) that do not take into account the insurance business model and the differences between banks and insurers, the business and competitive position of such insurer non-bank SIFIs could be materially and adversely affected. See “Risk Factors — Regulatory and Legal Risks — Our Insurance and Brokerage Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth — Insurance Regulation - U.S. — Federal Regulatory Agencies.” On September 30, 2014, the Federal Reserve Board announced that it will begin a quantitative impact study (“QIS”) to evaluate the potential effects of its revised regulatory capital framework on savings and loan holding companies and non-bank financial companies supervised by the Federal Reserve Board that are substantially engaged in insurance underwriting activity (insurance holding companies). The Federal Reserve Board is conducting the QIS in order to enable it to design a capital framework for insurance holding companies it supervises that is in compliance with the Collins Amendment. Legislation that would clarify that the Federal Reserve Board may tailor capital rules for insurer non-bank SIFIs has been adopted by the U.S. Senate and the House of Representatives; however, the bills passed by the Senate and House of Representatives differ, and Congress must take action to reconcile the bills before they can be sent to the President for signature.
The stress testing requirements have been implemented and require non-bank SIFIs (as well as bank holding companies with $50 billion or more of assets) to undergo three stress tests each year: an annual supervisory stress test conducted by the Federal Reserve Board and two company-run stress tests (an annual test which coincides with the timing of the supervisory stress test, and a mid-cycle test). Companies will be required to take the results of the stress tests into consideration in their annual capital planning and resolution and recovery planning. If MetLife, Inc. is designated by the FSOC as a non-bank SIFI, its competitive position and its ability to pay dividends, repurchase common stock or other securities or engage in other transactions that could affect its capital or need for capital could be adversely affected by any additional capital requirements that might be imposed as a result of the stress testing requirements, as well as enhanced prudential standards, other measures imposed as a result of the enactment of Dodd-Frank and other regulatory initiatives.
Non-bank SIFIs would also be required to submit a resolution plan setting forth how the company could be resolved under the Bankruptcy Code in the event of material financial distress. Resolution plans would have to be resubmitted annually and promptly following any event, occurrence, change in conditions or circumstances, or other change that results in, or could reasonably be foreseen to have, a material effect on the resolution plan. A failure to submit a “credible” resolution plan could result in the imposition of a variety of measures, including additional capital, leverage, or liquidity requirements, and forced divestiture of assets or operations. If the FSOC determines to make a final designation of MetLife, Inc. as a non-bank SIFI, MetLife, Inc. would be required to submit a resolution plan by July 1, 2016, unless the Federal Reserve Board and FDIC require a different due date.
In addition, if it were determined that MetLife, Inc. posed a substantial threat to U.S. financial stability, the applicable federal regulators would have the right to require it to take one or more other mitigating actions to reduce that risk, including limiting its ability to merge with or acquire another company, terminating activities, restricting its ability to offer financial products or requiring it to sell assets or off-balance sheet items to unaffiliated entities. Enhanced standards would also permit, but not require, regulators to establish requirements with respect to contingent capital, enhanced public disclosures and short-term debt limits. These standards are described as being more stringent than those otherwise imposed on bank holding companies; however, the Federal Reserve Board is permitted to apply them on an institution-by-institution basis, depending on its determination of the institution’s level of risk.
Designation Process and Policy Measures that May Apply to Global Systemically Important Insurers
The International Association of Insurance Supervisors (“IAIS”), an association of insurance supervisors and regulators and a member of the Financial Stability Board (“FSB”), an international entity established to coordinate, develop and promote regulatory, supervisory and other financial sector policies in the interest of financial stability, is participating in the FSB’s initiative to identify global systemically important financial institutions and has devised and published a methodology to assess the systemic relevance of global insurers and a framework of policy measures to be applied to global systemically important insurers (“G-SIIs”). On November 6, 2014, the FSB published its updated list of G-SIIs, based on the IAIS’ assessment methodology, which includes MetLife, Inc. The FSB will continue to update the list annually.
For G-SIIs which engage in activities deemed to be systemically risky, the framework of policy measures calls for imposition of additional capital (higher loss absorbency (“HLA”)) requirements on those activities. Given the absence of a common global base on which to calculate an HLA for insurers, the FSB directed the IAIS to develop basic capital requirements (“BCR”). On October 23, 2014, the IAIS released the final BCR approved by the FSB for submission to the Group of Twenty (20 major world economies) leaders in November 2014. The BCR will apply to G-SIIs in 2015. Work on HLA development is in very early stages and how the HLA requirements will be computed remains unclear. The HLA requirements are required to be finalized by the end of 2015. From 2015 to 2018, reporting will be on a confidential basis and subject to refinement by the IAIS. HLA requirements are to be applied in 2019 to companies designated as G-SIIs in 2017. In addition, the IAIS proposes to develop a risk-based global insurance capital standard by 2016 which will apply to all internationally active insurance groups, including G-SIIs, with implementation to begin in 2019 after two years of testing and refinement. The FSB and IAIS propose that national authorities ensure that any insurers identified as G-SIIs be subject to additional requirements consistent with the framework of policy measures, which include preparation of a systemic risk management plan, preparation of a recovery and resolution plan, enhanced liquidity planning and management, more intensive supervision, closer coordination among regulators through global supervisory colleges led by a regulator with group-wide supervisory authority, and a policy bias in favor of separation of non-traditional insurance and non-insurance activities from traditional insurance activities. The IAIS policy measures would need to be implemented by legislation or regulation in each applicable jurisdiction, and the impact on MetLife, Inc. and other designated G-SIIs is uncertain.
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the Interim Condensed Consolidated Financial Statements. The most critical estimates include those used in determining:
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(i) | liabilities for future policy benefits and the accounting for reinsurance; |
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(ii) | capitalization and amortization of DAC and the establishment and amortization of VOBA; |
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(iii) | estimated fair values of investments in the absence of quoted market values; |
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(iv) | investment impairments; |
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(v) | estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation; |
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(vi) | measurement of employee benefit plan liabilities; |
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(vii) | measurement of income taxes and the valuation of deferred tax assets; and |
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(viii) | liabilities for litigation and regulatory matters. |
In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our business and operations. Actual results could differ from these estimates.
The above critical accounting estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates” and Note 1 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report.
Economic Capital
Economic capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model accounts for the unique and specific nature of the risks inherent in our business.
Our economic capital model aligns segment allocated equity with emerging standards and consistent risk principles. The model applies statistics-based risk evaluation principles to the material risks to which the Company is exposed. These consistent risk principles include calibrating required economic capital shock factors to a specific confidence level and time horizon and applying an industry standard method for the inclusion of diversification benefits among risk types. Economic capital-based risk estimation is an evolving science and industry best practices have emerged and continue to evolve. Areas of evolving industry best practices include stochastic liability valuation techniques, alternative methodologies for the calculation of diversification benefits, and the quantification of appropriate shock levels. MetLife management is responsible for the on-going production and enhancement of the economic capital model and reviews its approach periodically to ensure that it remains consistent with emerging industry practice standards.
Segment net investment income is credited or charged based on the level of allocated equity; however, changes in allocated equity do not impact our consolidated net investment income, operating earnings or income (loss) from continuing operations, net of income tax.
Results of Operations
Consolidated Results
Sales experience was mixed across our businesses for the three months ended September 30, 2014 as compared to the same period of 2013. Despite the slow economic recovery in the U.S., our group term life, dental and disability businesses generated premium growth through stronger sales and improved persistency, with the dental business also benefiting from the positive impact of pricing actions on existing business. The introduction of new products also drove growth in our voluntary benefits business. The sustained low interest rate environment has contributed to the underfunding of pension plans; as a result, we experienced a decrease in sales of pension closeouts. Competitive pricing and a relative increase in participation drove an increase in structured settlement sales. Income annuity sales were strong in the current period, rebounding from the discontinuance of one contract in the prior period. Sales of variable annuities declined as we continue to focus on pricing discipline and risk management. Retail life sales were also lower, partially driven by the discontinuance of all but one of our secondary guarantees on universal life products.
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
Revenues | | | | | | | |
Premiums | $ | 5,087 |
| | $ | 4,804 |
| | $ | 15,415 |
| | $ | 14,563 |
|
Universal life and investment-type product policy fees | 623 |
| | 596 |
| | 1,806 |
| | 1,773 |
|
Net investment income | 2,990 |
| | 2,875 |
| | 8,931 |
| | 8,764 |
|
Other revenues | 440 |
| | 415 |
| | 1,303 |
| | 1,260 |
|
Net investment gains (losses) | 163 |
| | (99 | ) | | 74 |
| | (11 | ) |
Net derivative gains (losses) | 554 |
| | (573 | ) | | 617 |
| | (933 | ) |
Total revenues | 9,857 |
| | 8,018 |
| | 28,146 |
| | 25,416 |
|
Expenses | | | | | | | |
Policyholder benefits and claims and policyholder dividends | 6,017 |
| | 5,766 |
| | 18,234 |
| | 17,388 |
|
Interest credited to policyholder account balances | 536 |
| | 551 |
| | 1,610 |
| | 1,705 |
|
Capitalization of DAC | (106 | ) | | (132 | ) | | (313 | ) | | (438 | ) |
Amortization of DAC and VOBA | 88 |
| | 71 |
| | 482 |
| | 231 |
|
Interest expense on debt | 38 |
| | 38 |
| | 114 |
| | 115 |
|
Other expenses | 1,444 |
| | 1,464 |
| | 3,989 |
| | 4,371 |
|
Total expenses | 8,017 |
| | 7,758 |
| | 24,116 |
| | 23,372 |
|
Income (loss) from continuing operations before provision for income tax | 1,840 |
| | 260 |
| | 4,030 |
| | 2,044 |
|
Provision for income tax expense (benefit) | 537 |
| | 18 |
| | 1,150 |
| | 483 |
|
Income (loss) from continuing operations, net of income tax | 1,303 |
| | 242 |
| | 2,880 |
| | 1,561 |
|
Income (loss) from discontinued operations, net of income tax | — |
| | — |
| | (3 | ) | | — |
|
Net income (loss) | 1,303 |
| | 242 |
| | 2,877 |
| | 1,561 |
|
Less: Net income (loss) attributable to noncontrolling interests | (7 | ) | | (5 | ) | | (6 | ) | | (3 | ) |
Net income (loss) attributable to Metropolitan Life Insurance Company | $ | 1,310 |
| | $ | 247 |
| | $ | 2,883 |
| | $ | 1,564 |
|
Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013
During the three months ended September 30, 2014, income (loss) from continuing operations, before provision for income tax, increased $1.6 billion ($1.1 billion, net of income tax) from the prior period primarily driven by favorable changes in net derivative gains (losses), operating earnings and net investment gains (losses). Also included in income (loss) from continuing operations, before provision for income tax, is a $183 million ($119 million, net of income tax) increase as a result of our annual assumption review related to reserves and DAC.
We manage our investment portfolio using disciplined asset/liability management principles, focusing on cash flow and duration to support our current and future liabilities. Our intent is to match the timing and amount of liability cash outflows with invested assets that have cash inflows of comparable timing and amount, while optimizing risk-adjusted net investment income and risk-adjusted total return. Our investment portfolio is heavily weighted toward fixed income investments, with over 80% of our portfolio invested in fixed maturity securities and mortgage loans. These securities and loans have varying maturities and other characteristics which cause them to be generally well suited for matching the cash flow and duration of insurance liabilities. Other invested asset classes, including, but not limited to, equity securities, other limited partnership interests and real estate and real estate joint ventures, provide additional diversification and opportunity for long-term yield enhancement in addition to supporting the cash flow and duration objectives of our investment portfolio. We also use derivatives as an integral part of our management of the investment portfolio to hedge certain risks, including changes in interest rates, foreign currency exchange rates, credit spreads and equity market levels. Additional considerations for our investment portfolio include current and expected market conditions and expectations for changes within our specific mix of products and business segments.
The composition of the investment portfolio of each business segment is tailored to the specific characteristics of its insurance liabilities, causing certain portfolios to be shorter in duration and others to be longer in duration. Accordingly, certain portfolios are more heavily weighted in longer duration, higher yielding fixed maturity securities, or certain sub-sectors of fixed maturity securities, than other portfolios.
We purchase investments to support our insurance liabilities and not to generate net investment gains and losses. However, net investment gains and losses are incurred and can change significantly from period to period due to changes in external influences, including changes in market factors such as interest rates, foreign currency exchange rates, credit spreads and equity markets; counterparty specific factors such as financial performance, credit rating and collateral valuation; and internal factors such as portfolio rebalancing. Changes in these factors from period to period can significantly impact the levels of both impairments and realized gains and losses on investments sold.
We use freestanding interest rate, credit and currency derivatives to hedge certain invested assets and insurance liabilities. Certain of these hedges are designated and qualify as accounting hedges, which reduce volatility in earnings. For those hedges not designated as accounting hedges, changes in market factors lead to the recognition of fair value changes in net derivative gains (losses) generally without an offsetting gain or loss recognized in earnings for the item being hedged which creates volatility in earnings.
Certain direct variable annuity products with guaranteed minimum benefits contain embedded derivatives that are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value recorded in net derivative gains (losses). We hedge the market and other risks inherent in these variable annuity guarantees through reinsurance. Ceded reinsurance of direct variable annuity products with guaranteed minimum benefits generally contain embedded derivatives that are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value recorded in net derivative gains (losses). The valuation of these embedded derivatives includes a nonperformance risk adjustment, which is unhedged, and can be a significant driver of net derivative gains (losses) and volatility in earnings, but does not have an economic impact on us.
Direct and ceded variable annuity embedded derivatives are referred to as “VA program derivatives” in the following table. All other embedded derivatives and all freestanding derivatives that are economic hedges of certain invested assets and insurance liabilities are referred to as “non-VA program derivatives” in the following table. The table below presents the impact on net derivative gains (losses) from non-VA program derivatives and VA program derivatives:
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| | | | | | | |
| Three Months Ended September 30, |
| 2014 | | 2013 |
| (In millions) |
Non-VA program derivatives | | | |
Interest rate | $ | 72 |
| | $ | (254 | ) |
Foreign currency exchange rate | 230 |
| | (316 | ) |
Credit | (6 | ) | | 53 |
|
Non-VA embedded derivatives | 83 |
| | 84 |
|
Total non-VA program derivatives | 379 |
| | (433 | ) |
VA program derivatives | | | |
Embedded derivatives-direct guarantees: | | | |
Market risks | (62 | ) | | 262 |
|
Nonperformance risk | 5 |
| | (9 | ) |
Other risks | 13 |
| | (39 | ) |
Total | (44 | ) | | 214 |
|
Embedded derivatives-ceded reinsurance: | | | |
Market and other risks | 240 |
| | (403 | ) |
Nonperformance risk | (21 | ) | | 49 |
|
Total | 219 |
| | (354 | ) |
Total VA program derivatives | 175 |
| | (140 | ) |
Net derivative gains (losses) | $ | 554 |
| | $ | (573 | ) |
The favorable change in net derivative gains (losses) on non-VA program derivatives was $812 million ($528 million, net of income tax). This was primarily due to the strengthening of the U.S. dollar relative to other key currencies, favorably impacting foreign currency swaps and forwards that primarily hedge foreign denominated fixed maturity securities. In addition, long-term interest rates decreased in the current period but increased in the prior period favorably impacting receive-fixed interest rate swaps. These freestanding derivatives were primarily hedging long duration liability portfolios. Because certain of these hedging strategies are not designated or do not qualify as accounting hedges, the changes in the estimated fair value of these freestanding derivatives are recognized in net derivative gains (losses) without an offsetting gain or loss recognized in earnings for the item being hedged.
The favorable change in net derivative gains (losses) on VA program derivatives was $315 million ($205 million, net of income tax). This was due to a favorable change of $371 million ($241 million, net of income tax) related to market and other risks on direct variable annuity embedded derivatives, net of the impact of market and other risks on the ceded reinsurance embedded derivatives, partially offset by an unfavorable change of $56 million ($36 million, net of income tax) related to the nonperformance risk adjustment on the ceded variable annuity embedded derivatives, net of the impact of the nonperformance risk adjustment on the direct variable annuity embedded derivatives.
The unfavorable change in the nonperformance risk adjustment on the ceded variable annuity embedded derivatives of $70 million ($45 million, net of income tax) was due to an unfavorable change of $63 million, before income tax, due to the impact of changes in capital market inputs, such as long-term interest rates and key equity index levels, on the variable annuity guarantees, as well as an unfavorable change of $7 million, before income tax, related to changes in our own credit spread. We calculate the nonperformance risk adjustment as the change in the embedded derivative discounted at the risk-adjusted rate (which includes our own credit spread to the extent that the embedded derivative is in-the-money) less the change in the embedded derivative discounted at the risk-free rate. The favorable change in the nonperformance risk adjustment on the direct variable annuity embedded derivatives of $14 million ($9 million, net of income tax) was due to the impact of changes in capital market inputs, such as long-term interest rates and key equity index levels, on the variable annuity guarantees.
When equity index levels decrease in isolation, the direct variable annuity guarantees become more valuable to policyholders, which results in an increase in the undiscounted embedded derivative liability. Discounting this unfavorable change by the risk-adjusted rate yields a smaller loss than by discounting at the risk-free rate, thus creating a gain from including an adjustment for nonperformance risk on the direct variable annuity embedded derivatives. The opposite impact occurs with respect to the nonperformance risk adjustment on the ceded variable annuity guarantees.
When the risk-free interest rate decreases in isolation, discounting the embedded derivative liability produces a higher valuation of the liability than if the risk-free interest rate had remained constant. Discounting this unfavorable change by the risk-adjusted rate yields a smaller loss than by discounting at the risk-free rate, thus creating a gain from including an adjustment for nonperformance risk on the direct variable annuity embedded derivatives. The opposite impact occurs with respect to the nonperformance risk adjustment on the ceded variable annuity guarantees.
When our own credit spread increases in isolation, discounting the embedded derivative liability produces a lower valuation of the liability than if our own credit spread had remained constant. As a result, a gain is created from including an adjustment for nonperformance risk on the direct variable annuity embedded derivatives. The opposite impact occurs with respect to the nonperformance risk adjustment on the ceded variable annuity guarantees when the reinsurer’s credit spread increases in isolation. For each of these primary market drivers, the opposite effect occurs when they move in the opposite direction.
Generally, a higher portion of the ceded reinsurance for guaranteed minimum income benefits (“GMIBs”) is accounted for as an embedded derivative as compared to the direct guarantees since the settlement provisions of the reinsurance agreements generally meet the accounting criteria of “net settlement.” This mismatch in accounting can lead to significant volatility in earnings, even though the risks inherent in these direct guarantees are fully covered by the ceded reinsurance.
The foregoing favorable change in net derivative gains (losses) on VA program derivatives of $315 million ($205 million, net of income tax) was primarily driven by changes in market factors.
The primary changes in market factors are summarized as follows:
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• | Long-term interest rates decreased in the current period and increased in the prior period contributing to a favorable change in our ceded reinsurance assets and an unfavorable change in our direct embedded derivatives. |
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• | Key equity index levels were mixed in the current period but increased in the prior period, contributing to an unfavorable change in our direct embedded derivatives and a favorable change in our ceded reinsurance assets. |
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• | Key equity volatility measures increased in the current period and decreased in the prior period, contributing to a favorable change in our ceded reinsurance assets and an unfavorable change in our direct embedded derivatives. |
The favorable change in net investment gains (losses) of $262 million ($170 million, net of income tax) reflects a favorable change in other gains (losses), primarily driven by the impact of changes in foreign currency exchange rates on funding agreement liabilities. An improvement in investment portfolio gains (losses) was the result of higher net gains on real estate and real estate joint ventures and lower net losses on sales of fixed maturity securities.
Results for the current period include a $172 million ($112 million, net of income tax) benefit, net of reinsurance, associated with our annual assumption review related to reserves and DAC, of which $57 million ($37 million, net of income tax) was recognized in net derivative gains (losses). Of the $172 million benefit, $130 million ($85 million, net of income tax) was associated with DAC and $42 million ($27 million, net of income tax) was related to reserves. With respect to the $57 million gain recorded in net derivative gains (losses), a $68 million gain on direct variable annuity embedded derivatives was partially offset by an $11 million loss on ceded reinsurance embedded derivatives. The $68 million gain on direct variable annuity embedded derivatives was included within the other risks caption in the table above. Of the $11 million loss on ceded reinsurance embedded derivatives, a $12 million loss was included within the nonperformance risk caption in the table above and a $1 million gain was included within the market and other risks caption in the table above.
As a result of our annual assumption review, changes were made to economic, policyholder behavior mortality and other assumptions. The most significant impacts were in the Retail Life and Annuity blocks of business and are summarized as follows:
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• | Changes in economic assumptions resulted in reserve decreases, and favorable DAC resulting in a net benefit of $53 million ($35 million, net of income tax). |
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• | Changes to policyholder behavior and mortality assumptions resulted in reserve decreases, partially offset by unfavorable DAC, resulting in a net benefit of $31 million ($20 million, net of income tax). |
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• | The remaining updates resulted in reserve increases, which were more than offset by favorable DAC, resulting in a net benefit of $88 million ($57 million, net of income tax). The most notable update was related to our projection of closed block results. |
Results for the prior period include an $11 million ($7 million, net of income tax) charge, net of reinsurance, associated with our annual assumption review related to reserves and DAC, of which $41 million ($27 million, net of income tax) was recognized in net derivative gains (losses). Of the $11 million charge, $41 million ($27 million, net of income tax) was related to reserves, offset by a $30 million ($20 million, net of income tax) charge related to DAC. With respect to the $41 million charge recorded in net derivatives gains (losses), a $44 million loss on direct variable annuity embedded derivatives was included within the other risks caption in the table above and a $3 million gain on ceded reinsurance embedded derivatives was included within the market risks and other risks caption in the table above.
Income tax expense for the three months ended September 30, 2014 was $537 million, or 29% of income (loss) from continuing operations before provision for income tax, compared with $18 million, or 7% of income (loss) from continuing operations before provision for income tax, for the three months ended September 30, 2013. The Company’s third quarter 2014 and 2013 effective tax rates differ from the U.S. statutory rate of 35% primarily due to non-taxable investment income and tax credits for low income housing. The current period includes a $5 million tax charge related to an annual fee, effective January 1, 2014, imposed on health insurers by the Patient Protection and Affordable Care Act (“PPACA”), which was not deductible for income tax purposes.
As more fully described in “— Non-GAAP and Other Financial Disclosures,” we use operating earnings, which does not equate to income (loss) from continuing operations, net of income tax, as determined in accordance with GAAP, to analyze our performance, evaluate segment performance, and allocate resources. We believe that the presentation of operating earnings, as we measure it for management purposes, enhances the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of the business. Operating earnings should not be viewed as a substitute for income (loss) from continuing operations, net of income tax. Operating earnings increased $204 million, net of income tax, to $929 million, net of income tax, for the three months ended September 30, 2014 from $725 million, net of income tax, for the three months ended September 30, 2013.
Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013
During the nine months ended September 30, 2014, income (loss) from continuing operations, before provision for income tax, increased $2.0 billion ($1.3 billion, net of income tax) from the prior period primarily driven by favorable changes in net derivative gains (losses) and operating earnings. Also included in income (loss) from continuing operations, before provision for income tax, is a $183 million ($119 million, net of income tax) increase as a result of our annual assumption review related to reserves and DAC.
Direct and ceded variable annuity embedded derivatives are referred to as “VA program derivatives” in the following table. All other embedded derivatives and all freestanding derivatives that are economic hedges of certain invested assets and insurance liabilities are referred to as “non-VA program derivatives” in the following table. The table below presents the impact on net derivative gains (losses) from non-VA program derivatives and VA program derivatives:
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2014 | | 2013 |
| (In millions) |
Non-VA program derivatives | | | |
Interest rate | $ | 385 |
| | $ | (1,166 | ) |
Foreign currency exchange rate | 218 |
| | (88 | ) |
Credit | 31 |
| | 106 |
|
Non-VA embedded derivatives | (378 | ) | | 726 |
|
Total non-VA program derivatives | 256 |
| | (422 | ) |
VA program derivatives | | | |
Embedded derivatives-direct guarantees: | | | |
Market risks | 45 |
| | 711 |
|
Nonperformance risk | 5 |
| | (41 | ) |
Other risks | (49 | ) | | 9 |
|
Total | 1 |
| | 679 |
|
Embedded derivatives-ceded reinsurance: | | | |
Market and other risks | 382 |
| | (1,304 | ) |
Nonperformance risk | (22 | ) | | 114 |
|
Total | 360 |
| | (1,190 | ) |
Total VA program derivatives | 361 |
| | (511 | ) |
Net derivative gains (losses) | $ | 617 |
| | $ | (933 | ) |
The favorable change in net derivative gains (losses) on non-VA program derivatives was $678 million ($441 million, net of income tax). This was primarily due to long-term interest rates decreasing in the current period and increasing in the prior period favorably impacting receive-fixed interest rate swaps and interest rate swaptions. These freestanding derivatives were primarily hedging long duration liability portfolios. The strengthening of the U.S. dollar relative to other key currencies favorably impacted foreign currency swaps and forwards that primarily hedge foreign denominated fixed maturity securities. Because certain of these hedging strategies are not designated or do not qualify as accounting hedges, the changes in the estimated fair value of these freestanding derivatives are recognized in net derivative gains (losses) without an offsetting gain or loss recognized in earnings for the item being hedged. A change in the value of underlying assets unfavorably impacted non-VA embedded derivatives related to affiliated ceded reinsurance written on a coinsurance with funds withheld basis.
The favorable change in net derivative gains (losses) on VA program derivatives was $872 million ($567 million, net of income tax). This was due to a favorable change of $962 million ($625 million, net of income tax) related to market and other risks on direct variable annuity embedded derivatives, net of the impact of market and other risks on the ceded reinsurance embedded derivatives, partially offset by an unfavorable change of $90 million ($58 million, net of income tax) related to the nonperformance risk adjustment on the ceded variable annuity embedded derivatives, net of the impact of the nonperformance risk adjustment on the direct variable annuity embedded derivatives.
The unfavorable change in the nonperformance risk adjustment on the ceded variable annuity embedded derivatives of $136 million ($88 million, net of income tax) was due to an unfavorable change of $121 million, before income tax, as a result of the impact of changes in capital market inputs, such as long-term interest rates and key equity index levels, on the variable annuity guarantees, as well as an unfavorable change of $15 million, before income tax, related to changes in our own credit spread. The favorable change in the nonperformance risk adjustment on the direct variable annuity embedded derivatives of $46 million ($30 million, net of income tax) was primarily due to a favorable change of $45 million, before income tax, as a result of the impact of changes in capital market inputs, such as long-term interest rates and key equity index levels, on the variable annuity guarantees.
The foregoing favorable change in net derivative gains (losses) on VA program derivatives of $872 million ($567 million, net of income tax) was primarily driven by changes in market factors. The primary changes in market factors are summarized as follows:
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• | Long-term interest rates decreased in the current period and increased in the prior period, contributing to a favorable change in our ceded reinsurance assets and an unfavorable change in our direct embedded derivatives. |
| |
• | Key equity index levels increased less in the current period than in the prior period, contributing to a favorable change in our ceded reinsurance assets and an unfavorable change in our direct embedded derivatives. |
| |
• | Key equity volatility measures decreased less in the current period than in the prior period, contributing to a favorable change in our ceded reinsurance assets and an unfavorable change in our direct embedded derivatives. |
The favorable change in net investment gains (losses) of $85 million ($55 million, net of income tax) reflects a favorable change in other gains (losses) primarily driven by the impact of changes in foreign currency exchange rates on funding agreement liabilities and, to a lesser extent, a favorable change in investment portfolio gains (losses).
Results for the current period include a $172 million ($112 million, net of income tax) benefit, net of reinsurance, associated with our annual assumption review related to reserves and DAC, of which $57 million ($37 million, net of income tax) was recognized in net derivative gains (losses). Of the $172 million impact, $130 million ($85 million, net of income tax) was associated with DAC and $42 million ($27 million, net of income tax) was related to reserves. With respect to the $57 million gain recorded in net derivative gains (losses), a $68 million gain on direct variable annuity embedded derivatives was partially offset by an $11 million loss on ceded reinsurance embedded derivatives. The $68 million gain on direct variable annuity embedded derivatives was included within the other risks caption in the table above. Of the $11 million loss on ceded reinsurance embedded derivatives, a $12 million loss was included within the nonperformance risk caption in the table above and a $1 million gain was included within the market and other risks caption in the table above.
As a result of our annual assumption review, changes were made to economic, policyholder behavior, mortality and other assumptions. The most significant impacts were in the Retail Life and Annuity blocks of business and are summarized as follows:
| |
• | Changes in economic assumptions resulted in reserve decreases, and favorable DAC, resulting in a net benefit of $53 million ($35 million, net of income tax). |
| |
• | Changes to policyholder behavior and mortality assumptions resulted in reserve decreases, partially offset by unfavorable DAC, resulting in a net benefit of $31 million ($20 million, net of income tax). |
| |
• | The remaining updates resulted in reserve increases, which were more than offset by favorable DAC, resulting in a net benefit of $88 million ($57 million, net of income tax). The most notable update was related to our projection of closed block results. |
Results for the prior period include an $11 million ($7 million, net of income tax) charge, net of reinsurance, associated with our annual assumption review related to reserves and DAC, of which $41 million ($27 million, net of income tax) was recognized in net derivative gains (losses). Of the $11 million charge, $41 million ($27 million, net of income tax) was related to reserves, offset by a $30 million ($20 million, net of income tax) charge related to DAC. With respect to the $41 million charge recorded in net derivatives gains (losses), a $44 million loss on direct variable annuity embedded derivatives was included within the other risks caption in the table above and a $3 million gain on ceded reinsurance embedded derivatives was included within the market risks and other risks caption in the table above.
Income tax expense for the nine months ended September 30, 2014 was $1.2 billion, or 29% of income (loss) from continuing operations before provision for income tax, compared with $483 million, or 24% of income (loss) from continuing operations before provision for income tax, for the nine months ended September 30, 2013. The Company’s 2014 and 2013 effective tax rates differ from the U.S. statutory rate of 35% primarily due to non-taxable investment income and tax credits for low income housing. The 2014 period includes a $15 million tax charge related to the PPACA fee, which was not deductible for income tax purposes.
On June 11, 2014, the Internal Revenue Service (“IRS”) concluded its audit of the Company’s tax returns for the years 2003 through 2006 and issued a Revenue Agent’s Report. The Company agreed with certain tax adjustments and protested other tax adjustments to IRS Appeals. The protest was filed on July 10, 2014. Management believes it has established adequate tax liabilities and final resolution of the audit for the years 2003 through 2006 is not expected to have a material impact on the Company’s financial statements.
Operating earnings increased $466 million, net of income tax, to $2.7 billion, net of income tax, for the nine months ended September 30, 2014 from $2.2 billion, net of income tax, for the nine months ended September 30, 2013.
Reconciliation of income (loss) from continuing operations, net of income tax, to operating earnings
Three Months Ended September 30, 2014 |
| | | | | | | | | | | | | | | | | | | |
| Retail | | Group, Voluntary & Worksite Benefits | | Corporate Benefit Funding | | Corporate & Other | | Total |
| (In millions) |
Income (loss) from continuing operations, net of income tax | $ | 508 |
| | $ | 234 |
| | $ | 458 |
| | $ | 103 |
| | $ | 1,303 |
|
Less: Net investment gains (losses) | (2 | ) | | (10 | ) | | 188 |
| | (13 | ) | | 163 |
|
Less: Net derivative gains (losses) | 314 |
| | 106 |
| | 17 |
| | 117 |
| | 554 |
|
Less: Other adjustments to continuing operations (1) | (74 | ) | | (42 | ) | | (5 | ) | | (20 | ) | | (141 | ) |
Less: Provision for income tax (expense) benefit | (84 | ) | | (18 | ) | | (70 | ) | | (30 | ) | | (202 | ) |
Operating earnings | $ | 354 |
| | $ | 198 |
| | $ | 328 |
| | $ | 49 |
| | $ | 929 |
|
Three Months Ended September 30, 2013
|
| | | | | | | | | | | | | | | | | | | |
| Retail | | Group, Voluntary & Worksite Benefits | | Corporate Benefit Funding | | Corporate & Other | | Total |
| (In millions) |
Income (loss) from continuing operations, net of income tax | $ | 72 |
| | $ | 42 |
| | $ | 114 |
| | $ | 14 |
| | $ | 242 |
|
Less: Net investment gains (losses) | (2 | ) | | (3 | ) | | (20 | ) | | (74 | ) | | (99 | ) |
Less: Net derivative gains (losses) | (287 | ) | | (174 | ) | | (154 | ) | | 42 |
| | (573 | ) |
Less: Other adjustments to continuing operations (1) | (13 | ) | | (44 | ) | | 1 |
| | (16 | ) | | (72 | ) |
Less: Provision for income tax (expense) benefit | 105 |
| | 78 |
| | 61 |
| | 17 |
| | 261 |
|
Operating earnings | $ | 269 |
| | $ | 185 |
| | $ | 226 |
| | $ | 45 |
| | $ | 725 |
|
__________________
| |
(1) | See definitions of operating revenues and operating expenses under “— Non-GAAP and Other Financial Disclosures” for the components of such adjustments. |
Nine Months Ended September 30, 2014
|
| | | | | | | | | | | | | | | | | | | |
| Retail | | Group, Voluntary & Worksite Benefits | | Corporate Benefit Funding | | Corporate & Other | | Total |
| (In millions) |
Income (loss) from continuing operations, net of income tax | $ | 1,247 |
| | $ | 647 |
| | $ | 1,035 |
| | $ | (49 | ) | | $ | 2,880 |
|
Less: Net investment gains (losses) | 9 |
| | (11 | ) | | 80 |
| | (4 | ) | | 74 |
|
Less: Net derivative gains (losses) | 484 |
| | 294 |
| | 109 |
| | (270 | ) | | 617 |
|
Less: Other adjustments to continuing operations (1) | (274 | ) | | (123 | ) | | 4 |
| | (25 | ) | | (418 | ) |
Less: Provision for income tax (expense) benefit | (77 | ) | | (56 | ) | | (68 | ) | | 104 |
| | (97 | ) |
Operating earnings | $ | 1,105 |
| | $ | 543 |
| | $ | 910 |
| | $ | 146 |
| | $ | 2,704 |
|
Nine Months Ended September 30, 2013
|
| | | | | | | | | | | | | | | | | | | |
| Retail | | Group, Voluntary & Worksite Benefits | | Corporate Benefit Funding | | Corporate & Other | | Total |
| (In millions) |
Income (loss) from continuing operations, net of income tax | $ | 303 |
| | $ | 136 |
| | $ | 556 |
| | $ | 566 |
| | $ | 1,561 |
|
Less: Net investment gains (losses) | 27 |
| | (15 | ) | | (29 | ) | | 6 |
| | (11 | ) |
Less: Net derivative gains (losses) | (709 | ) | | (615 | ) | | (238 | ) | | 629 |
| | (933 | ) |
Less: Other adjustments to continuing operations (1) | (25 | ) | | (129 | ) | | 62 |
| | (21 | ) | | (113 | ) |
Less: Provision for income tax (expense) benefit | 247 |
| | 266 |
| | 72 |
| | (205 | ) | | 380 |
|
Operating earnings | $ | 763 |
| | $ | 629 |
| | $ | 689 |
| | $ | 157 |
| | $ | 2,238 |
|
__________________
| |
(1) | See definitions of operating revenues and operating expenses under “— Non-GAAP and Other Financial Disclosures” for the components of such adjustments. |
Reconciliation of GAAP revenues to operating revenues and GAAP expenses to operating expenses
Three Months Ended September 30, 2014
|
| | | | | | | | | | | | | | | | | | | |
| Retail | | Group, Voluntary & Worksite Benefits | | Corporate Benefit Funding | | Corporate & Other | | Total |
| (In millions) |
Total revenues | $ | 3,082 |
| | $ | 4,400 |
| | $ | 2,016 |
| | $ | 359 |
| | $ | 9,857 |
|
Less: Net investment gains (losses) | (2 | ) | | (10 | ) | | 188 |
| | (13 | ) | | 163 |
|
Less: Net derivative gains (losses) | 314 |
| | 106 |
| | 17 |
| | 117 |
| | 554 |
|
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
|
Less: Other adjustments to revenues (1) | (58 | ) | | (41 | ) | | (4 | ) | | — |
| | (103 | ) |
Total operating revenues | $ | 2,828 |
| | $ | 4,345 |
| | $ | 1,815 |
| | $ | 255 |
| | $ | 9,243 |
|
Total expenses | $ | 2,299 |
| | $ | 4,033 |
| | $ | 1,313 |
| | $ | 372 |
| | $ | 8,017 |
|
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | (10 | ) | | — |
| | — |
| | — |
| | (10 | ) |
Less: Other adjustments to expenses (1) | 26 |
| | — |
| | 2 |
| | 20 |
| | 48 |
|
Total operating expenses | $ | 2,283 |
| | $ | 4,033 |
| | $ | 1,311 |
| | $ | 352 |
| | $ | 7,979 |
|
Three Months Ended September 30, 2013
|
| | | | | | | | | | | | | | | | | | | |
| Retail | | Group, Voluntary & Worksite Benefits | | Corporate Benefit Funding | | Corporate & Other | | Total |
| (In millions) |
Total revenues | $ | 2,393 |
| | $ | 3,876 |
| | $ | 1,514 |
| | $ | 235 |
| | $ | 8,018 |
|
Less: Net investment gains (losses) | (2 | ) | | (3 | ) | | (20 | ) | | (74 | ) | | (99 | ) |
Less: Net derivative gains (losses) | (287 | ) | | (174 | ) | | (154 | ) | | 42 |
| | (573 | ) |
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Less: Other adjustments to revenues (1) | (65 | ) | | (44 | ) | | 7 |
| | (4 | ) | | (106 | ) |
Total operating revenues | $ | 2,745 |
| | $ | 4,097 |
| | $ | 1,681 |
| | $ | 271 |
| | $ | 8,794 |
|
Total expenses | $ | 2,281 |
| | $ | 3,811 |
| | $ | 1,340 |
| | $ | 326 |
| | $ | 7,758 |
|
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | (64 | ) | | — |
| | — |
| | — |
| | (64 | ) |
Less: Other adjustments to expenses (1) | 14 |
| | — |
| | 6 |
| | 12 |
| | 32 |
|
Total operating expenses | $ | 2,331 |
| | $ | 3,811 |
| | $ | 1,334 |
| | $ | 314 |
| | $ | 7,790 |
|
__________________
| |
(1) | See definitions of operating revenues and operating expenses under “— Non-GAAP and Other Financial Disclosures” for the components of such adjustments. |
Nine Months Ended September 30, 2014
|
| | | | | | | | | | | | | | | | | | | |
| Retail | | Group, Voluntary & Worksite Benefits | | Corporate Benefit Funding | | Corporate & Other | | Total |
| (In millions) |
Total revenues | $ | 8,694 |
| | $ | 13,211 |
| | $ | 5,688 |
| | $ | 553 |
| | $ | 28,146 |
|
Less: Net investment gains (losses) | 9 |
| | (11 | ) | | 80 |
| | (4 | ) | | 74 |
|
Less: Net derivative gains (losses) | 484 |
| | 294 |
| | 109 |
| | (270 | ) | | 617 |
|
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | (15 | ) | | — |
| | — |
| | — |
| | (15 | ) |
Less: Other adjustments to revenues (1) | (184 | ) | | (123 | ) | | 10 |
| | (4 | ) | | (301 | ) |
Total operating revenues | $ | 8,400 |
| | $ | 13,051 |
| | $ | 5,489 |
| | $ | 831 |
| | $ | 27,771 |
|
Total expenses | $ | 6,775 |
| | $ | 12,193 |
| | $ | 4,097 |
| | $ | 1,051 |
| | $ | 24,116 |
|
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | 14 |
| | — |
| | — |
| | — |
| | 14 |
|
Less: Other adjustments to expenses (1) | 61 |
| | — |
| | 7 |
| | 20 |
| | 88 |
|
Total operating expenses | $ | 6,700 |
| | $ | 12,193 |
| | $ | 4,090 |
| | $ | 1,031 |
| | $ | 24,014 |
|
Nine Months Ended September 30, 2013
|
| | | | | | | | | | | | | | | | | | | |
| Retail | | Group, Voluntary & Worksite Benefits | | Corporate Benefit Funding | | Corporate & Other | | Total |
| (In millions) |
Total revenues | $ | 7,322 |
| | $ | 11,709 |
| | $ | 4,877 |
| | $ | 1,508 |
| | $ | 25,416 |
|
Less: Net investment gains (losses) | 27 |
| | (15 | ) | | (29 | ) | | 6 |
| | (11 | ) |
Less: Net derivative gains (losses) | (709 | ) | | (615 | ) | | (238 | ) | | 629 |
| | (933 | ) |
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
Less: Other adjustments to revenues (1) | (196 | ) | | (129 | ) | | 60 |
| | (7 | ) | | (272 | ) |
Total operating revenues | $ | 8,192 |
| | $ | 12,468 |
| | $ | 5,084 |
| | $ | 880 |
| | $ | 26,624 |
|
Total expenses | $ | 6,855 |
| | $ | 11,499 |
| | $ | 4,022 |
| | $ | 996 |
| | $ | 23,372 |
|
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | (183 | ) | | — |
| | — |
| | — |
| | (183 | ) |
Less: Other adjustments to expenses (1) | 20 |
| | — |
| | (2 | ) | | 14 |
| | 32 |
|
Total operating expenses | $ | 7,018 |
| | $ | 11,499 |
| | $ | 4,024 |
| | $ | 982 |
| | $ | 23,523 |
|
__________________
| |
(1) | See definitions of operating revenues and operating expenses under “— Non-GAAP and Other Financial Disclosures” for the components of such adjustments. |
Consolidated Results — Operating
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
OPERATING REVENUES | | | | | | | |
Premiums | $ | 5,087 |
| | $ | 4,804 |
| | $ | 15,415 |
| | $ | 14,563 |
|
Universal life and investment-type product policy fees | 608 |
| | 579 |
| | 1,775 |
| | 1,723 |
|
Net investment income | 3,108 |
| | 2,996 |
| | 9,278 |
| | 9,078 |
|
Other revenues | 440 |
| | 415 |
| | 1,303 |
| | 1,260 |
|
Total operating revenues | 9,243 |
| | 8,794 |
| | 27,771 |
| | 26,624 |
|
OPERATING EXPENSES | | | | | | | |
Policyholder benefits and claims and policyholder dividends | 5,999 |
| | 5,753 |
| | 18,189 |
| | 17,382 |
|
Interest credited to policyholder account balances | 533 |
| | 544 |
| | 1,601 |
| | 1,691 |
|
Capitalization of DAC | (106 | ) | | (132 | ) | | (313 | ) | | (438 | ) |
Amortization of DAC and VOBA | 90 |
| | 135 |
| | 454 |
| | 416 |
|
Interest expense on debt | 38 |
| | 38 |
| | 113 |
| | 113 |
|
Other expenses | 1,425 |
| | 1,452 |
| | 3,970 |
| | 4,359 |
|
Total operating expenses | 7,979 |
| | 7,790 |
| | 24,014 |
| | 23,523 |
|
Provision for income tax expense (benefit) | 335 |
| | 279 |
| | 1,053 |
| | 863 |
|
Operating earnings | $ | 929 |
| | $ | 725 |
| | $ | 2,704 |
| | $ | 2,238 |
|
Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013
Unless otherwise stated, all amounts discussed below are net of income tax.
The increase in operating earnings was the result of higher net investment income from portfolio growth, favorable refinements to DAC and other insurance-related liabilities, a decrease in interest credited expense, as a result of the sustained low interest rate environment, and higher asset-based fee revenues from improved equity market performance. Our financial results include fees earned related to an affiliated reinsurance agreement, which were recorded in other revenues, but were almost entirely offset by related charges in other expenses.
We benefited from strong sales and business growth across many of our products. However, we continue to focus on pricing discipline and risk management which resulted in a decrease in sales of our variable annuity products. Growth in our investment portfolio from funding agreement issuances and strong sales of structured settlements, pension closeouts and institutional income annuities in our Corporate Benefit Funding segment, positive net flows from our retail life business and current period premiums and deposits in our Group, Voluntary & Worksite Benefits segment, generated higher net investment income. This was partially offset by the related increase in interest credited expense. In addition, surrenders and withdrawals of our annuity products exceeded sales for the current period resulting in lower asset-based fees. The changes in business growth discussed above resulted in a $58 million increase in operating earnings.
On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. These annual updates, which occurred in both periods, resulted in a net operating earnings increase of $14 million and were primarily related to favorable DAC unlockings in our traditional and universal life businesses, partially offset by unfavorable DAC unlockings in our variable annuity business. In addition to our annual updates, refinements to DAC and certain insurance-related liabilities that were recorded in both periods resulted in a $48 million increase in operating earnings.
Market factors, including the sustained low interest rate environment, continued to impact our investment yields, as well as our crediting rates. Investment yields were negatively impacted by the adverse impact of the sustained low interest rate environment on yields from fixed maturity securities, partially offset by higher returns on other limited partnership interests and real estate joint ventures, higher income on currency and interest rate derivatives and increased prepayment fee income. Our average separate account balance grew with the equity markets driving higher fee income in our annuity business. Very favorable equity market returns in the prior period drove lower DAC amortization in that period as compared to the current period where equity returns were much less favorable. Many of our funding agreement and guaranteed interest contract liabilities have interest credited rates that are contractually tied to external indices and, as a result, we set lower interest credited rates on new business, as well as on existing business with terms that can fluctuate. The changes in market factors discussed above resulted in a $27 million increase in operating earnings.
Operating earnings increased due to declines in expenses of $22 million, mainly the result of lower employee-related costs. However, this was largely offset by the PPACA fee which reduced operating earnings by $15 million in the current period.
Unfavorable mortality experience, most notably in our Group, Voluntary & Worksite Benefits segment, was largely offset by favorable experience in our Corporate Benefit Funding segment, resulting in a slight decrease in operating earnings from the prior period.
The Company’s effective tax rate differs from the U.S. statutory rate of 35% primarily due to non-taxable investment income and tax credits for low income housing. In the current period, the Company realized additional tax benefits of $40 million compared to the prior period, primarily from the higher utilization of tax preferenced investments. The current period includes a $5 million tax charge related to the PPACA fee, which is not deductible for income tax purposes.
Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013
Unless otherwise stated, all amounts discussed below are net of income tax.
The primary driver of the increase in operating earnings was a $140 million decrease in expenses due to adjustments made to better align the allocation of acquisition expenses with affiliates’ sales revenue. Excluding this impact, operating earnings improved as a result of higher net investment income from portfolio growth, a decrease in interest credited expense as a result of the sustained low interest rate environment, and higher asset-based fee revenues from improved equity market performance, partially offset by unfavorable mortality and morbidity experience. Our financial results include fees earned related to an affiliated reinsurance agreement, which were recorded in other revenues, but were almost entirely offset by related charges in other expenses.
Market factors, including the sustained low interest rate environment, continued to impact our investment yields, as well as our crediting rates. Investment yields were negatively impacted by the adverse impact of the sustained low interest rate environment on yields from fixed maturity securities and mortgage loans and decreased earnings on our wholly-owned real estate and alternative investments, partially offset by higher returns on other limited partnership interests and real estate joint ventures, in addition to higher income on interest rate and currency derivatives and prepayment fees. Many of our funding agreement and guaranteed interest contract liabilities have interest credited rates that are contractually tied to external indices and, as a result, we set lower interest credited rates on new business, as well as on existing business with terms that can fluctuate. Our average separate account balance grew with the equity markets driving higher fee income in our annuity business. However, this was partially offset by higher DAC amortization due to the significant prior period equity market increase. The changes in market factors discussed above resulted in a $111 million increase in operating earnings.
On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. These annual updates, which occurred in both periods, resulted in a net operating earnings increase of $14 million and were primarily related to favorable DAC unlockings in our traditional and universal life businesses, partially offset by unfavorable DAC unlockings in our variable annuity business. In addition to our annual updates, refinements to DAC and certain insurance-related liabilities that were recorded in both periods resulted in a $115 million increase in operating earnings, which includes a favorable reserve adjustment in the current period related to disability premium waivers in our Retail segment.
We benefited from strong sales and business growth across many of our products. However, we continue to focus on pricing discipline and risk management which resulted in a decrease in sales of our variable annuity products. Growth in our investment portfolio from funding agreement issuances and strong sales of structured settlements, pension closeouts and institutional income annuities in our Corporate Benefit Funding segment, positive net flows from our retail life business and current period premiums and deposits in our Group, Voluntary & Worksite Benefits segment, generated higher net investment income. This was partially offset by the related increase in interest credited expense. In addition, surrenders and withdrawals of our annuity products exceeded sales for the current period resulting in lower asset-based fees. The changes in business growth discussed above resulted in a $67 million increase in operating earnings.
Operating earnings increased due to declines in expenses of $69 million, mainly the result of lower employee-related costs. However, this was largely offset by the PPACA fee, which reduced operating earnings by $44 million in the current period.
Less favorable mortality and morbidity experience, primarily in our Group, Voluntary & Worksite Benefits segment, resulted in a $99 million decrease in operating earnings.
The Company’s effective tax rate differs from the U.S. statutory rate of 35% primarily due to non-taxable investment income and tax credits for low income housing. In the current period, the Company realized additional tax benefits of $55 million compared to the prior period, primarily from the higher utilization of tax preferenced investments. This was partially offset by a $15 million tax charge related to the PPACA fee, which was not deductible for income tax purposes.
Segment Results and Corporate & Other
Retail
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
OPERATING REVENUES | | | | | | | |
Premiums | $ | 1,010 |
| | $ | 976 |
| | $ | 2,978 |
| | $ | 2,903 |
|
Universal life and investment-type product policy fees | 377 |
| | 363 |
| | 1,092 |
| | 1,042 |
|
Net investment income | 1,344 |
| | 1,318 |
| | 4,057 |
| | 4,005 |
|
Other revenues | 97 |
| | 88 |
| | 273 |
| | 242 |
|
Total operating revenues | 2,828 |
| | 2,745 |
| | 8,400 |
| | 8,192 |
|
OPERATING EXPENSES | | | | | | | |
Policyholder benefits and claims and policyholder dividends | 1,581 |
| | 1,510 |
| | 4,669 |
| | 4,612 |
|
Interest credited to policyholder account balances | 245 |
| | 248 |
| | 729 |
| | 742 |
|
Capitalization of DAC | (92 | ) | | (125 | ) | | (272 | ) | | (400 | ) |
Amortization of DAC and VOBA | 78 |
| | 123 |
| | 422 |
| | 379 |
|
Interest expense on debt | 1 |
| | 2 |
| | 3 |
| | 4 |
|
Other expenses | 470 |
| | 573 |
| | 1,149 |
| | 1,681 |
|
Total operating expenses | 2,283 |
| | 2,331 |
| | 6,700 |
| | 7,018 |
|
Provision for income tax expense (benefit) | 191 |
| | 145 |
| | 595 |
| | 411 |
|
Operating earnings | $ | 354 |
| | $ | 269 |
| | $ | 1,105 |
| | $ | 763 |
|
Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013
Unless otherwise stated, all amounts (with the exception of sales data) discussed below are net of income tax.
Changes to our guarantee features since 2012, along with continued management of sales in the current period by focusing on pricing discipline and risk management, drove a decrease in variable annuity sales. Life sales were also lower, partially driven by the discontinuance of all but one of our secondary guarantees on universal life products.
A $20 million increase in operating earnings was attributable to business growth. Our life business had positive net flows, despite a decline in universal life sales, which resulted in higher net investment income. This favorable impact was partially offset by lower fees as the prior period benefited from the first year fees received on the now discontinued secondary guarantees on our universal life products. In our deferred annuities business, surrenders and withdrawals exceeded sales for the current period, resulting in negative cash flows contributing to a reduction in average separate account balances and, consequently, asset-based fees, partially offset by a reduction in interest credited expenses in the general account and a decrease in DAC amortization. In addition, operating earnings increased as a result of an affiliated reinsurance treaty entered into in connection with the Mergers. We also earned more income on a larger invested asset base, which resulted from a higher amount of allocated equity as compared to the prior period.
A $13 million increase in operating earnings was attributable to changes in market factors, including equity markets and interest rates. Continued strong equity market performance since the last period increased our average separate account balances, which drove higher asset-based fees. Equity market performance also drove higher investment income from other limited partnership interests. Very favorable equity market returns in the prior period drove lower DAC amortization in that period as compared to the current period where equity returns were much less favorable. The sustained low interest rate environment resulted in a decline in net investment income on our fixed maturity securities as proceeds from maturing investments were reinvested at lower yields.
Favorable morbidity experience in our individual disability income business, partially offset by unfavorable mortality experience in our life business, resulted in a $2 million increase in operating earnings.
On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. These annual updates, which occurred in both periods, resulted in a net operating earnings increase of $14 million and were primarily related to favorable DAC unlockings in our traditional and universal life businesses, partially offset by unfavorable DAC unlockings in our variable annuity business. Refinements to DAC and certain insurance-related liabilities that were recorded in both periods resulted in an $11 million increase in operating earnings. A decline in expenses of $29 million contributed to the increase in operating earnings, mainly the result of lower employee-related costs.
Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013
Unless otherwise stated, all amounts discussed below are net of income tax.
The primary driver of the increase in operating earnings was a $140 million decrease in expenses due to adjustments made to better align the allocation of acquisition expenses with affiliates’ sales revenue.
A $45 million increase in operating earnings was attributable to business growth. Our life business had positive net flows, despite a decline in universal life sales, which resulted in higher net investment income. This favorable impact was partially offset by lower fees, as the prior period benefited from the first year fees on the now discontinued secondary guarantees on our universal life products, and an increase in interest credited expenses. In our deferred annuities business, surrenders and withdrawals exceeded sales for the period, resulting in negative cash flows contributing to a decrease in average separate account balances and, consequently, asset-based fees, partially offset by a reduction in interest credited expenses in the general account and lower DAC amortization. In addition, operating earnings increased as a result of a new affiliated reinsurance treaty entered into in connection with the Mergers. We also earned more income on a larger invested asset base, which resulted from a higher amount of allocated equity as compared to the prior period.
An $18 million increase in operating earnings was attributable to changes in market factors, including equity markets and interest rates. Strong equity market performance increased our average separate account balances, driving an increase in asset-based fee income; however, this was partially offset by higher DAC amortization. The more favorable equity market returns in the prior period drove lower DAC amortization in that period compared to the current period where equity returns were much less favorable. This positive equity market performance also drove higher net investment income from other limited partnership interests. The sustained low interest rate environment resulted in a decline in net investment income on our fixed maturity securities and mortgage loans as proceeds from maturing investments were reinvested at lower yields. This negative interest rate impact was partially offset by lower interest credited expense, as we reduced interest credited rates on contracts with discretionary rate reset provisions, and lower DAC amortization in our life business. These decreases were partially offset by higher income from real estate joint ventures and increased prepayment fee income.
Less favorable mortality experience in our traditional life and variable and universal life businesses, partially offset by an increase in the immediate annuities business, resulted in a $7 million decrease in operating earnings.
On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. These annual updates, which occurred in both periods, resulted in a net operating earnings increase of $14 million and were primarily related to favorable DAC unlockings in our traditional and universal life businesses, partially offset by unfavorable DAC unlockings in our variable annuity business. Refinements to DAC and certain insurance-related liabilities that were recorded in both periods resulted in a $53 million increase in operating earnings, primarily driven by a favorable reserve adjustment in the current period related to disability premium waivers in our life business. Operating earnings increased due to a decline in expenses of $78 million, mainly the result of lower employee-related costs.
Group, Voluntary & Worksite Benefits
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
OPERATING REVENUES | | | | | | | |
Premiums | $ | 3,606 |
| | $ | 3,383 |
| | $ | 10,863 |
| | $ | 10,308 |
|
Universal life and investment-type product policy fees | 180 |
| | 171 |
| | 538 |
| | 521 |
|
Net investment income | 458 |
| | 443 |
| | 1,340 |
| | 1,336 |
|
Other revenues | 101 |
| | 100 |
| | 310 |
| | 303 |
|
Total operating revenues | 4,345 |
| | 4,097 |
| | 13,051 |
| | 12,468 |
|
OPERATING EXPENSES | | | | | | | |
Policyholder benefits and claims and policyholder dividends | 3,466 |
| | 3,274 |
| | 10,494 |
| | 9,904 |
|
Interest credited to policyholder account balances | 38 |
| | 39 |
| | 117 |
| | 116 |
|
Capitalization of DAC | (4 | ) | | (5 | ) | | (12 | ) | | (15 | ) |
Amortization of DAC and VOBA | 8 |
| | 8 |
| | 19 |
| | 20 |
|
Interest expense on debt | — |
| | — |
| | — |
| | 1 |
|
Other expenses | 525 |
| | 495 |
| | 1,575 |
| | 1,473 |
|
Total operating expenses | 4,033 |
| | 3,811 |
| | 12,193 |
| | 11,499 |
|
Provision for income tax expense (benefit) | 114 |
| | 101 |
| | 315 |
| | 340 |
|
Operating earnings | $ | 198 |
| | $ | 185 |
| | $ | 543 |
| | $ | 629 |
|
Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013
Unless otherwise stated, all amounts discussed below are net of income tax.
The macroeconomic environment continues to signal stronger growth and is likely to instill further confidence in the U.S. economy. The improvement in the U.S. economy and overall employment remains slow and steady. In the current period, premiums increased across the segment. Our term life, dental and disability businesses generated premium growth through stronger sales and improved persistency, with the dental business also benefiting from pricing actions on existing business. In addition, premiums in our term life business increased due to the impact of experience adjustments on our participating contracts, however, changes in premiums for these contracts were almost entirely offset by the related changes in policyholder benefits. The introduction of new products also drove growth in the voluntary benefits business. Although we have discontinued selling our long-term care (“LTC”) product, we continue to collect premiums and administer the existing block of business, contributing to asset growth in the segment.
Favorable claims experience in accidental death and dismemberment, within our group life business, and in our disability business was partially offset by increased utilization of services across most channels of our dental business, resulting in an $8 million increase in operating earnings. Operating earnings from our term life business increased by $17 million as a result of a favorable reserve refinement in the current period; however, this was almost entirely offset by a $16 million decrease due to increased claims severity, primarily in our group universal life business. In our LTC business, increases in new and pending claims resulted in an $11 million decrease in operating earnings; however, this was almost entirely offset by a $10 million favorable reserve refinement in the current period.
The impact of changes in market factors, including equity markets and interest rates, resulted in higher investment yields. The increase in yields was primarily driven by higher returns on other limited partnership interests, real estate joint ventures and increased prepayment fee income, partially offset by the negative impact of the sustained low interest rate environment on yields from fixed maturity securities. Unlike in the Retail and Corporate Benefit Funding segments, a change in investment yield does not necessarily drive a corresponding change in the rates credited on certain insurance liabilities. The increase in investment yields, along with a slight decrease in crediting rates in the current period, improved operating earnings by $3 million.
Growth in premiums and deposits in the current period, partially offset by a reduction in policyholder account balances (“PABs”) and other liabilities, resulted in an increase in our average invested assets, increasing operating earnings by $7 million. Consistent with the growth in average invested assets from premiums and deposits, primarily in our LTC business, interest credited on long-duration contracts increased by $7 million. The PPACA fee increased other expenses by $15 million in the current period; however, the impact of the assessment was mostly offset by a related increase in premiums in the dental business. The remaining increase in other operating expenses was more than offset by the remaining increase in premiums, fees and other revenues.
Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013
Unless otherwise stated, all amounts discussed below are net of income tax.
Our life business experienced less favorable mortality in the current period, mainly due to increased claims incidence and severity in the group universal life business and an increase in claims severity in the term life business, which resulted in a $52 million decrease in operating earnings. Unfavorable claims experience in our disability business, driven by higher approvals and lower net closures, coupled with increased utilization of services across most channels of our dental business, were partially offset by a decline in new and pending claims in our LTC business, resulting in a $52 million decrease in operating earnings. The impact of favorable reserve refinements in the current period resulted in an increase in operating earnings of $43 million.
The impact of changes in market factors, including equity markets and interest rates, resulted in lower investment yields. The decrease in yields was primarily driven by the negative impact of the sustained low interest rate environment on yields from fixed maturity securities and mortgage loans, as well as decreased income on alternative investments and interest rate derivatives, partially offset by higher returns on our real estate joint ventures and other limited partnership interests. The decrease in investment yields, slightly offset by lower crediting rates in the current period, reduced operating earnings by $26 million.
Growth in premiums and deposits in the current period, partially offset by a reduction in PABs, other liabilities and allocated equity, resulted in an increase in our average invested assets, increasing operating earnings by $29 million. Consistent with the growth in average invested assets from premiums and deposits, primarily in our LTC business, interest credited on long-duration contracts and PABs increased by $18 million. The PPACA fee increased other expenses by $44 million in the current period; however, the impact of the assessment was mostly offset by a related increase in premiums in the dental business. The remaining increase in other operating expenses, driven by business growth and voluntary product initiatives, was largely offset by the remaining increase in premiums, fees and other revenues.
Corporate Benefit Funding
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
OPERATING REVENUES | | | | | | | |
Premiums | $ | 438 |
| | $ | 425 |
| | $ | 1,475 |
| | $ | 1,295 |
|
Universal life and investment-type product policy fees | 51 |
| | 45 |
| | 145 |
| | 160 |
|
Net investment income | 1,257 |
| | 1,144 |
| | 3,655 |
| | 3,425 |
|
Other revenues | 69 |
| | 67 |
| | 214 |
| | 204 |
|
Total operating revenues | 1,815 |
| | 1,681 |
| | 5,489 |
| | 5,084 |
|
OPERATING EXPENSES | | | | | | | |
Policyholder benefits and claims and policyholder dividends | 929 |
| | 946 |
| | 2,965 |
| | 2,817 |
|
Interest credited to policyholder account balances | 250 |
| | 257 |
| | 755 |
| | 833 |
|
Capitalization of DAC | (10 | ) | | (2 | ) | | (29 | ) | | (23 | ) |
Amortization of DAC and VOBA | 4 |
| | 4 |
| | 13 |
| | 17 |
|
Interest expense on debt | 3 |
| | 3 |
| | 8 |
| | 8 |
|
Other expenses | 135 |
| | 126 |
| | 378 |
| | 372 |
|
Total operating expenses | 1,311 |
| | 1,334 |
| | 4,090 |
| | 4,024 |
|
Provision for income tax expense (benefit) | 176 |
| | 121 |
| | 489 |
| | 371 |
|
Operating earnings | $ | 328 |
| | $ | 226 |
| | $ | 910 |
| | $ | 689 |
|
Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013
Unless otherwise stated, all amounts discussed below are net of income tax.
The sustained low interest rate environment has contributed to the underfunding of pension plans, which limits our customers’ ability to engage in full pension plan closeout terminations. However, we expect that customers may choose to close out portions of pension plans over time, at costs reflecting current interest rates and availability of capital. Lower pension closeouts in the current period resulted in a decrease in premiums. However, competitive pricing and a relative increase in participation drove an increase in structured settlement sales in the current period. Income annuity sales were also strong in the current period, rebounding from the discontinuance of one contract in the prior period. Changes in premiums for these businesses were almost entirely offset by the related changes in policyholder benefits.
The impact of changes in market factors, including the impact of the sustained low interest rate environment on fixed maturity securities, drove a slight decrease in investment yields. This unfavorable change was partially offset by improved returns on other limited partnership interests and real estate joint ventures, and higher income on interest rate and currency derivatives. Many of our funding agreement and guaranteed interest contract liabilities have interest credited rates that are contractually tied to external indices and, as a result, we set lower interest credited rates on new business, as well as on existing business with terms that can fluctuate. The impact of lower interest credited expense and slightly lower investment returns resulted in a net increase in operating earnings of $26 million.
The impact of funding agreement issuances, an increase in allocated equity and strong sales in structured settlements, pension closeouts and group annuities resulted in higher invested assets, which drove an increase in net investment income that was partially offset by the related increase in interest credited expense and resulted in a $44 million increase in operating earnings. In addition, strong investment performance and large case sales for our separate account products drove higher average account balances which resulted in an increase in separate account fees of $6 million.
Favorable mortality in both periods, spread across products, resulted in a $14 million increase in operating earnings. The net impact of insurance liability refinements that were recorded in both periods resulted in a $10 million increase in operating earnings.
Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013
Unless otherwise stated, all amounts discussed below are net of income tax.
The impact of changes in market factors drove higher investment yields, including higher income on interest rate derivatives, improved returns on real estate joint ventures and other limited partnership interests and increased prepayment fees. These favorable changes were partially offset by the impact of the sustained low interest rate environment on fixed maturity securities and mortgage loans. Many of our funding agreements and guaranteed interest contract liabilities have interest credited rates that are contractually tied to external indices and, as a result, we set lower interest credited rates on new business, as well as on existing business with terms that can fluctuate. The impact of lower interest credited expense and higher investment returns resulted in an increase in operating earnings of $120 million.
An increase in allocated equity, the impact of funding agreement issuances and strong sales in structured settlements, pension closeouts and group annuities resulted in higher invested assets, which drove an increase in net investment income that was partially offset by the related increase in interest credited expense and resulted in a $60 million increase in operating earnings. In addition, strong investment performance and large case sales for our separate account products drove higher average account balances which resulted in an increase in separate account fees of $6 million.
Favorable mortality in the current period, primarily in our structured settlements business, resulted in a $9 million increase in operating earnings. The net impact of insurance liability refinements that were recorded in both periods increased operating earnings by $19 million.
Corporate & Other |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
OPERATING REVENUES | | | | | | | |
Premiums | $ | 33 |
| | $ | 20 |
| | $ | 99 |
| | $ | 57 |
|
Net investment income | 49 |
| | 91 |
| | 226 |
| | 312 |
|
Other revenues | 173 |
| | 160 |
| | 506 |
| | 511 |
|
Total operating revenues | 255 |
| | 271 |
| | 831 |
| | 880 |
|
OPERATING EXPENSES | | | | | | | |
Policyholder benefits and claims and policyholder dividends | 23 |
| | 23 |
| | 61 |
| | 49 |
|
Interest expense on debt | 34 |
| | 33 |
| | 102 |
| | 100 |
|
Other expenses | 295 |
| | 258 |
| | 868 |
| | 833 |
|
Total operating expenses | 352 |
| | 314 |
| | 1,031 |
| | 982 |
|
Provision for income tax expense (benefit) | (146 | ) | | (88 | ) | | (346 | ) | | (259 | ) |
Operating earnings | $ | 49 |
| | $ | 45 |
| | $ | 146 |
| | $ | 157 |
|
The table below presents operating earnings by source on an after-tax basis:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (In millions) |
| | | | | | | |
Net investment income | $ | 32 |
| | $ | 59 |
| | $ | 147 |
| | $ | 203 |
|
Interest expense on debt | (22 | ) | | (21 | ) | | (66 | ) | | (65 | ) |
Acquisition costs | — |
| | (5 | ) | | (5 | ) | | (15 | ) |
Corporate initiatives and projects | (34 | ) | | (23 | ) | | (94 | ) | | (62 | ) |
Incremental tax benefit | 112 |
| | 73 |
| | 276 |
| | 223 |
|
Other | (39 | ) | | (38 | ) | | (112 | ) | | (127 | ) |
Operating earnings | $ | 49 |
| | $ | 45 |
| | $ | 146 |
| | $ | 157 |
|
Three Months Ended September 30, 2014 Compared with the Three Months Ended September 30, 2013
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings increased by $4 million, primarily due to higher incremental tax benefits, largely offset by lower net investment income and higher costs associated with corporate initiatives and projects. The financial results of Corporate & Other include fees earned related to an affiliated reinsurance agreement, which were recorded in other revenues, but were almost entirely offset by related charges in other expenses.
Net investment income decreased by $27 million driven by an increase in the amount credited to the segments due to growth in the economic capital managed by Corporate & Other on their behalf, lower mark-to-market income on trading securities and the adverse impact of the sustained low interest rate environment on yields from our fixed maturity securities. These decreases were partially offset by higher mark-to-market income on residential mortgage loans carried at fair value.
Expenses related to corporate initiatives and projects increased by $11 million, primarily due to higher relocation costs, severance and consulting expenses.
Corporate & Other benefits from the impact of certain permanent tax differences, including non-taxable investment income and tax credits for investments in low income housing. As a result, our effective tax rate differs from the U.S. statutory rate of 35%. Higher utilization of tax preferenced investments and other benefits increased our operating earnings by $39 million over the prior period.
Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings decreased by $11 million, primarily due to lower net investment income and higher expenses related to corporate initiatives and projects, partially offset by higher incremental tax benefits and a decrease in other expenses. The financial results of Corporate & Other include fees earned related to an affiliated reinsurance agreement, which were recorded in other revenues, but were almost entirely offset by related charges in other expenses.
Net investment income decreased by $56 million driven by an increase in the amount credited to the segments due to growth in the economic capital managed by Corporate & Other on their behalf, the adverse impact of the sustained low interest rate environment on yields from our fixed maturity securities and lower returns on real estate investments. These decreases were partially offset by improved returns on other limited partnership interests and higher mark-to-market income on residential mortgage loans carried at fair value.
Acquisition costs decreased by $10 million due to lower internal resource costs for associates committed to certain acquisition activities.
Expenses related to corporate initiatives and projects increased by $32 million primarily due to higher relocation costs, severance and consulting expenses. These expenses include a $10 million decrease in restructuring charges, the majority of which related to severance. Other expenses decreased $15 million primarily driven by lower employee-related costs and lower costs associated with interest on uncertain tax positions.
Corporate & Other benefits from the impact of certain permanent tax differences, including non-taxable investment income and tax credits for investments in low income housing. As a result, our effective tax rate differs from the U.S. statutory rate of 35%. Higher utilization of tax preferenced investments and other benefits increased our operating earnings by $53 million over the prior period.
Adoption of New Accounting Pronouncements
See Note 1 of the Notes to the Interim Condensed Consolidated Financial Statements.
Future Adoption of New Accounting Pronouncements
See Note 1 of the Notes to the Interim Condensed Consolidated Financial Statements.
Non-GAAP and Other Financial Disclosures
Operating earnings is defined as operating revenues less operating expenses, both net of income tax.
Operating revenues excludes net investment gains (losses) and net derivative gains (losses).
The following additional adjustments are made to GAAP revenues, in the line items indicated, in calculating operating revenues:
| |
• | Universal life and investment-type product policy fees excludes the amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain variable annuity GMIB fees (“GMIB Fees”); and |
| |
• | Net investment income: (i) includes amounts for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment, (ii) includes income from discontinued real estate operations, (iii) excludes post-tax operating earnings adjustments relating to insurance joint ventures accounted for under the equity method, and (iv) excludes certain amounts related to securitization entities that are variable interest entities (“VIEs”) consolidated under GAAP. |
The following adjustments are made to GAAP expenses, in the line items indicated, in calculating operating expenses:
| |
• | Policyholder benefits and claims and policyholder dividends excludes: (i) changes in the policyholder dividend obligation related to net investment gains (losses) and net derivative gains (losses), (ii) amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets, (iii) benefits and hedging costs related to GMIBs (“GMIB Costs”), and (iv) market value adjustments associated with surrenders or terminations of contracts (“Market Value Adjustments”); |
| |
• | Interest credited to PABs includes adjustments for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of PABs but do not qualify for hedge accounting treatment; |
| |
• | Amortization of DAC and VOBA excludes amounts related to: (i) net investment gains (losses) and net derivative gains (losses), (ii) GMIB Fees and GMIB Costs, and (iii) Market Value Adjustments; |
| |
• | Interest expense on debt excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and |
| |
• | Other expenses excludes costs related to noncontrolling interests and goodwill impairments. |
We believe the presentation of operating earnings, as we measure it for management purposes, enhances the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of our business. Operating revenues, operating expenses and operating earnings should not be viewed as substitutes for the following financial measures calculated in accordance with GAAP: GAAP revenues, GAAP expenses and income (loss) from continuing operations, net of income tax, respectively. Reconciliations of these measures to the most directly comparable GAAP measures are included in “— Results of Operations.”
In this discussion, we sometimes refer to sales activity for various products. These sales statistics do not correspond to revenues under GAAP, but are used as relevant measures of business activity.
Item 4. Controls and Procedures
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
There were no changes to the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II — Other Information
Item 1. Legal Proceedings
The following should be read in conjunction with (i) Part I, Item 3, of Metropolitan Life Insurance Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Annual Report”); (ii) Part II, Item 1, of Metropolitan Life Insurance Company’s Quarterly Report on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014; and (iii) Note 11 of the Notes to the Interim Condensed Consolidated Financial Statements in Part I of this report.
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.
As reported in the 2013 Annual Report, Metropolitan Life Insurance Company received approximately 5,898 asbestos-related claims in 2013. During the nine months ended September 30, 2014 and 2013, Metropolitan Life Insurance Company received approximately 3,641 and 4,256 new asbestos-related claims, respectively. See Note 17 of the Notes to the Consolidated Financial Statements included in the 2013 Annual Report for historical information concerning asbestos claims and Metropolitan Life Insurance Company’s increase in its recorded liability at December 31, 2013. The number of asbestos cases that may be brought, the aggregate amount of any liability that Metropolitan Life Insurance Company may incur, and the total amount paid in settlements in any given year are uncertain and may vary significantly from year to year.
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 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. Based upon its reevaluation of its exposure from asbestos litigation, Metropolitan Life Insurance Company has updated its liability analysis for asbestos-related claims through September 30, 2014.
Unclaimed Property Inquiries and Related Litigation
Total Asset Recovery Services, LLC on behalf of the State of Florida v. MetLife, Inc., et. al. (Cir. Ct. Leon County, FL, filed October 27, 2010)
Alleging that Metropolitan Life Insurance Company violated the Florida Disposition of Unclaimed Property law by failing to escheat to Florida benefits of 9,022 life insurance contracts, Total Asset Recovery Services, LLC (the “Relator”) brought an action under the Florida False Claims Act seeking to recover damages on behalf of Florida. The Relator alleged that the aggregate damages attributable to Metropolitan Life Insurance Company, including statutory damages and treble damages, were $767 million. On August 20, 2013, the court granted Metropolitan Life Insurance Company’s motion to dismiss the action. On September 19, 2014, the District Court of Appeal affirmed the decision granting the dismissal.
Other Litigation
McGuire v. Metropolitan Life Insurance Company (E.D. Mich., filed February 22, 2012)
This lawsuit was filed by the fiduciary for the Union Carbide Employees’ Pension Plan and alleges that Metropolitan Life Insurance Company, which issued annuity contracts to fund some of the benefits the Plan provides, engaged in transactions that Employee Retirement Income Security Act of 1974 (“ERISA”) prohibits and violated duties under ERISA and federal common law by determining that no dividends were payable with respect to the contracts from and after 1999. On September 26, 2012, the court denied Metropolitan Life Insurance Company’s motion to dismiss the complaint. The trial has been scheduled for February 2015.
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.
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. 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 effect upon the Company’s financial position, based on information currently known by the Company’s management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on the Company’s net income or cash flows in particular quarterly or annual periods.
Item 1A. Risk Factors
The following should be read in conjunction with, and supplements and amends, the factors that may affect the Company's business or operations described under “Risk Factors” in Part I, Item 1A, of the 2013 Annual Report, as supplemented and amended by the information under “Risk Factors” in Part II, Item 1A of Metropolitan Life Insurance Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014, which are incorporated herein by reference.
Regulatory and Legal Risks
Our Insurance and Brokerage Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth
Our insurance operations and brokerage businesses are subject to a wide variety of insurance and other laws and regulations. See “Business — Regulation — Insurance Regulation” included in the 2013 Annual Report, as supplemented by discussions of regulatory developments in our subsequently filed Quarterly Reports on Form 10-Q under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — Regulatory Developments,” and as further supplemented below.
Insurance Regulation - U.S.
State insurance regulators and the National Association of Insurance Commissioners (“NAIC”) regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, that are made for the benefit of the consumer sometimes lead to additional expense for the insurer and, thus, could have a material adverse effect on our financial condition and results of operations. State insurance regulators and the NAIC are investigating the use of affiliated captive reinsurers and offshore entities to reinsure insurance risk. Like many life insurance companies, we utilize captive reinsurers to satisfy reserve and capital requirements related to universal life and term life insurance policies. We also cede most of the variable annuity guarantee risks to a captive reinsurer, which allows us to consolidate hedging and other risk management programs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business” for information regarding MetLife, Inc.’s plans to merge three U.S.-based life insurance companies and a former offshore reinsurance subsidiary to create one larger U.S.-based and U.S.-regulated life insurance company. If state insurance regulators restrict the use of such captive reinsurers by following the lead of the New York State Department of Financial Services which has recommended a moratorium on such transactions, or if we otherwise are unable to continue to use captive reinsurers in the future, our ability to write certain products or to hedge the associated risks efficiently, and/or our risk-based capital (“RBC”) ratios and ability to deploy excess capital, could be adversely affected or we may need to increase prices on those products, which could adversely impact our competitive position and our results of operations.
The NAIC is also reviewing life insurers’ use of non-variable separate accounts that are insulated from general account claims in the event of an insurance company insolvency, and adopted recommendations, subject to further review and development of guidance as a working group, on July 1, 2014. We are currently evaluating the impact, if any, that these recommendations may have on our business.
U.S. Federal Regulation Affecting Insurance
Currently, the U.S. federal government does not directly regulate the business of insurance. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) established the Federal Insurance Office (“FIO”) within the Department of the Treasury, which has the authority to participate in the negotiations of international insurance agreements with foreign regulators for the U.S., as well as to collect information about the insurance industry and recommend prudential standards. On December 12, 2013, the FIO issued a report, mandated by Dodd-Frank, setting forth recommendations with respect to modernization of insurance regulation in the United States. The report raised the possibility of a greater role for the federal government if states do not achieve greater uniformity in their laws and regulations. We cannot predict whether any such legislation or regulatory changes will be adopted, or what impact they will have on our business, financial condition or results of operations. See “Business — Regulation — Holding Company Regulation — Federal Initiatives” included in the 2013 Annual Report.
Federal legislation and administrative policies can significantly and adversely affect insurance companies, including policies regarding financial services regulation, securities regulation, derivatives regulation, pension regulation, health care regulation, privacy, tort reform legislation and taxation. In addition, various forms of direct and indirect federal regulation of insurance have been proposed from time to time, including proposals for the establishment of an optional federal charter for insurance companies. Other aspects of our insurance operations could also be affected by Dodd-Frank. For example, Dodd-Frank subjects any entity designated as a non-bank systemically important financial institution (“non-bank SIFI”) to enhanced prudential supervision and authorizes the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) to impose additional capital requirements. In addition, under the so-called Volcker Rule, the Federal Reserve Board could impose additional capital requirements and quantitative limits on certain trading and investment activities of a non-bank SIFI. MetLife, Inc. could be subject to such requirements and limits were it to be designated as a non-bank SIFI, which could adversely affect our competitive position. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — Regulatory Developments — Potential Regulation of MetLife, Inc. as a Non-Bank SIFI” included elsewhere herein.
Non-bank SIFIs and certain other large financial companies can be assessed under Dodd-Frank for any uncovered costs arising in connection with the resolution of a systemically important financial company and to cover the expenses of the Office of Financial Research, an agency established by Dodd-Frank to improve the quality of financial data available to policymakers and facilitate more robust and sophisticated analysis of the financial system.
Federal Regulatory Agencies
Dodd-Frank established the Consumer Financial Protection Bureau (“CFPB”), which supervises and regulates institutions providing certain financial products and services to consumers. Although the consumer financial services to which this legislation applies exclude insurance business of the kind in which we engage, the CFPB has authority to regulate non-insurance consumer services provided throughout the MetLife enterprise. See “Business — Regulation — Consumer Protection Laws” included in the 2013 Annual Report.
While MetLife, Inc. has de-registered as a bank holding company, it may, in the future, be designated by the Financial Stability Oversight Council (“FSOC”) as a non-bank SIFI, and could once again be subject to regulation by the Federal Reserve Board and subject to enhanced supervision and prudential standards. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — Regulatory Developments — Potential Regulation of MetLife, Inc. as a Non-Bank SIFI” included elsewhere herein.
Moreover, other national and international authorities have also proposed measures intended to increase the intensity of regulation of large financial institutions, requiring greater coordination among regulators and efforts to harmonize regulatory regimes. If such measures were adopted, including as a result of MetLife, Inc.’s potential designation as a non-bank SIFI, they could materially adversely affect our ability to conduct business, our results of operations and financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — Regulatory Developments — Potential Regulation of MetLife, Inc. as a Non-Bank SIFI” included elsewhere herein.
Regulation of Brokers and Dealers
Dodd-Frank also authorized the U.S. Securities and Exchange Commission (the “SEC”) to establish a standard of conduct applicable to brokers and dealers when providing personalized investment advice to retail and other customers. This standard of conduct would be to act in the best interest of the customer without regard to the financial or other interest of the broker or dealer providing the advice. See “Business — Regulation — Securities, Broker-Dealer and Investment Adviser Regulation” included in the 2013 Annual Report.
Employee Retirement Income Security Act of 1974 Considerations
We provide products and services to certain employee benefit plans that are subject to ERISA or the Internal Revenue Code of 1986, as amended (the “Code”). Consequently, our activities are likewise subject to the restrictions imposed by ERISA and the Code, including the requirement that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries, and the requirement under ERISA and the Code that fiduciaries may not cause a plan to engage in prohibited transactions with persons who have certain relationships with respect to those plans.
The prohibited transaction rules generally restrict the provision of investment advice to ERISA plans and participants and individual retirement accounts (“IRAs”) if the investment recommendation results in fees paid to the individual advisor, his or her firm or their affiliates that vary according to the investment recommendation chosen. Regulations adopted in October 2011 in this area provide some relief from these investment advice restrictions. If additional relief is not provided, the ability of our affiliated broker-dealers and their registered representatives to provide investment advice to ERISA plans and participants and IRAs would likely be significantly restricted. Other proposed regulations in this area may negatively impact the current business model of our broker-dealers, including proposed changes to broaden the definition of “fiduciary,” thereby increasing the regulation of persons providing investment advice to ERISA plans and IRAs. These proposed regulations are expected in 2015. See “Business — Regulation — Employee Retirement Income Security Act of 1974 (“ERISA”) Considerations” included in the 2013 Annual Report.
General
From time to time, regulators raise issues during examinations or audits of us and regulated subsidiaries that could, if determined adversely, have a material impact on us. In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact, particularly in areas such as accounting or statutory reserve requirements. We are also subject to other regulations and may in the future become subject to additional regulations. Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on our financial condition and results of operations.
Potential Regulation of MetLife, Inc. as a Non-Bank SIFI or as Systemically Important Under Other Regulations Proposed by National or International Authorities Could Adversely Affect Our Ability to Compete and Our Business and Results of Operations
While MetLife, Inc. has de-registered as a bank holding company, it may, in the future be designated by the FSOC as a non-bank SIFI. This would subject MetLife, Inc. to enhanced supervision and prudential standards which could adversely affect our ability to compete with other insurers that are not subject to those requirements and adversely affect our business and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — Regulatory Developments — Potential Regulation of MetLife, Inc. as a Non-Bank SIFI.”
On September 4, 2014, the FSOC notified MetLife, Inc. that it has been preliminarily designated as a non-bank SIFI. On October 3, 2014, MetLife, Inc. delivered notice to the FSOC requesting a written and oral evidentiary hearing to contest the FSOC’s proposed determination. In accordance with its regulations, the FSOC held an evidentiary hearing on November 3, 2014 and will make a final determination on MetLife, Inc.’s status as a non-bank SIFI within 60 days after the hearing. Regulation of MetLife, Inc. as a non-bank SIFI could materially and adversely affect our business. In December 2011, the Federal Reserve Board proposed a set of prudential standards (“Regulation YY”) that would apply a set of prudential standards to non-bank SIFIs, including enhanced RBC requirements, leverage limits, liquidity requirements, single counterparty exposure limits, governance requirements for risk management, stress test requirements, special debt-to-equity limits for certain companies, early remediation procedures, and recovery and resolution planning. The Federal Reserve Board’s proposal contemplates that these standards would be subject to the authority of the Federal Reserve Board to determine, on its own or in response to a recommendation by the FSOC, to tailor the application of the enhanced standards to different companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities, size, and any other risk-related factors that the Federal Reserve Board deems appropriate. On February 18, 2014, the Federal Reserve Board adopted amendments to Regulation YY to implement certain of the enhanced prudential standards for bank holding companies and foreign banking organizations with total consolidated assets of $50 billion or more. While Regulation YY, as originally proposed, would have applied to non-bank SIFIs, the final rule does not, but the Federal Reserve Board has indicated that it plans to apply enhanced prudential standards to non-bank SIFIs by rule or order. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — Regulatory Developments — Potential Regulation of MetLife, Inc. as a Non-Bank SIFI” included elsewhere herein. Accordingly, the manner in which these proposed standards might apply to MetLife, Inc. remains unclear. The Federal Reserve Board has stated that it believes other provisions of Dodd-Frank, known as the Collins Amendment, constrain its ability to tailor capital standards for non-bank SIFIs.
In the wake of the recent financial crisis, other national and international authorities have also proposed measures intended to increase the intensity of regulation of large financial institutions, requiring greater coordination among regulators and efforts to harmonize regulatory regimes. For example, the International Association of Insurance Supervisors (“IAIS”) is participating in the Financial Stability Board’s (“FSB”) initiative to identify global systemically important financial institutions. To this end, the IAIS devised and published a methodology to assess the systemic relevance of global insurers and a framework of policy measures to be applied to global systemically important insurers (“G-SIIs”). On November 6, 2014, the FSB published its updated list of G-SIIs, based on the IAIS’ assessment methodology, which includes MetLife, Inc. As directed by the FSB, the IAIS has developed G-SII basic capital requirements (“BCR”) as the basis for the calculation of additional capital. The BCR will apply to G-SIIs in 2015. In addition, the IAIS has confirmed that it will develop a risk-based global insurance capital standard by 2016 which will apply to all internationally active insurance groups, including G-SIIs, with implementation to begin in 2019 after two years of testing and refinement. The IAIS policy measures would need to be implemented by legislation or regulation in each applicable jurisdiction, and the impact on MetLife, Inc. and other designated G-SIIs is uncertain. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — Regulatory Developments — Designation Process and Policy Measures that May Apply to Global Systemically Important Insurers.”
If such measures were adopted, including as a result of the potential designation of MetLife, Inc. as a non-bank SIFI, they could materially adversely affect our ability to conduct business and our results of operations and financial condition. Enhanced capital requirements could adversely affect our ability to compete with other insurers that are not subject to those requirements, and our ability to issue guarantees could be constrained. We could have to raise the price of the products we offer, reduce the amount of risk we take on, or stop offering certain products altogether. Further, counterparty exposure limits could affect our ability to engage in hedging activities. The Federal Reserve Board would also have the right to require us or any of our affiliates to take prompt action to correct any financial weaknesses. See “Business — Regulation” in the 2013 Annual Report.
In the event that MetLife, Inc. is designated as a non-bank SIFI, it may elect to contest such designation using all available remedies under Dodd-Frank or otherwise. If ultimately designated as a non-bank SIFI, MetLife, Inc. may consider such structural and other business alternatives that may be available to it in response to such a designation, and we cannot predict the impact that any such alternatives, if implemented, may have on us.
Legislative and Regulatory Activity in Health Care and Other Employee Benefits Could Affect our Profitability As a Provider of Life Insurance, Annuities, and Non-Medical Health Insurance Benefit Products
The Patient Protection and Affordable Care Act, signed into law on March 23, 2010, and The Health Care and Education Reconciliation Act of 2010, signed into law on March 30, 2010 (together, the “Health Care Act”), may lead to fundamental changes in the way that employers, including us, provide health care benefits, other benefits, and other forms of compensation to their employees and former employees. The Health Care Act also imposes requirements on us as a provider of non-medical health insurance benefit and other products and on the purchasers of certain of these products. In 2014 we are subject to a new excise tax called the “health insurer fee,” the cost of which will primarily be passed on to group purchasers of certain of our dental and vision insurance products. Additionally, with respect to dental insurance products sold to groups with fifty or fewer employees, we have changed certain of our product offerings. The cost of these product changes will also be reflected in our pricing of such products. The Health Care Act or any other related regulations or regulatory actions could adversely affect our ability to offer certain of these products in the same manner as we do today. They could also result in increased or unpredictable costs to provide certain products, and could harm our competitive position if the Health Care Act has a disparate impact on our products compared to products offered by our competitors.
On July 14, 2014, the District of Columbia (“DC”) adopted a law that imposes an assessment on health insurers doing business in DC, including those that issue policies covering the Health Insurance Portability and Accountability Act excepted benefits (which includes critical illness, accident, dental, vision, disability income, long-term care and hospital indemnity insurance, among other products the Company sells). This assessment will spread the funding of the DC public healthcare exchange’s $26 million budget across all health insurers, including those that do not and/or could not sell insurance on the exchange. An insurance trade group has filed suit on behalf of the industry challenging this assessment, arguing that it is preempted by the Health Care Act, and that it is unconstitutional. The Company and an affiliate have received assessments totaling approximately $433,000. The court has not yet ruled on this matter and the assessments were paid on September 30, 2014. While the financial impact to the Company of DC’s action will be minimal, if other states successfully adopt this model, there could be an impact on product pricing and sales.
In addition, we depend on employees of MetLife, Inc. affiliates to conduct our business. These employees are offered employment-related benefits and benefits are also provided to certain retirees. These benefits are provided under complex plans that are subject to a variety of regulatory requirements. The Health Care Act or related regulations or regulatory actions could adversely affect MetLife, Inc. affiliates’ ability to attract, retain and motivate our associates. They could also result in increased or unpredictable costs to provide employee benefits, and could harm our competitive position if we are subject to fees, penalties, tax provisions or other limitations in the Health Care Act and our competitors are not.
The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 also includes certain provisions for defined benefit pension plan funding relief. These provisions may impact the likelihood and/or timing of corporate plan sponsors terminating their plans and/or engaging in transactions to partially or fully transfer pension obligations to an insurance company. As part of our Corporate Benefit Funding segment, we offer general account and separate account group annuity products that enable a plan sponsor to transfer these risks, often in connection with the termination of defined benefit pension plans. Consequently, this legislation could indirectly affect the mix of our business, with fewer closeouts and more non-guaranteed funding products, and adversely impact our results of operations.
Investments-Related Risks
Our Requirements to Pledge Collateral or Make Payments Related to Declines in Estimated Fair Value of Derivatives Transactions or Specified Assets in Connection with OTC-Cleared and OTC-Bilateral Transactions May Adversely Affect Our Liquidity, Expose Us to Central Clearinghouse and Counterparty Credit Risk, and Increase our Costs of Hedging
Substantially all of our derivatives transactions require us to pledge collateral related to any decline in the net estimated fair value of such derivatives transactions executed through a specific broker at a clearinghouse or entered into with a specific counterparty on a bilateral basis. Certain derivatives financing transactions require us to pledge collateral or make payments related to declines in the estimated fair value of the specified assets under certain circumstances to central clearinghouses or our counterparties. The amount of collateral we may be required to pledge and the payments we may be required to make under our derivatives transactions may increase under certain circumstances and will likely increase under Dodd-Frank as a result of the requirement to pledge initial margin for over-the-counter (“OTC”) derivatives that are cleared and settled through central clearing counterparties (“OTC-cleared”) transactions entered into after June 10, 2013 and for OTC derivatives that are bilateral contracts between two counterparties (“OTC-bilateral”) transactions entered into after the phase-in period, which would be applicable to us in 2019 if the Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, Farm Credit Administration and Federal Housing Finance Agency (collectively, the “Prudential Regulators”), U.S. Commodity Futures Trading Commission (“CFTC”) and the SEC adopt the final margin requirements for non-centrally cleared derivatives published by the Bank of International Settlements and International Organization of Securities Commissions in September 2013 and re-proposed by the Prudential Regulators and CFTC in September 2014. Each of these items could also adversely affect our liquidity. The Prudential Regulators, CFTC, central clearinghouses and counterparties may also restrict or eliminate certain types of previously eligible collateral, which could also adversely affect our liquidity or charge us to pledge such collateral which would increase our costs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — Regulatory Developments — Regulation of Over-the-Counter Derivatives” and Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements included elsewhere herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity and Capital Uses — Pledged Collateral” in the 2013 Annual Report.
Item 6. Exhibits
(Note Regarding Reliance on Statements in Our Contracts: In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Metropolitan Life Insurance Company and its subsidiaries, or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and (i) should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; (iii) may apply standards of materiality in a way that is different from what may be viewed as material to investors; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Metropolitan Life Insurance Company and its subsidiaries may be found elsewhere in this Quarterly Report on Form 10-Q and Metropolitan Life Insurance Company’s other public filings, which are available without charge through the SEC’s website at www.sec.gov.)
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Exhibit No. | | Description |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | | XBRL Instance Document. |
101.SCH | | XBRL Taxonomy Extension Schema Document. |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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METROPOLITAN LIFE INSURANCE COMPANY |
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By: | | | /s/ Peter M. Carlson |
| | Name: | Peter M. Carlson |
| | Title: | Executive Vice President and Chief |
| | | Accounting Officer (Authorized Signatory |
| | | and Principal Accounting Officer) |
Date: November 12, 2014
Exhibit Index
(Note Regarding Reliance on Statements in Our Contracts: In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Metropolitan Life Insurance Company and its subsidiaries, or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and (i) should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; (iii) may apply standards of materiality in a way that is different from what may be viewed as material to investors; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Metropolitan Life Insurance Company and its subsidiaries may be found elsewhere in this Quarterly Report on Form 10-Q and Metropolitan Life Insurance Company’s other public filings, which are available without charge through the SEC’s website at www.sec.gov.)
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Exhibit No. | | Description |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | | XBRL Instance Document. |
101.SCH | | XBRL Taxonomy Extension Schema Document. |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |