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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number: 001-15787
METLIFE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-4075851
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Madison Avenue
New York, New York 10010-3690
(212) 578-2211
(Address of principal executive offices, including zip code, and
Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
At November 10, 2000, 764,558,831 shares of the Registrant's Common Stock, $.01
par value per share, were outstanding.
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TABLE OF CONTENTS
<TABLE>
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Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Interim Condensed Consolidated Statements of Income for the
three months and nine months ended September 30, 2000 and 1999 3
Interim Condensed Consolidated Balance Sheets at September 30, 2000
(unaudited) and December 31, 1999 4
Unaudited Interim Condensed Consolidated Statement of Stockholders'
Equity for the nine months ended September 30, 2000 5
Unaudited Interim Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2000 and 1999 6
Notes to Unaudited Interim Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 86
PART II - OTHER INFORMATION
86
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 88
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METLIFE, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma Nine
Months Ended
Three Months Nine Months September 30,
Ended September 30, Ended September 30, (Note 4)
------------------------- ------------------------ -------------
2000 1999 2000 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUES
Premiums $ 3,076 $ 2,938 $ 10,117 $ 8,724 $ 9,223
Universal life and investment-type product policy
fees 450 368 1,367 1,019 1,367
Net investment income 2,340 2,383 7,405 7,189 6,774
Other revenues 636 531 1,995 1,579 2,006
Net realized investment losses (net of amounts
allocable to other accounts of $(9), $(3), $14,
$37 and $3, respectively) (284) (22) (431) (177) (411)
Contribution from the closed block 35 -- 36 -- 60
-------- -------- -------- -------- --------
6,253 6,198 20,489 18,334 19,019
-------- -------- -------- -------- --------
EXPENSES
Policyholder benefits and claims (includes amounts
directly related to net realized investment
losses of $(5), $(5), $3, $11 and $2,
respectively) 3,204 3,154 10,540 9,554 9,623
Interest credited to policyholder account balances 754 625 2,175 1,832 2,176
Policyholder dividends 88 453 693 1,237 314
Payments to former Canadian policyholders -- -- 327 -- --
Other expenses (includes amounts directly related
to net realized investment losses of $(4), $2, $11,
$26 and $1, respectively 1,895 1,509 5,775 4,930 5,608
-------- -------- -------- -------- --------
5,941 5,741 19,510 17,553 17,721
-------- -------- -------- -------- --------
Income before provision for income taxes and
extraordinary item 312 457 979 781 1,298
Provision for income taxes 71 182 447 353 414
-------- -------- -------- -------- --------
Income before extraordinary item 241 275 532 428 884
Extraordinary item - demutualization expense -- 33 170 77 --
-------- -------- -------- -------- --------
Net income $ 241 $ 242 $ 362 $ 351 $ 884
======== ======== ======== ======== ========
Net income after date of demutualization (Note 5) $ 241 $ 582
======== ========
Net income per share
Basic $ 0.31 $ 0.75 $ 1.14
======== ======== ========
Diluted $ 0.31 $ 0.74 $ 1.13
======== ======== ========
</TABLE>
See accompanying notes to unaudited interim condensed
consolidated financial statements.
3
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METLIFE, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value $ 85,709 $ 96,981
Equity securities, at fair value 2,276 2,006
Mortgage loans on real estate 16,110 19,739
Real estate and real estate joint ventures 5,638 5,649
Policy loans 4,259 5,598
Other limited partnership interests 1,619 1,331
Short-term investments 1,985 3,055
Other invested assets 2,297 1,501
--------- ---------
119,893 135,860
Cash and cash equivalents 1,600 2,789
Accrued investment income 1,528 1,725
Premiums and other receivables 8,064 6,681
Deferred policy acquisition costs 6,922 9,069
Deferred income taxes 238 603
Other 4,608 3,564
Closed block assets 39,533 --
Separate account assets 75,103 64,941
--------- ---------
$ 257,489 $ 225,232
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 41,957 $ 73,582
Policyholder account balances 53,339 45,901
Other policyholder funds 5,446 4,498
Policyholder dividends payable 313 974
Short-term debt 1,768 4,208
Long-term debt 2,892 2,514
Current income taxes payable 354 548
Other 16,912 14,376
Closed block liabilities 43,113 --
Separate account liabilities 75,103 64,941
--------- ---------
241,197 211,542
--------- ---------
Commitments and contingencies (Note 8)
Company-obligated mandatorily redeemable securities of
subsidiary trusts holding solely junior subordinated
debentures of their Parents 1,085 --
--------- ---------
Stockholders' Equity:
Preferred stock, par value $.01 per share; 200,000,000
shares authorized; none issued -- --
Series A Junior Participating Preferred Stock -- --
Common stock, par value $.01 per share; 3,000,000,000 shares
authorized; 786,203,472 shares issued 8 --
Additional paid-in capital 14,926 --
Retained earnings 582 14,100
Treasury stock, at cost; 19,203,403 shares (407) --
Accumulated other comprehensive income (loss) 98 (410)
--------- ---------
15,207 13,690
--------- ---------
$ 257,489 $ 225,232
========= =========
</TABLE>
See accompanying notes to unaudited interim condensed
consolidated financial statements.
4
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METLIFE, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
Accumulated Other Comprehensive
Income (Loss)
-----------------------------------
Net Foreign Minimum
Additional Treasury Unrealized Currency Pension
Common Paid-in Retained Stock Investment Translation Liability
Stock Capital Earnings at Cost Gains (Losses) Adjustment Adjustment Total
-------- -------- --------- -------- -------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 $ -- $ -- $ 14,100 $ -- $ (297) $ (94) $ (19) $ 13,690
Policy credits and cash payments
to eligible policyholders (2,958) (2,958)
Common stock issued
in demutualization 5 10,917 (10,922) --
Initial public offering
of common stock 2 3,152 3,154
Private placement of common stock 1 854 855
Unit offering 3 3
Treasury stock acquired (407) (407)
Comprehensive income:
Net loss before date of
demutualization (220) (220)
Net income after date of
demutualization 582 582
Other comprehensive income:
Unrealized investment gains,
net of related offsets,
reclassification adjustments
and income taxes 518 518
Foreign currency translation
adjustments (10) (10)
--------
Other comprehensive income 508
--------
Comprehensive income 870
-------- -------- -------- -------- -------- -------- ------- --------
Balance at September 30, 2000 $ 8 $ 14,926 $ 582 $ (407) $ 221 $ (104) $ (19) $ 15,207
======== ======== ======== ======== ======== ======== ======= ========
</TABLE>
See accompanying notes to unaudited interim
condensed consolidated financial statements.
5
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METLIFE, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,625 $ 3,564
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities 28,919 56,979
Equity securities 490 444
Mortgage loans on real estate 1,459 1,234
Real estate and real estate joint ventures 434 588
Other limited partnership interests 366 397
Purchases of:
Fixed maturities (33,796) (56,334)
Equity securities (526) (270)
Mortgage loans on real estate (1,030) (3,491)
Real estate and real estate joint ventures (337) (234)
Other limited partnership interests (539) (290)
Net change in short-term investments 1,167 (3,043)
Net change in policy loans (179) 42
Purchase of business, net of cash received (416) (267)
Proceeds from sales of businesses 121 --
Net change in investment collateral 1,877 2,356
Other, net (544) (155)
-------- --------
Net cash used in investing activities (2,534) (2,044)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued 4,009 --
Treasury stock acquired (407) --
Net proceeds from issuance of company-obligated
mandatorily redeemable securities of
subsidiary trust holding solely junior
subordinated debentures of its Parent 969 --
Cash payments to eligible policyholders (2,550) --
Policyholder account balances:
Deposits 20,236 17,420
Withdrawals (20,268) (18,873)
Net change in short-term debt (2,442) 2,035
Long-term debt issued 214 66
Long-term debt repaid (41) (416)
-------- --------
Net cash (used in) provided by financing activities (280) 232
-------- --------
Change in cash and cash equivalents (1,189) 1,752
Cash and cash equivalents, beginning of period 2,789 3,301
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,600 $ 5,053
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 304 $ 283
======== ========
Income taxes $ 279 $ 354
======== ========
Non-cash transactions during the period:
Policy credits to eligible policyholders $ 408 $ --
======== ========
Business acquisitions - assets $ 23,729 $ --
======== ========
Business acquisitions - liabilities $ 22,482 $ --
======== ========
</TABLE>
See accompanying notes to unaudited interim
condensed consolidated financial statements.
6
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METLIFE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
MetLife, Inc. and its subsidiaries (the "Company") is a leading provider of
insurance and financial services to a broad section of institutional and
individual customers. The Company offers life insurance, annuities and mutual
funds to individuals and group insurance, reinsurance and retirement and savings
products and services to corporations and other institutions.
On April 7, 2000 (the "date of demutalization"), Metropolitan Life
Insurance Company ("Metropolitan Life") converted from a mutual life insurance
company to a stock life insurance company and became a wholly-owned subsidiary
of MetLife, Inc. ("MetLife"), a Delaware corporation. The conversion was
pursuant to an order by the New York Superintendent of Insurance
("Superintendent") approving Metropolitan Life's plan of reorganization, as
amended (the "plan").
On the date of demutualization, each policyholder's membership interest in
Metropolitan Life was extinguished and each eligible policyholder received, in
exchange for that interest, trust interests representing shares of common stock
of MetLife to be held in a trust, cash or an adjustment to their policy values
in the form of policy credits, as provided in the plan. In addition,
Metropolitan Life's Canadian branch made cash payments to holders of certain
policies transferred to Clarica Life Insurance Company in connection with the
sale of a substantial portion of Metropolitan Life's Canadian operations in
1998, as a result of a commitment made in connection with obtaining Canadian
regulatory approval of that sale.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America. These condensed consolidated financial statements
reflect all adjustments (which include only normal recurring adjustments)
necessary to present fairly the consolidated financial position of the Company
and its consolidated results of operations and cash flows for the periods
presented. Interim results are not necessarily indicative of full year
performance. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto for the year ended December 31, 1999 included in MetLife's
Registration Statement on Form S-1 (registration no. 333-91517) filed with the
Securities and Exchange Commission.
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PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of MetLife and its subsidiaries, partnerships and joint ventures in
which the Company has a majority voting interest or general partner interest
with limited removal rights from limited partners. All material intercompany
accounts and transactions have been eliminated.
EXTRAORDINARY ITEM - DEMUTUALIZATION EXPENSE
The accompanying condensed consolidated statements of income include
extraordinary charges of $33 (net of income tax benefit of $5) for the three
months ended September 30, 1999 and $170 (net of income tax benefit of $60) and
$77 (net of income tax benefit of $15) for the nine months ended September 30,
2000 and 1999, respectively, related to costs associated with the
demutualization. There were no extraordinary charges for the three months ended
September 30, 2000.
FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary, at the
end of each successive interim period to reflect the current estimate of the
annual effective tax rate. Income tax expense for the three months ended
September 30, 2000 reflects the effect of a reduction in prior year capital
gains tax. Income tax expense for the nine months ended September 30, 2000 also
reflects the effect of surplus tax for the period prior to demutualization and
the non-deductible payment in the second quarter to the former Canadian
policyholders.
CLOSED BLOCK
On the date of demutualization, Metropolitan Life established a closed
block for the benefit of holders of certain individual life insurance policies
of Metropolitan Life. Assets have been allocated to the closed block in an
amount that has been determined to produce cash flows which, together with
anticipated revenues from the policies included in the closed block, are
reasonably expected to be sufficient to support obligations and liabilities
relating to these policies, including, but not limited to, provisions for the
payment of claims and certain expenses and taxes, and to provide for the
continuation of policyholder dividend scales in effect for 1999, if the
experience underlying such dividend scales continues, and for appropriate
adjustments in such scales if the experience changes. The closed block assets,
the cash flows generated by the closed block assets and the anticipated revenues
from the policies in the closed block will benefit only the holders of the
policies in the closed block. To the extent that, over time, cash flows from the
assets allocated to the closed block and claims and other experience related to
the closed block are, in the aggregate, more or less favorable than what was
assumed when the closed block was established, total dividends paid to closed
block policyholders in the future may be greater than or less than the total
dividends that would have been paid to these policyholders if the policyholder
dividend scales in effect for 1999 had been continued. Any cash flows in excess
of amounts assumed will be available for distribution over time to closed block
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policyholders and will not be available to stockholders. The closed block will
continue in effect as long as any policy in the closed block remains in force.
The expected life of the closed block is over 100 years.
The Company uses the same accounting principles to account for the
participating policies included in the closed block as it used prior to the date
of demutualization. However, the Company establishes a policyholder dividend
obligation for earnings that will be paid to policyholders as additional
dividends as described below. The excess of closed block liabilities over closed
block assets at the effective date of the demutualization represents the
estimated maximum future contributions from the closed block expected to result
from operations attributed to the closed block after income taxes. Contributions
from the closed block are recognized in income over the period the policies and
contracts in the closed block remain in force. Management believes that over
time the actual cumulative contributions from the closed block will
approximately equal the expected cumulative contributions due to the effect of
dividend changes. If, over the period the closed block remains in existence, the
actual cumulative contribution from the closed block is greater than the
expected cumulative contribution from the closed block, the Company will pay the
excess of the actual cumulative contribution from the closed block over the
expected cumulative contribution to closed block policyholders as additional
policyholder dividends unless offset by future unfavorable experience of the
closed block and, accordingly, will recognize only the expected cumulative
contribution in income with the excess recorded as a policyholder dividend
obligation. If over such period, the actual cumulative contribution from the
closed block is less than the expected cumulative contribution from the closed
block, the Company will recognize only the actual contribution in income.
However, the Company may change policyholder dividend scales in the future,
which would be intended to increase future actual contributions until the actual
cumulative contributions equal the expected cumulative contributions.
The results of operations of the closed block are presented as a single
line item in the Company's condensed consolidated statements of income entitled,
"Contribution from the closed block." In addition, all assets and liabilities
allocated to the closed block are reported in the Company's condensed
consolidated balance sheets separately under the captions "Closed block assets"
and "Closed block liabilities," respectively. Prior to the establishment of the
closed block, the assets, liabilities, revenues and expenses currently in the
closed block were reported in various line items in the Company's condensed
consolidated financial statements. Accordingly, certain line items in the
Company's condensed consolidated financial statements subsequent to the
establishment of the closed block reflect material reductions in reported
amounts, as compared to periods prior to the establishment of the closed block,
while having no effect on stockholders' equity or net income.
The pre-tax contribution from the closed block includes only those
revenues, benefit payments, dividends, premium taxes, administrative and
investment expenses considered in funding the closed block and deferred policy
acquisition costs incurred prior to the date of demutualization, in each case
applicable to policies included in the closed block. Income tax expenses
applicable to the closed block are allocated to the closed block and are
reflected as a component of the provision for income taxes.
9
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APPLICATION OF ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2000, the Company adopted Statement of Position
("SOP") 98-7, Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk ("SOP 98-7"). SOP 98-7 provides guidance on the method
of accounting for insurance and reinsurance contracts that do not transfer
insurance risk, defined in the SOP as the deposit method. SOP 98-7 classifies
insurance and reinsurance contracts for which the deposit method is appropriate
into those that 1) transfer only significant timing risk, 2) transfer only
significant underwriting risk, 3) transfer neither significant timing nor
underwriting risk and 4) have an indeterminate risk. Adoption of SOP 98-7 did
not have a material effect on the Company's condensed consolidated financial
statements.
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an Amendment of FASB
Statement No. 133 ("SFAS 138"). In June 1999, the FASB also issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133
("SFAS 137"). SFAS 137 defers the provisions of Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133") until January 1, 2001. SFAS 133, as amended by SFAS 138,
requires, among other things, that all derivatives be recognized in the
consolidated balance sheets as either assets or liabilities and measured at fair
value. The corresponding derivative gains and losses should be reported based
upon the hedge relationship, if such a relationship exists. Changes in the fair
value of derivatives that are not designated as hedges or that do not meet the
hedge accounting criteria in SFAS 133 are required to be reported in income. The
Company is in the process of quantifying the impact of SFAS 133 on its
consolidated financial statements.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities - a replacement of FASB Statement No. 125
("SFAS 140"). SFAS 140 is effective for transfers and extinguishments of
liabilities occurring after March 31, 2001 and is effective for disclosures
about securitizations and collateral and for recognition and reclassification of
collateral for fiscal years ending after December 15, 2000. The Company is in
the process of quantifying the impact, if any, of the requirements of SFAS 140.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 as of January 1, 2001. The Company is
in the process of quantifying the impact, if any, of the requirements of SAB
101.
In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles ("Codification") which is
effective on January 1, 2001. Codification provides a comprehensive guide of
statutory accounting
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principles. However, individual states retain the right to adopt Codification in
whole or in part. The impact of adopting Codification will be reported as an
adjustment to statutory surplus by insurance enterprises on the effective date.
The Company is in the process of quantifying the impact on statutory surplus of
the insurance subsidiaries of Codification and the state prescribed accounting
principles that may be adopted by the various states of domicile.
2. INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS
On the date of demutualization, MetLife conducted an initial public
offering of 202,000,000 shares of its common stock and concurrent private
placements of an aggregate of 60,000,000 shares of its common stock at an
initial public offering price of $14.25 per share. The shares of common stock
issued in the offerings are in addition to 493,903,472 shares of common stock of
MetLife distributed to the Metropolitan Life policyholder trust for the benefit
of policyholders of Metropolitan Life in connection with the demutualization. On
April 10, 2000, MetLife issued 30,300,000 additional shares of common stock as a
result of the exercise of over-allotment options granted to underwriters in the
initial public offering.
On June 27, 2000, MetLife's Board of Directors authorized the repurchase of
up to $1 billion of MetLife's outstanding common stock, over an unspecified
period of time. Under this authorization, MetLife may purchase the stock from
the Metropolitan Life policyholder trust, in the open market, and in private
transactions. Through September 30, 2000, 19,203,403 shares have been acquired
for $407.
On April 7, 2000, the Company and MetLife Capital Trust I, a Delaware
statutory business trust wholly owned by MetLife, issued 20,125,000 8.00% equity
security units ("units"). Each unit consists of (i) a purchase contract under
which the holder agrees to purchase, for $50.00, shares of common stock of
MetLife on May 15, 2003 and (ii) a capital security, with a stated liquidation
amount of $50.00. The number of shares to be purchased at such date will be
determined based on the average trading price of MetLife common stock. The
proceeds from the sale of the units were used to acquire $1,006 8.00% debentures
of MetLife ("MetLife debentures"). The capital securities represent undivided
beneficial ownership interests in MetLife Capital Trust I's assets, which
consist solely of the MetLife debentures. These securities are pledged to
collateralize the obligations of the unit holder under the related purchase
contracts. Holders of the capital securities are entitled to receive cumulative
cash distributions accruing from April 7, 2000 and payable quarterly in arrears
commencing August 15, 2000 at an annual rate of 8.00%. MetLife irrevocably
guarantees, on a senior and unsecured basis, the payment in full of
distributions on the capital securities and the stated liquidation amount of the
capital securities, in each case to the extent of available trust funds. Holders
of the capital securities generally have no voting rights.
The MetLife debentures bear interest at an annual rate of 8.00% of the
principal amount, payable quarterly in arrears commencing August 15, 2000 and
mature on May 15, 2005. These debentures are unsecured. Because MetLife is a
holding company, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation,
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reorganization or otherwise, is subject to the prior claims of creditors of the
subsidiary, except to the extent MetLife may be recognized as a creditor of that
subsidiary. Accordingly, MetLife's obligations under the debentures are
effectively subordinated to all existing and future liabilities of its
subsidiaries.
In connection with the contribution to Metropolitan Life of the net
proceeds from the initial public offering, the private placements and the units
offering, Metropolitan Life issued to MetLife a $1,006 8.00% mandatorily
convertible note due 2005 having the same interest and payment terms as set
forth in the debentures of MetLife issued to MetLife Capital Trust I. The
principal amount of the capital note is mandatorily convertible into common
stock of Metropolitan Life upon maturity or acceleration of the capital note and
without any further action by MetLife or Metropolitan Life. In addition, the
capital note provides that Metropolitan Life may not make any payment of
principal or interest on the capital note so long as specified payment
restrictions exist and have not been waived by the Superintendent. Payment
restrictions would exist if Metropolitan Life fails to exceed certain thresholds
relative to the level of its statutory risk-based capital or the amount of its
outstanding capital notes, surplus notes or similar obligations. At September
30, 2000, Metropolitan Life's statutory total adjusted capital exceeded these
limitations.
3. CLOSED BLOCK
The closed block was established on the effective date of demutualization.
Amounts reported at April 7, 2000 and for the period after demutualization are
as of April 1, 2000 and for the period beginning on April 1, 2000 (the effect of
transactions from April 1, 2000 through April 6, 2000 are not considered
material). Certain amounts reported for the closed block are based on estimates
and assumptions that management believes are reasonable. Revisions to such
estimates will be recorded in the period of change. Pro forma amounts are as if
the closed block had been established on January 1, 2000.
Closed block revenues and expenses were as follows:
<TABLE>
<CAPTION>
Pro Forma Pro Forma
January 1, 2000 April 7, 2000 Nine Months
through through Ended
April 6, 2000 September 30, 2000 September 30, 2000
------------- ------------------ ------------------
<S> <C> <C> <C>
REVENUES
Premiums $ 894 $ 1,829 $ 2,723
Net investment income and other revenues 620 1,248 1,868
Net realized investment losses (net of amounts allocable
to other accounts of $11, $28 and $39, respectively) (20) (9) (29)
------- ------- -------
1,494 3,068 4,562
------- ------- -------
EXPENSES
Policyholder benefits and claims (includes amounts
directly related to net realized investment
losses of $-, $21 and $21, respectively) 916 1,831 2,747
Policyholder dividends 379 745 1,124
Policyholder dividend obligation -- 43 43
Other expenses (includes amounts directly related to net
realized investment losses of $11,
$7 and $18, respectively) 175 413 588
------- ------- -------
1,470 3,032 4,502
------- ------- -------
Contribution from the closed block $ 24 $ 36 $ 60
======= ======= =======
</TABLE>
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Closed block revenues and expenses for the three months ended September 30,
2000 were as follows:
<TABLE>
<CAPTION>
<S> <C>
REVENUES
Premiums $ 893
Net investment income and other revenues 622
Net realized investment gains (net of amounts allocable to
other accounts of $34) 11
------
1,526
------
EXPENSES
Policyholder benefits and claims (includes amounts
directly related to net realized investment
gains of $28) 913
Policyholder dividends 369
Policyholder dividend obligation 16
Other expenses (includes amounts directly related to
net realized investment gains of $6) 193
------
1,491
------
Contribution from the closed block $ 35
======
</TABLE>
13
<PAGE> 14
Closed block assets and liabilities at September 30, 2000 and April 7, 2000
were as follows:
<TABLE>
<CAPTION>
September 30, April 7,
2000 2000
------------ ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value $24,699 $23,939
Equity securities, at fair value 33 --
Mortgage loans on real estate 5,422 4,744
Policy loans 3,794 3,762
Short-term investments 106 167
Other invested assets 398 325
------- -------
34,452 32,937
Cash and cash equivalents 725 643
Deferred policy acquisition costs 3,820 4,011
Other 536 810
------- -------
Total closed block assets $39,533 $38,401
======= =======
LIABILITIES
Future policy benefits $39,009 $38,662
Other policyholder liabilities 1,200 1,068
Other 2,904 2,377
------- -------
Total closed block liabilities $43,113 $42,107
======= =======
</TABLE>
14
<PAGE> 15
4. PRO FORMA INFORMATION
The pro forma information for the nine months ended September 30, 2000 is
provided for informational purposes only and does not necessarily indicate the
consolidated results of operations had the demutualization been consummated on
January 1, 2000. The pro forma information also does not project or forecast the
consolidated results of operations for any future period.
The pro forma earnings information gives effect to the demutualization and
other related events as if they occurred on January 1, 2000. Accordingly, pro
forma earnings reflect the following adjustments:
- The elimination of surplus tax of $30, since Metropolitan Life will no
longer be subject to such tax as a stock life insurance company;
- The elimination of interest of $9 (net of income taxes of $5) related
to the repayment of $900 of short-term debt incurred in connection
with Metropolitan Life's acquisition of GenAmerica for the period
January 1, 2000 through April 6, 2000;
- The elimination of cash payments of $327 made by Metropolitan Life's
Canadian branch to certain holders of policies included in its
Canadian business sold to Clarica Life Insurance Company in 1998;
- A charge to other expenses for minority interest of $20 on the capital
securities at a rate of 8.00% and the accretion of the discount of $2
on the carrying value of the Company-obligated mandatorily redeemable
securities of subsidiary trust holding solely debentures of its
Parents as well as the related income tax effect of $8 for the period
January 1, 2000 through April 6, 2000;
- The elimination of demutualization expenses of $170 (net of income
taxes of $60) which were assumed to have been incurred prior to
January 1, 2000; and
- The establishment of the closed block (See Note 3 for pro forma
amounts of revenues and expenses).
5. EARNINGS AFTER DATE OF DEMUTUALIZATION AND EARNINGS PER SHARE
Net income after the date of demutualization is based on the results of
operations for the period beginning on April 1, 2000, adjusted to eliminate the
payments to the former Canadian policyholders and costs of demutualization
recorded in April 2000 which are applicable to the period prior to
demutualization.
15
<PAGE> 16
The following presents a reconciliation of the weighted average shares used
in calculating basic earnings per share to those used in calculating diluted
earnings per share.
<TABLE>
<CAPTION>
Net Per Share
Income Shares Amount
----------- ----------- ---------
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
Amounts for basic earnings per share $ 241 772,738,955 $0.31
=========== =====
Incremental shares from conversion of
forward purchase contracts 15,957,841
----------
Amounts for diluted earnings per share $ 241 788,696,796 $0.31
=========== =========== =====
FOR THE PERIOD APRIL 7, 2000 THROUGH SEPTEMBER 30, 2000
Amounts for basic earnings per share $ 582 775,297,449 $0.75
=========== =====
Incremental shares from conversion of
forward purchase contracts 10,070,045
-----------
Amounts for diluted earnings per share $ 582 785,367,494 $0.74
=========== =========== =====
FOR THE PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 2000
Amounts for basic earnings per share $ 884 778,942,162 $1.14
=========== =====
Incremental shares from conversion of
forward purchase contracts 6,071,285
-----------
Amounts for diluted earnings per share $ 884 785,013,447 $1.13
=========== =========== =====
</TABLE>
Earnings per share amounts, on a basic and diluted basis, have been
calculated based upon the weighted average common shares outstanding or deemed
to be outstanding only for the period after the date of demutualization. Pro
forma earnings per share amounts are presented as if the transactions discussed
in Notes 2, 3 and 4 had occurred on January 1, 2000.
Basic earnings per share is computed based on the weighted average number
of shares outstanding during the period. Diluted earnings per share include the
dilutive effect of forward purchase contracts, using the treasury stock method.
Under the treasury stock method, exercise of the forward purchase contracts is
assumed with the proceeds used to purchase common stock at the average market
price for the period. The difference between the number of shares assumed issued
and number of shares assumed purchased represents the dilutive shares.
16
<PAGE> 17
6. GENAMERICA ACQUISITION
On January 6, 2000, Metropolitan Life completed its acquisition of
GenAmerica Corporation ("GenAmerica") for $1.2 billion plus costs of the
acquisition. GenAmerica is a holding company which includes General American
Life Insurance Company, 48.3% of the outstanding shares of Reinsurance Group of
America, Incorporated ("RGA") common stock, a provider of reinsurance, and
61.0% of the outstanding shares of Conning Corporation ("Conning") common
stock, an asset manager. Metropolitan Life owned 9.6% of the outstanding shares
of RGA common stock prior to the completion of the GenAmerica acquisition. On
the date of the acquisition, Metropolitan Life's ownership percentage of the
outstanding shares of RGA common stock was 57.9%.
In connection with the acquisition of GenAmerica, Metropolitan Life
obtained GenAmerica Capital I, a wholly-owned subsidiary trust of GenAmerica. In
June 1997, GenAmerica Capital I issued $125 of 8.525% capital securities.
GenAmerica has fully and conditionally guaranteed, on a subordinated basis, the
obligation of the trust under the capital securities and is obligated to
mandatorily redeem the securities on June 30, 2027. GenAmerica may prepay the
securities at any time after June 30, 2007.
In April 2000, Metropolitan Life acquired the outstanding shares of Conning
common stock not already owned by Metropolitan Life for $73.
As part of the GenAmerica acquisition, General American Life Insurance
Company paid Metropolitan Life a fee of $120 in connection with the assumption
of certain funding agreements. The fee has been considered as part of the
purchase price of GenAmerica. In connection with this transaction, Metropolitan
Life made a capital contribution of $120 to General American Life after the
completion of the acquisition.
The Company's total revenues, income before extraordinary items and net
income for the three months and nine months ended September 30, 1999 on both an
historical and pro forma basis as if the acquisition of GenAmerica had occurred
on January 1, 1999 were as follows:
For the three months ended September 30, 1999
<TABLE>
<CAPTION>
Income Before
Total Revenues Extraordinary Item Net Income
-------------- ------------------ ----------
<S> <C> <C> <C>
Historical $ 6,198 $ 275 $ 242
Pro forma $ 7,037 $ 179 $ 86
</TABLE>
17
<PAGE> 18
For the nine months ended September 30, 1999
<TABLE>
<CAPTION>
Income Before
Total Revenues Extraordinary Item Net Income
-------------- ------------------ ----------
<S> <C> <C> <C>
Historical $ 18,334 $ 428 $ 351
Pro forma $ 21,222 $ 357 $ 216
</TABLE>
7. NET REALIZED INVESTMENT LOSSES
Net realized investment losses, including changes in valuation allowances,
for the three months and nine months ended September 30, 2000 and 1999 were as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Fixed maturities $(332) $ (61) $(572) $(337)
Equity securities 25 53 104 16
Mortgage loans on real estate (20) (5) (14) (1)
Real estate and real estate joint ventures 29 3 56 169
Other limited partnership interests 11 1 8 28
Sales of businesses -- -- 3 --
Other 12 (10) (30) (89)
----- ----- ----- -----
(275) (19) (445) (214)
Amounts allocable to:
Deferred policy acquisition costs (4) 2 11 26
Participating pension contracts (5) (5) 3 11
----- ----- ----- -----
$(284) $ (22) $(431) $(177)
===== ===== ===== =====
</TABLE>
Realized investment losses have been reduced by (1) deferred policy
acquisition cost adjustments to the extent that such adjustments result from
realized investment gains and losses and (2) adjustments to participating
contractholder accounts when amounts equal to such investment gains and losses
are credited to or deducted from the contractholders' accounts. This
presentation may not be comparable to presentations made by other insurers.
8. COMMITMENTS AND CONTINGENCIES
Metropolitan Life is currently a defendant in approximately 550 lawsuits
raising allegations of improper marketing and sales of individual life insurance
policies or annuities. These lawsuits are generally referred to as "sales
practices claims".
On December 28, 1999, after a fairness hearing, the United States District
Court for the Western District of Pennsylvania approved a class action
settlement resolving a multidistrict litigation proceeding involving alleged
sales practices claims. No appeal was taken, and the settlement is final. The
settlement class includes most of the owners of
18
<PAGE> 19
permanent life insurance policies and annuity contracts or certificates issued
pursuant to individual sales in the United States by Metropolitan Life,
Metropolitan Insurance and Annuity Company or Metropolitan Tower Life Insurance
Company between January 1, 1982 and December 31, 1997. The class includes owners
of approximately six million in-force or terminated insurance policies and
approximately one million in-force or terminated annuity contracts or
certificates.
In addition to dismissing the consolidated class actions, the District
Court's order also bars sales practices claims by class members with respect to
sales by the defendant insurers during the class period, effectively resolving
all pending class actions against these insurers.
Under the terms of the order, only those class members who excluded
themselves from the settlement may continue an existing, or start a new, sales
practices lawsuit against Metropolitan Life, Metropolitan Insurance and Annuity
Company or Metropolitan Tower Life Insurance Company for sales that occurred
during the class period. Approximately 20,000 class members elected to exclude
themselves from the settlement. At September 30, 2000, approximately 300 of
these "opt-outs" have filed individual lawsuits.
Metropolitan Life expects that the total cost of the settlement will be
approximately $957. This amount is equal to the amount of the increase in
liabilities for the death benefits and policy adjustments and the present value
of expected cash payments to be provided to included class members, as well as
attorneys' fees and expenses and estimated other administrative costs, but does
not include the cost of litigation with policyholders who are excluded from the
settlement. Metropolitan Life believes that the cost to it of the settlement
will be substantially covered by available reinsurance and the provisions made
in its consolidated financial statements, and thus will not have a material
adverse effect on its business, results of operations or financial position.
Metropolitan Life has made some recoveries under those reinsurance agreements
and, although there is no assurance that other reinsurance claim submissions
will be paid, Metropolitan Life believes payment is likely to occur.
Metropolitan Life believes it has made adequate provision in its consolidated
financial statements for all probable losses for sales practices claims,
including litigation costs involving policyholders who are excluded from the
settlement as well as for the two class action settlements described in the
following paragraph.
Separate from the Metropolitan Life class action settlement, similar sales
practices class action litigation against New England and General American Life
Insurance Company has been settled. The New England case, a consolidated
multidistrict litigation in the United States District Court for the District of
Massachusetts, involves approximately 600,000 life insurance policies sold
during the period January 1, 1983 through August 31, 1996. The settlement of
this case was approved by the District Court on October 4, 2000, and one or more
appeals may be filed. The Company expects that the total cost of this settlement
to it will be approximately $150. The settlement of the consolidated
multidistrict sales practices class action case against General American was
preliminarily approved by the United States District Court for the Eastern
District of Missouri. The
19
<PAGE> 20
fairness hearing for the General American settlement is scheduled for December
15, 2000. The General American case involves approximately 250,000 life
insurance policies sold during the period 1982 through 1996.
The Metropolitan Life class action settlement does not resolve two putative
class actions involving sales practices claims filed against Metropolitan Life
in Canada. Two recent Ontario decisions involving other parties declined to
certify similar purported class actions. A certified class action with
conditionally certified subclasses against Metropolitan Life, Metropolitan
Insurance and Annuity Company, Metropolitan Tower Life Insurance Company and
various individual defendants alleging improper sales abroad is pending in the
United States District Court for the Southern District of New York and
settlement discussions are continuing.
In the past, some individual sales practices claims have been resolved
through settlement, won by dispositive motions, or, in a few instances, went to
trial. Most of the current cases seek substantial damages, including in some
cases punitive and treble damages and attorneys' fees. Additional litigation
relating to the Company's marketing and sales of individual life insurance may
be commenced in the future.
See Note 9 of Notes to Consolidated Financial Statements for the year ended
December 31, 1999 included in MetLife's Registration Statement on Form S-1
(registration no. 333-91517) filed with the Securities and Exchange Commission
for information regarding reinsurance contracts related to sales practices
claims.
Regulatory authorities in a small number of states have had investigations
or inquiries relating to Metropolitan Life's or New England's sales of
individual life insurance policies or annuities. Over the past several years,
Metropolitan Life has resolved a number of investigations by regulatory
authorities for monetary payments and certain other relief, and may continue to
do so in the future.
Metropolitan Life is also a defendant in numerous lawsuits seeking
compensatory and punitive damages for personal injuries allegedly caused by
exposure to asbestos or asbestos-containing products. Metropolitan Life has
never engaged in the business of manufacturing, producing, distributing or
selling asbestos or asbestos-containing products. Rather, these lawsuits,
currently numbering in the thousands, have principally been based upon
allegations relating to certain research, publication and other activities of
one or more of Metropolitan Life's employees during the period from the 1920's
through approximately the 1950's and alleging that Metropolitan Life learned or
should have learned of certain health risks posed by asbestos and, among other
things, improperly publicized or failed to disclose those health risks. Legal
theories asserted against Metropolitan Life have included negligence,
intentional tort claims and conspiracy claims concerning the health risks
associated with asbestos. While Metropolitan Life believes it has meritorious
defenses to these claims, and has not suffered any adverse judgments in respect
of these claims, most of the cases have been resolved by settlements.
Metropolitan Life intends to continue to exercise its best
20
<PAGE> 21
judgment regarding settlement or defense of such cases. The number of such cases
that may be brought or the aggregate amount of any liability that Metropolitan
Life may ultimately incur is uncertain.
Significant portions of amounts paid in settlement of such cases have been
funded with proceeds from a previously resolved dispute with Metropolitan Life's
primary, umbrella and first level excess liability insurance carriers.
Metropolitan Life is presently in litigation with several of its excess
liability insurers regarding amounts payable under its policies with respect to
coverage for these claims. The trial court has granted summary judgment to these
insurers. Metropolitan Life has appealed. There can be no assurance regarding
the outcome of this litigation or the amount and timing of recoveries, if any,
from these excess liability insurers. Metropolitan Life's asbestos-related
litigation with these insurers should have no effect on its recoveries under
excess insurance policies that were obtained in 1998 for asbestos-related
claims.
See Note 9 of Notes to Consolidated Financial Statements for the year ended
December 31, 1999 included in MetLife's Registration Statement on Form S-1
(registration no. 333-91517) filed with the Securities and Exchange Commission
for information regarding insurance policies obtained in 1998 related to
asbestos-related claims.
A purported class action suit involving policyholders in 32 states has been
filed in a Rhode Island state court against a Metropolitan Life subsidiary,
Metropolitan Property and Casualty Insurance Company, with respect to claims by
policyholders for the alleged diminished value of automobiles after
accident-related repairs. The trial court recently denied a motion by
Metropolitan Property and Casualty Insurance Company for summary judgment, and
discovery has commenced. A similar "diminished value" allegation was made
recently in a Texas Deceptive Trade Practices Act letter and lawsuit which
involve a Metropolitan Property and Casualty Insurance Company policyholder. A
purported class action has been filed against Metropolitan Property and Casualty
Insurance Company and its subsidiary, Metropolitan Casualty Insurance Company,
in Florida by a policyholder alleging breach of contract and unfair trade
practices with respect to allowing the use of parts not made by the original
manufacturer to repair damaged automobiles. These suits are in the early stages
of litigation and Metropolitan Property and Casualty Insurance Company and
Metropolitan Casualty Insurance Company intend to defend themselves vigorously
against these suits. Similar suits have been filed against several other
personal lines property and casualty insurers.
The United States, the Commonwealth of Puerto Rico and various hotels and
individuals have sued MetLife Capital Corporation, a former subsidiary of the
Company, seeking damages for clean up costs, natural resource damages, personal
injuries and lost profits and taxes based upon, among other things, a release of
oil from a barge which was being towed by the M/V Emily S. In connection with
the sale of MetLife Capital, the Company acquired MetLife Capital's potential
liability with respect to the M/V Emily S lawsuit. MetLife Capital had entered
into a sale and leaseback financing arrangement with respect to the M/V Emily S.
The plaintiffs have taken the position that MetLife
21
<PAGE> 22
Capital, as the owner of record of the M/V Emily S, is responsible for all
damages caused by the barge, including the oil spill. The governments of the
United States and Puerto Rico have claimed damages in excess of $150. The action
brought by the United States and Puerto Rico has been conditionally settled. The
Company can provide no assurance, however, that this action will be settled.
Metropolitan Life has completed a tender offer to purchase the shares of
Conning Corporation that it had not already owned. After Metropolitan Life had
announced its intention to make a tender offer, three putative class actions
were filed by Conning shareholders alleging that the prospective offer was
inadequate and constituted a breach of fiduciary duty. The parties to the
litigation have reached an agreement in principle providing for a settlement of
the actions.
Several lawsuits have been brought challenging the fairness of Metropolitan
Life's plan of reorganization and the adequacy and accuracy of Metropolitan
Life's disclosure to policyholders regarding the plan. These actions name as
defendants some or all of Metropolitan Life, MetLife, the individual directors,
the New York State Superintendent of Insurance and the underwriters for the
initial public offering, Goldman Sachs & Company and Credit Suisse First Boston.
Five purported class actions pending in the Supreme Court of the State of New
York for New York County have been consolidated within the commercial part.
There remains a separate purported class action in New York state court in New
York County and another in Kings County. The plaintiffs in the state court class
actions seek injunctive, declaratory and compensatory relief, as well as an
accounting. Some of the plaintiffs in the above described actions have also
brought a proceeding under Article 78 of New York's Civil Practice Law and Rules
challenging the Opinion and Decision of the New York Superintendent of Insurance
that approved the plan. In this action, petitioners seek to vacate the
Superintendent's Opinion and Decision and enjoin him from granting final
approval of the plan. Three purported class actions were filed in the United
States District Court for the Eastern District of New York claiming violation of
the Securities Act of 1933. The plaintiffs in these actions, which have been
consolidated, claim that the Policyholder Information Booklets relating to the
plan failed to disclose certain material facts and seek rescission and
compensatory damages. On August 3, 2000, a purported class action was filed in
the United States District Court for the Southern District of New York seeking
damages from MetLife for alleged violations of various provisions of the
Constitution of the United States in connection with the plan of reorganization.
Metropolitan Life, MetLife and the individual defendants believe they have
meritorious defenses to the plaintiffs' claims and intend to contest vigorously
all of the plaintiffs' claims in these actions. The defendants have moved to
dismiss each of these actions, except for the Kings County action and the
Article 78 proceeding, both of which are being voluntarily held in abeyance.
Two lawsuits were filed in July 2000 against Metropolitan Life alleging
racial discrimination in the marketing, sale, and administration of life
insurance policies, including "industrial" life insurance policies, sold by
Metropolitan Life decades ago. The first lawsuit was filed in the United States
District Court for the Southern District of New York and the second was filed in
the United States District Court for the Eastern District
22
<PAGE> 23
of Louisiana. The plaintiffs in these purported class actions seek unspecified
compensatory damages, punitive damages, reformation, imposition of a
constructive trust, a declaration that the alleged practices are discriminatory
and illegal, injunctive relief requiring Metropolitan Life to discontinue the
alleged discriminatory practices and adjust policy values, and other relief.
Metropolitan Life believes it has meritorious defenses to the plaintiffs' claims
and intends to contest vigorously all of the plaintiffs' claims in these
actions. Metropolitan Life has moved for summary judgment dismissing the New
York action and has moved to transfer the Louisiana action to the United States
District Court for the Southern District of New York.
Insurance Departments in a number of states recently have initiated
inquiries about possible race-based underwriting of life insurance. These
inquiries generally have been directed to all life insurers licensed in the
respective states, including Metropolitan Life and certain of its subsidiaries.
Various litigation, claims and assessments against the Company, in addition
to those discussed above and those otherwise provided for in the Company's
consolidated financial statements, have arisen in the course of the Company's
business, including, but not limited to, in connection with its activities as an
insurer, employer, investor, investment advisor and taxpayer. Further, state
insurance regulatory authorities and other Federal and state authorities
regularly make inquiries and conduct investigations concerning the Company's
compliance with applicable insurance and other laws and regulations.
In some of the matters referred to above, very large and/or indeterminate
amounts, including punitive and treble damages, are sought. While it is not
feasible to predict or determine the ultimate outcome of all pending
investigations and legal proceedings or provide reasonable ranges of potential
losses, it is the opinion of the Company's management that their outcomes, after
consideration of available insurance and reinsurance and the provisions made in
the Company's consolidated financial statements, are not likely to have a
material adverse effect on the Company's consolidated financial position.
However, given the large and/or indeterminate amounts sought in certain of these
matters and the inherent unpredictability of litigation, it is possible that an
adverse outcome in certain matters could, from time to time, have a material
adverse effect on the Company's operating results or cash flows in particular
quarterly or annual periods.
23
<PAGE> 24
9. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months and nine months ended
September 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- ------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) before date of demutualization $ -- $ 242 $ (220) $ 351
Net income after date of demutualization 241 -- 582 --
Accumulated other comprehensive income (loss):
Unrealized investment gains (losses), net of
related offsets, reclassification adjustments
and income taxes 610 (609) 518 (1,686)
Foreign currency translation adjustments (18) (2) (10) 25
------- ------- ------- -------
Accumulated other comprehensive gain (loss) 592 (611) 508 (1,661)
------- ------- ------- -------
Comprehensive income (loss) $ 833 $ (369) $ 870 $(1,310)
======= ======= ======= =======
</TABLE>
10. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Auto
&
For the three months ended September 30, 2000 Individual Institutional Home International
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ 1,140 $ 1,678 $ 664 $ 162
Universal life and investment-type
product policy fees 300 135 -- 15
Net investment income 1,590 1,020 49 62
Other revenues 215 163 5 2
Net realized investment gains (losses) (41) (175) (6) 1
Contribution from the closed block -- -- -- --
Income (loss) before provision for
income taxes and extraordinary item 270 66 (3) 12
-------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Asset Consolidation/
For the three months ended September 30, 2000 Reinsurance Management Corporate Elimination Total
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums $ 327 $ -- $ -- $ (895) $ 3,076
Universal life and investment-type
product policy fees -- -- -- -- 450
Net investment income 95 21 161 (658) 2,340
Other revenues 9 217 46 (21) 636
Net realized investment gains (losses) 2 -- (66) 1 (284)
Contribution from the closed block -- -- -- 35 35
Income (loss) before provision for
income taxes and extraordinary item 27 15 (62) (13) 312
-----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Auto
&
For the three months ended September 30, 1999 Individual Institutional Home International
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ 1,023 $ 1,420 $ 375 $ 120
Universal life and investment-type
product policy fees 233 122 -- 13
Net investment income 1,310 938 22 53
Other revenues 150 151 5 2
Net realized investment gains (losses) (12) 20 2 (3)
Income (loss) before provision for
income taxes and extraordinary item 214 211 10 (9)
--------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Asset Consolidation/
For the three months ended September 30, 1999 Reinsurance Management Corporate Elimination Total
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums $-- $ -- $ -- $ -- $ 2,938
Universal life and investment-type
product policy fees -- -- -- -- 368
Net investment income -- 20 99 (59) 2,383
Other revenues -- 196 13 14 531
Net realized investment gains (losses) -- -- (24) (5) (22)
Income (loss) before provision for
income taxes and extraordinary item -- 23 28 (20) 457
-------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
Auto
&
For the nine months ended September 30, 2000 Individual Institutional Home International
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ 3,393 $ 5,055 $ 1,965 $ 481
Universal life and investment-type
product policy fees 920 408 -- 39
Net investment income 4,766 2,902 132 190
Other revenues 619 518 23 7
Net realized investment gains (losses) (98) (216) -- 9
Contribution from the closed block -- -- -- --
Income (loss) before provision for
income taxes and extraordinary item 818 475 (12) (284)
--------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Asset Consolidation/
For the nine months ended September 30, 2000 Reinsurance Management Corporate Elimination Total
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums $ 1,055 $ -- $ -- $ (1,832) $ 10,117
Universal life and investment-type
product policy fees -- -- -- -- 1,367
Net investment income 278 63 513 (1,439) 7,405
Other revenues 20 651 109 48 1,995
Net realized investment gains (losses) (1) -- (150) 25 (431)
Contribution from the closed block -- -- -- 36 36
Income (loss) before provision for
income taxes and extraordinary item 77 55 (102) (48) 979
----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Auto
&
For the nine months ended September 30, 1999 Individual Institutional Home International
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ 3,091 $ 4,174 $ 1,102 $ 357
Universal life and investment-type
product policy fees 614 371 -- 34
Net investment income 3,911 2,836 66 154
Other revenues 410 456 14 5
Net realized investment gains (losses) 11 (52) 1 3
Income (loss) before provision for
income taxes and extraordinary item 696 665 39 (5)
--------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Asset Consolidation/
For the nine months ended September 30, 1999 Reinsurance Management Corporate Elimination Total
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums $-- $ -- $ -- $ -- $ 8,724
Universal life and investment-type
product policy fees -- -- -- -- 1,019
Net investment income -- 58 377 (213) 7,189
Other revenues -- 599 34 61 1,579
Net realized investment gains (losses) -- -- (116) (24) (177)
Income (loss) before provision for
income taxes and extraordinary item -- 71 (608) (77) 781
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At September 30, At December 31,
2000 1999
--------------- --------------
<S> <C> <C>
Assets
Individual $ 133,350 $ 109,401
Institutional 92,039 88,127
Auto & Home 4,613 4,443
International 4,842 4,381
Reinsurance 6,761 --
Asset Management 1,325 1,036
Corporate 18,941 20,499
Consolidation/Elimination (4,382) (2,655)
--------- ---------
Total $ 257,489 $ 225,232
========= =========
</TABLE>
The Individual segment includes the results of the closed block for the
period April 7, 2000 (date the closed block became effective) through September
30, 2000 combined on a line by line basis with the results of operations outside
the closed block. See Note 3 for closed block amounts included in the Individual
segment above.
The Individual segment includes an equity ownership interest in Nvest
Companies, L.P. ("Nvest") under the equity method of accounting. Nvest has been
included within the Asset Management segment due to the types of products and
strategies employed by the entity. The Individual segment's equity in earnings
of Nvest, which is included in net investment income, was $8 and $13 for the
three months ended September 30, 2000 and 1999, respectively, and $29 and $38
for the nine months ended September 30, 2000 and 1999, respectively. The
investment in Nvest was $189 and $218 at September 30, 2000 and 1999,
respectively.
The Reinsurance segment includes the life reinsurance business of RGA
combined with Exeter, a previously existing ancillary life reinsurance business
of the Company. Exeter has been
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<PAGE> 26
reported as a component of the Individual segment rather than as a separate
segment for periods prior to January 1, 2000 due to its immateriality.
The Consolidation/Elimination column includes the elimination of all
intersegment amounts, the closed block amounts presented on a line by line basis
in the Individual segment, and the Individual segment's ownership interest in
Nvest.
Revenues (including revenues of the closed block) derived from any one
customer did not exceed 10% of consolidated revenues. Revenues from U.S.
operations were $7,502 and $6,013 for the three months ended September 30, 2000
and 1999, respectively, which represented 97% of consolidated revenues for both
the three months ended September 30, 2000 and 1999. Revenues from U.S.
operations were $22,795 and $17,781 for the nine months ended September 30, 2000
and 1999, respectively, which represented 97% of consolidated revenues for both
the nine months ended September 30, 2000 and 1999.
11. SUBSEQUENT EVENTS
SALE OF NVEST
On October 30, 2000, the Company completed the sale of its 48% ownership
interest in its affiliates, Nvest, L.P. and Nvest Companies, L.P., to CDC Asset
Management, an affiliate of Caisse des Depots Group. CDC Asset Management paid
$40 per unit for Nvest, L.P. and Nvest Companies, L.P. The Company received $858
in the transaction and will report the gain in the fourth quarter of 2000. Total
assets of the Nvest entities were approximately $935 at September 30, 2000.
Total revenues and net income (net of minority interest) applicable to the Nvest
entities were approximately $156 and $8 for the three months ended September 30,
2000, respectively, and $474 and $29 for the nine months ended September 30,
2000, respectively.
REINSURANCE OF CLOSED BLOCK
Metropolitan Life entered into a reinsurance agreement, effective October
1, 2000, under which it ceded 90 percent of the risk associated with the
participating life insurance policies constituting the Metropolitan Life U.S.
traditional life segment of the closed block, which was formed in connection
with the demutualization on April 7, 2000. The agreement will protect
Metropolitan Life against inadequate funding of the closed block to meet
policyholder contractual guarantees in the event of significantly adverse closed
block experience. The agreement is on a modified coinsurance basis under which
Metropolitan Life will continue to hold and manage the assets backing the
coinsured block of business.
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<PAGE> 27
COMMON STOCK CASH DIVIDEND
On October 24, 2000, the Company announced the declaration by its Board of
Directors of a dividend of $0.20 per common share payable on December 15, 2000
to shareholders of record on November 7, 2000.
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<PAGE> 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of this discussion, the term "Company" refers, at all times
prior to the plan effective date (as hereinafter defined), to Metropolitan Life
Insurance Company, a mutual life insurance company organized under the laws of
the State of New York ("Metropolitan Life"), and its subsidiaries, and at all
times on and after the plan effective date, to MetLife, Inc. ("MetLife"), a
Delaware corporation, and its subsidiaries, including Metropolitan Life.
Following this summary is a discussion addressing the consolidated results of
operations and financial condition of the Company for the periods indicated. The
discussion of the Company's consolidated financial results of operations
includes the results of the closed block for the three months ended September
30, 2000 and for the period April 7, 2000 (the date the closed block became
effective) through September 30, 2000 combined on a line by line basis with the
results of operations outside the closed block for such period. Amounts reported
at April 7, 2000 and for the period after demutualization are as of April 1,
2000 and for the period beginning on April 1, 2000 as the effect of transactions
from April 1, 2000 through April 6, 2000 are not considered material. This
discussion should be read in conjunction with the Company's unaudited interim
condensed consolidated financial statements included elsewhere herein.
Statements, analyses, and other information contained in this report
relating to trends in the Company's operations and financial results, the
markets for the Company's products, the future development of the Company's
business, and the risks and uncertainties to which the Company may be subject,
other than with respect to historical information, as well as other statements
including words such as "anticipate," "believe," "plan," "estimate," "expect,"
"intend" and other similar expressions constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are made based upon management's current expectations
and beliefs concerning future developments and their potential effects on the
Company. Such forward-looking statements are not guarantees of future
performance. Actual results may differ materially from those included in the
forward-looking statements as a result of risks and uncertainties including, but
not limited to the following: (i) changes in general economic conditions,
including the performance of financial markets and interest rates; (ii)
heightened competition, including with respect to pricing, entry of new
competitors and the development of new products by new and existing competitors;
(iii) the Company's primary reliance, as a holding company, on dividends from
its subsidiaries to meet debt payment obligations and the applicable regulatory
restrictions on the ability of the subsidiaries to pay such dividends; (iv)
catastrophe losses; (v) regulatory, accounting or tax changes that may effect
the cost of, or demand for, the Company's products or services; (vi) downgrades
in the Company's affiliates' claims paying ability or financial strength
ratings; (vii) discrepancies between actual claims experience and assumptions
used in setting prices for the Company's products and establishing liabilities
for the Company's obligations for future policy benefits and claims; (viii)
adverse litigation or arbitration results and (ix) other risks and uncertainties
described from time to time in the Company's filings with the Securities and
Exchange Commission, including its S-1 registration statements. The Company
specifically disclaims any obligation to update or revise any forward-looking
statement, whether as a result of new information, future developments or
otherwise.
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<PAGE> 29
THE DEMUTUALIZATION
On April 7, 2000 (the "date of demutualization"), pursuant to an order by
the New York Superintendent of Insurance ("Superintendent") approving its plan
of reorganization, as amended (the "plan"), Metropolitan Life converted from a
mutual life insurance company to a stock life insurance company and became a
wholly-owned subsidiary of MetLife. In conjunction therewith, each
policyholder's membership interest was extinguished and each eligible
policyholder received, in exchange for that interest, trust interests
representing shares of common stock of MetLife to be held in the Metropolitan
Life Policyholder Trust, cash or an adjustment to their policy values in the
form of policy credits, as provided in the plan. In addition, Metropolitan
Life's Canadian branch made cash payments to holders of certain policies
transferred to Clarica Life Insurance Company in connection with the sale of a
substantial portion of Metropolitan Life's Canadian operations in 1998, as a
result of a commitment made in connection with obtaining Canadian regulatory
approval of that sale. The payments, which were recorded in the second quarter
of 2000, were determined in a manner that was consistent with the treatment of,
and fair and equitable to, eligible policyholders of Metropolitan Life.
On the date of demutualization, MetLife conducted an initial public
offering of 202,000,000 shares of its common stock and concurrent private
placements of an aggregate of 60,000,000 shares of its common stock at an
initial public offering price of $14.25 per share. The shares of common stock
issued in the offerings are in addition to 493,903,472 shares of common stock of
MetLife distributed to the Metropolitan Life Policyholder Trust for the benefit
of policyholders of Metropolitan Life in connection with the demutualization. On
April 10, 2000, MetLife issued 30,300,000 additional shares of its common stock
as a result of the exercise of over-allotment options granted to underwriters in
the initial public offering.
Concurrently with these offerings, the Company and MetLife Capital Trust I,
a Delaware statutory business trust wholly-owned by MetLife, issued 20,125,000
8.00% equity security units for an aggregate offering price of $1,006 million.
Each unit consists of (i) a contract to purchase shares of common stock and (ii)
a capital security of MetLife Capital Trust I.
On the date of demutualization, the Company established the closed block
for the benefit of holders of certain individual life insurance policies of
Metropolitan Life. Assets have been allocated to the closed block in an amount
that produces cash flows which, together with anticipated revenue from the
policies included in the closed block, are reasonably expected to be sufficient
to support obligations and liabilities relating to these policies, including,
but not limited to, provisions for the payment of claims and certain expenses
and taxes, and to provide for the continuation of policyholder dividend scales
in effect for 1999, if the experience underlying such dividend scales continues,
and for appropriate adjustments in such scales if the experience changes. The
closed block assets, the cash flows generated by the closed block assets and the
anticipated revenue from the policies in the closed block will benefit only the
holders of the policies in the closed block. To the extent that, over time, cash
flows from the assets allocated to the closed block and claims and other
experience relating to the closed block are, in the aggregate, more or less
29
<PAGE> 30
favorable than assumed in establishing the closed block, total dividends paid to
closed block policyholders in the future may be greater than or less than the
total dividends that would have been paid to these policyholders if the
policyholder dividend scales in effect for 1999 had been continued. Any cash
flows in excess of amounts assumed will be available for distribution over time
to closed block policyholders and will not be available to stockholders. The
closed block will continue in effect as long as any policy in the closed block
remains in force. Its expected life is over 100 years.
The Company does not expect the closed block to affect its net income or
its liquidity. The Company will use the same accounting principles to account
for the participating policies included in the closed block as it used prior to
the date of demutualization. However, the Company will establish a policyholder
dividend obligation for earnings that will be paid to policyholders as
additional dividends as described below, unless these earnings are offset by
future unfavorable experience of the closed block. The excess of closed block
liabilities over closed block assets at the effective date of the
demutualization represents the estimated maximum future contributions from the
closed block expected to result from operations attributed to the closed block
after income taxes. Contributions are recognized from the closed block in income
over the period the policies and contracts in the closed block remain in force.
Management believes that over time the actual cumulative contributions from the
closed block will approximately equal the expected cumulative contributions, due
to the effect of dividend changes. If, over the period the closed block remains
in existence, the actual cumulative contribution from the closed block is
greater than the expected cumulative contribution from the closed block, the
Company will pay the excess of the actual cumulative contribution from the
closed block over the expected cumulative contribution to closed block
policyholders as additional policyholder dividends unless offset by future
unfavorable experience of the closed block and, accordingly will recognize only
the expected cumulative contribution in income with the excess recorded as a
policyholder dividend obligation. If over such period, the actual cumulative
contribution from the closed block is less than the expected cumulative
contribution from the closed block, the Company will recognize only the actual
contribution in income. However, the Company may change dividends in the future,
which would be intended to increase future actual contributions until the actual
cumulative contributions equal the expected cumulative contributions.
On June 27, 2000, MetLife's Board of Directors authorized the repurchase of
up to $1 billion of MetLife's outstanding common stock. The buyback may take
place over an unspecified period of time. MetLife may purchase stock from the
Metropolitan Life policyholder trust, in the open market, and in private
transactions. Through September 30, 2000, 19,203,403 shares have been acquired
for $407.
ACQUISITIONS AND DISPOSITIONS
On January 6, 2000, the Company completed its acquisition of GenAmerica
Corporation ("GenAmerica") for $1.2 billion plus costs of the acquisition.
GenAmerica is a holding company which includes General American Life Insurance
Company, 48.3% of the outstanding shares of Reinsurance Group of America ("RGA")
common stock, a
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<PAGE> 31
provider of reinsurance, and 61.0% of the outstanding shares of Conning
Corporation ("Conning") common stock, an asset manager. The Company owned 9.6%
of the outstanding shares of RGA common stock prior to the completion of the
GenAmerica acquisition. On the date of the acquisition, the Company's ownership
percentage of the outstanding shares of RGA common stock was 57.9%.
On April 18, 2000, Metropolitan Life completed its tender offer for all of
the outstanding shares of Conning common stock not already owned by Metropolitan
Life for $73 million.
On October 30, 2000, the Company completed the sale of its 48% ownership
interest in its affiliates, Nvest, L.P. and Nvest Companies, L.P., to CDC Asset
Management, an affiliate of Caisse des Depots Group. CDC Asset Management paid
$40 per unit for Nvest, L.P. and Nvest Companies, L.P. The Company received $858
in the transaction and will report the gain in the fourth quarter of 2000.
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<PAGE> 32
RESULTS OF OPERATIONS
The following table presents summary consolidated financial information for
the periods indicated. For comparability with prior periods, the table below
includes the results of operations of the closed block combined on a line by
line basis with the results of operations outside the closed block. All
discussions are based on a comparison of such combined amounts.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 3,969 $ 2,938 $ 11,946 $ 8,724
Universal life and investment-type product policy fees 450 368 1,367 1,019
Net investment income 2,945 2,383 8,653 7,189
Other revenues 653 531 1,995 1,579
Net realized investment losses (net of amounts allocable to
other accounts of $25, $(3), $42 and $37, respectively) (273) (22) (440) (177)
-------- -------- -------- --------
7,744 6,198 23,521 18,334
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims (includes amounts
directly related to net realized investment
losses of $23, $(5), $24 and $11, respectively) 4,133 3,154 12,414 9,554
Interest credited to policyholder account balances 754 625 2,175 1,832
Policyholder dividends 457 453 1,438 1,237
Payments to former Canadian policyholders -- -- 327 --
Other expenses (includes amounts directly related
to net realized investment losses of $2, $2, $18 and $26,
respectively) 2,088 1,509 6,188 4,930
-------- -------- -------- --------
7,432 5,741 22,542 17,553
-------- -------- -------- --------
Income before provision for income taxes and
extraordinary item 312 457 979 781
Provision for income taxes 71 182 447 353
-------- -------- -------- --------
Income before extraordinary item 241 275 532 428
Extraordinary item - demutualization expense -- 33 170 77
-------- -------- -------- --------
Net income $ 241 $ 242 $ 362 $ 351
======== ======== ======== ========
</TABLE>
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<PAGE> 33
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Premiums increased by $1,031 million, or 35%, to $3,969 million for the
three months ended September 30, 2000 from $2,938 million for the comparable
1999 period, primarily due to the acquisition of GenAmerica on January 6, 2000.
Excluding the impact of this acquisition, premiums increased by $569 million, or
19%. This increase was attributable to Auto & Home, Institutional Business and
International. The increase of $289 million, or 77%, in Auto & Home was
primarily due to the acquisition of the standard personal lines property and
casualty insurance operations of The St. Paul Companies ("St. Paul"),
representing $247 million of the increase, as well as growth in this segment's
standard auto business. The increase of $241 million, or 17%, in Institutional
Business was primarily due to an increase in non-medical health premiums due to
higher sales and improved policyholder retention in this segment's dental and
disability businesses and the acquisitions of the workplace benefits division
from Business Men's Assurance Company in July 2000 and Lincoln National's
disability business in November 1999 ("the BMA and Lincoln National
acquisitions") which contributed $40 million to the variance. In addition,
significant premiums received from existing group life and retirement and
savings customers in 2000 contributed to the variance. The increase of $42
million, or 35%, in International was primarily due to overall growth in Korea,
Mexico, Taiwan, Spain and Brazil.
Universal life and investment-type product policy fees increased by $82
million, or 22%, to $450 million for the three months ended September 30, 2000
from $368 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, universal life and investment-type product policy fees
increased by $23 million, or 6%. This increase was almost entirely attributable
to a $17 million, or 7%, increase in Individual Business, primarily due to this
segment's continued growth in separate account assets.
Net investment income increased by $562 million, or 24%, to $2,945 million
for the three months ended September 30, 2000 from $2,383 million in 1999.
Excluding the impact of the GenAmerica acquisition, net investment income
increased by $277 million, or 12%. This increase was primarily due to higher
income from (i) fixed maturities of $179 million, or 10%, (ii) real estate and
real estate joint ventures, after investment expenses and depreciation, of $29
million, or 26%, (iii) other invested assets or $27 million, or 338%, (iv) cash
and short-term investments of $15 million, or 39%, (v) lower investment expenses
of $11 million, or 20%, (vi) policy loans of $10 million, or 12%, and (vii)
equity securities and other limited partnership interests of $8 million, or 35%.
These increases were partially offset by reduced income in mortgage loans on
real estate of $2 million, or 1%.
Other revenues increased by $122 million, or 23%, to $653 million for the
three months ended September 30, 2000 from $531 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, other revenues
increased by $8 million, or 2%, primarily due to increases in the Institutional
and Individual Businesses, partially offset by a decrease in Corporate. The
increase in Institutional of $11 million,
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<PAGE> 34
or 7%, was primarily due to sales growth in this segment's dental and disability
administrative services businesses. The increase in Individual Business of $6
million, or 4%, was primarily due to higher commission and fee income associated
with increased sales in this segment's broker/dealer and other subsidiaries. The
decrease in Corporate of $7 million, or 54%, was primarily due to the
amortization of a gain in 1999 related to the excess of loss reinsurance
agreements obtained to provide reinsurance with respect to sales practices
claims made on or prior to December 31, 1999.
The Company's realized investment gains and losses are net of related
policyholder amounts. The amounts netted against realized investment gains and
losses are (i) amortization of deferred policy acquisition and value of business
acquired costs attributable to the increase or decrease in product gross margins
or profits resulting from realized investment gains and losses, (ii) additional
policyholder liabilities, which are required when investment gains are realized
and the Company reinvests the proceeds in lower yielding assets ("loss
recognition"), and (iii) liabilities for those participating contracts in which
the policyholders' accounts are increased or decreased by the related investment
gains or losses.
Net realized investment losses increased by $251 million, or 1,141%, to
$273 million for the three months ended September 30, 2000 from $22 million for
the comparable 1999 period. This increase reflected total gross realized
investment losses of $298 million, an increase of $279 million, or 1,468%, from
$19 million in 1999, before the offsets for the amortization of deferred policy
acquisition and value of business acquired costs of $2 million in both 2000 and
1999, changes in the policyholder dividend obligation of $28 million in 2000 and
charges to participating contracts of $5 million in both 2000 and 1999 related
to assets sold. Excluding the impact of the GenAmerica acquisition, net
realized investment losses increased by $265 million, or 1,205%. Net realized
investment losses reflect the continuation of the Company's strategy to
reposition its investment portfolio in order to provide a higher operating
return on its invested assets.
The Company believes the policy of netting related policyholder amounts
against realized investment gains and losses provides important information in
evaluating its operating performance. Realized investment gains and losses are
often excluded by investors when evaluating the overall financial performance of
insurers. The Company believes its presentation enables readers of its
consolidated statements of income to easily exclude realized investment gains
and losses and the related effects on the consolidated statements of income when
evaluating its operating performance. The Company's presentation of realized
investment gains and losses net of policyholder amounts may be different from
the presentation used by other insurance companies and, therefore, amounts in
its consolidated statements of income may not be comparable with amounts
reported by other insurers.
Policyholder benefits and claims increased by $979 million, or 31%, to
$4,133 million for the three months ended September 30, 2000 from $3,154 million
for the comparable 1999 period. This increase reflected total gross policyholder
benefits and claims of $4,110 million, an increase of $951 million from $3,159
million in 1999, before
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<PAGE> 35
the offsets for participating contractholder accounts of $23 million and $(5)
million directly related to net realized investment gains and losses for the
three months ended September 30, 2000 and 1999, respectively. Excluding the
impact of the GenAmerica acquisition, policyholder benefits and claims increased
$555 million, or 18%. This increase was primarily due to increases in
Institutional Business, Auto & Home, International and Individual Business. The
increase in Institutional Business of $285 million, or 17%, was primarily due to
overall growth within this segment's group dental and disability businesses, as
well as the BMA and Lincoln National acquisitions. In addition, policyholder
benefits and claims related to the group life and retirement and savings
businesses increased commensurate with the premium variance discussed above. The
increase in Auto & Home of $198 million, or 69%, was primarily due to the St.
Paul acquisition which represented $192 million of the increase. The increase in
International of $30 million, or 28%, was primarily due to overall growth in
Korea, Taiwan, Mexico, Spain and Brazil, commensurate with the increase in
premiums discussed above. The increase in Individual Business of $20 million, or
2%, was primarily due to increased sales of supplementary contracts and
immediate annuity products.
Interest credited increased by $129 million, or 21%, to $754 million for
the three months ended September 30, 2000 from $625 million for the comparable
1999 period. Excluding the impact of the GenAmerica acquisition, interest
credited increased by $31 million, or 5%. This increase was almost entirely
attributable to a $27 million, or 10%, increase in Institutional Business. This
increase was primarily due to asset growth in customer account balances as well
as an increase in funding agreements resulting from the reinvestment of cash
received in connection with the demutualization.
Policyholder dividends increased by $4 million, or 1%, to $457 million for
the three months ended September 30, 2000 from $453 million for the comparable
1999 period. Excluding the acquisition of GenAmerica, policyholder dividends
decreased by $46 million, or 10%. Policyholder dividends vary from period to
period based on participating group and traditional individual life insurance
contract experience.
Other expenses increased by $579 million, or 38%, to $2,088 million for the
three months ended September 30, 2000 from $1,509 million for the comparable
1999 period. Excluding the capitalization and amortization of deferred policy
acquisition and value of business acquired costs, other expenses increased by
$571 million, or 36%, to $2,168 million in 2000 from $1,597 million in 1999.
Excluding the impact of the GenAmerica acquisition, other expenses increased by
$242 million, or 15%. This increase was primarily attributable to increases in
Auto & Home, Corporate, Institutional Business and Asset Management. The
increase in Auto & Home of $127 million, or 115%, was primarily due to the St.
Paul acquisition. The increase in Corporate of $85 million, or 139%, was
primarily due to higher interest expense related to the issuance of $1,006
million 8% equity security units in MetLife Capital Trust I in connection with
the demutualization and higher interest rates in 2000 as compared to 1999. The
increase in Institutional Business of $21 million, or 5%, was primarily due to
higher expense levels in the defined contribution business as well as higher
expenses associated with the Company's securities lending program. The increase
in Asset Management of $9 million, or 5%, was primarily due to increased
discretionary spending.
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<PAGE> 36
Deferred policy acquisition and value of business acquired costs are
principally amortized in proportion to gross margins or profits, including
realized investment gains or losses. The amortization is allocated to realized
investment gains and losses to provide consolidated statement of income
information regarding the impact of investment gains and losses on the amount of
the amortization, and other expenses to provide amounts related to gross margins
or profits originating from transactions other than investment gains and losses.
Capitalization of deferred policy acquisition costs increased to $431
million for the three months ended September 30, 2000 from $269 million for the
1999 comparable period, while amortization of deferred policy acquisition and
value of business acquired costs increased to $349 million in 2000 from $179
million in 1999. Excluding the impact of the GenAmerica acquisition,
capitalization of deferred policy acquisition costs increased to $356 million in
2000 from $269 million in 1999 while amortization of deferred policy acquisition
and value of business acquired costs increased to $274 million in 2000 from $179
million in 1999. Amortization of deferred policy acquisition costs and value of
business acquired of $351 million and $181 million were allocated to other
expenses in 2000 and 1999, respectively, while the remainder of the amortization
in each year was allocated to realized investment losses. Excluding the impact
of the GenAmerica acquisition, amortization of deferred policy acquisition costs
and value of business acquired of $288 million and $181 million were allocated
to other expenses in 2000 and 1999, respectively, while the remainder of the
amortization in each year was allocated to realized investment losses. The
increase in amortization of deferred policy acquisition costs and value of
business acquired allocated to other expenses was primarily attributable to
increases in Auto & Home as well as the Individual and Institutional Businesses.
Auto & Home increased to $98 million in 2000 from $43 million in 1999, primarily
due to the St. Paul acquisition. Individual Business increased to $137 million
in 2000 from $118 million in 1999, primarily due to refinements in the
calculation of estimated gross margins and profits. Institutional Business
increased to $33 million in 2000 from $14 million in 1999, primarily due to
increased amortization in the defined contribution business.
Income tax expense for the three months ended September 30, 2000 was $71
million, or 23% of income before provision for income taxes and extraordinary
item, compared with $182, or 40%, for the comparable 1999 period. The 2000
effective tax rate differs from the corporate tax rate of 35% primarily due to a
reduction in prior year taxes on capital gains associated with the sale of
businesses recorded in the third quarter. The 1999 effective rate differs from
the corporate tax rate of 35% primarily due to the impact of surplus tax. Prior
to its demutualization, the Company was subject to surplus tax imposed on mutual
life insurance companies under Section 809 of the Internal Revenue Code. The
surplus tax results from the disallowance of a portion of a mutual life
insurance company's policyholder dividends as a deduction from taxable income.
Demutualization expenses, net of income taxes, were $33 million for the
three months ended September 30, 1999. These costs related to the Company's
demutualization
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<PAGE> 37
\efforts. There were no extraordinary charges for the three months ended
September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
Premiums increased by $3,222 million, or 37%, to $11,946 million for the
nine months ended September 30, 2000 from $8,724 million for the comparable 1999
period, primarily due to the acquisition of GenAmerica on January 6, 2000.
Excluding the impact of this acquisition, premiums increased by $1,788 million,
or 20%. This increase was attributable to Auto & Home, Institutional Business
and International. The increase of $863 million, or 78%, in Auto & Home was
primarily due to the St. Paul acquisition, which represented $767 million of the
increase, as well as growth in this segment's standard auto business. The
increase of $815 million, or 20%, in Institutional Business was primarily due to
an increase in non-medical health premiums due to higher sales and improved
policyholder retention in this segment's dental and disability businesses and
the BMA and Lincoln National acquisitions which contributed $68 million to the
variance. In addition, significant premiums received from existing group life
and retirement and savings customers in 2000 contributed to the variance. The
increase of $124 million, or 35%, in International was primarily due to overall
growth in Mexico, Taiwan, Korea, Spain and Brazil.
Universal life and investment-type product policy fees increased by $348
million, or 34%, to $1,367 million for the nine months ended September 30, 2000
from $1,019 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, universal life and investment-type product policy fees
increased by $166 million, or 16%. This increase was almost entirely
attributable to a $153 million, or 25%, increase in Individual Business, which
was primarily due to increased sales of variable life products, continued growth
in separate account assets and the acceleration of the recognition of unearned
fees in connection with a universal life product replacement program.
Net investment income increased by $1,464 million, or 20%, to $8,653
million for the nine months ended September 30, 2000 from $7,189 million in
1999. Excluding the impact of the GenAmerica acquisition, net investment income
increased by $632 million, or 9%. This increase was primarily due to higher
income from (i) fixed maturities of $418 million, or 8%, (ii) real estate and
real estate joint ventures, after investment expenses and depreciation, of $84
million, or 22%, (iii) mortgage loans on real estate of $69 million, or 6%, (iv)
cash and short-term investments of $65 million, or 60%, (v) policy loans of $14
million, or 6%, (vi) other invested assets of $12 million, or 26%, and (vii)
lower investment expenses of $3 million, or 2%. These increases were partially
offset by reduced income in equity securities and other limited partnership
interests of $33 million, or 17%.
Other revenues increased by $416 million, or 26%, to $1,995 million for the
nine months ended September 30, 2000 from $1,579 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, other revenues
increased by $124
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million, or 8%, primarily due to increases of $70 million, or 17%, in Individual
Business and $57 million, or 13%, in Institutional Business. The increase in
Individual Business was primarily due to continued growth in this segment's
broker/dealer and other subsidiaries. The increase in Institutional Business was
primarily due to strong sales growth in this segment's dental and disability
administrative services businesses and higher management fees from group life
insurance separate accounts.
The Company's realized investment gains and losses are net of related
policyholder amounts. The amounts netted against realized investment gains and
losses are (i) amortization of deferred policy acquisition and value of business
acquired costs attributable to the increase or decrease in product gross margins
or profits resulting from realized investment gains and losses, (ii) additional
policyholder liabilities, which are required when investment gains are realized
and the Company reinvests the proceeds in lower yielding assets ("loss
recognition"), and (iii) liabilities for those participating contracts in which
the policyholders' accounts are increased or decreased by the related investment
gains or losses.
Net realized investment losses increased by $263 million, or 149%, to $440
million for the nine months ended September 30, 2000 from $177 million for the
comparable 1999 period. This increase reflected total gross realized investment
losses of $482 million, an increase of $268 million, or 125%, from $214 million
in 1999, before the offsets for the amortization of deferred policy acquisition
and value of business acquired costs of $18 million and $26 million in 2000 and
1999, respectively, changes in the policyholder dividend obligation of $22
million in 2000 and credits to participating contracts of $2 million and $11
million in 2000 and 1999, respectively, related to assets sold. Excluding the
impact of the GenAmerica acquisition, net realized investment losses increased
by $278 million, or 157%. Net realized investment losses reflect the
continuation of the Company's strategy to reposition its investment portfolio
in order to provide a higher operating return on its invested assets.
The Company believes the policy of netting related policyholder amounts
against realized investment gains and losses provides important information in
evaluating its operating performance. Realized investment gains and losses are
often excluded by investors when evaluating the overall financial performance of
insurers. The Company believes its presentation enables readers of its
consolidated statements of income to easily exclude realized investment gains
and losses and the related effects on the consolidated statements of income when
evaluating its operating performance. The Company's presentation of realized
investment gains and losses net of policyholder amounts may be different from
the presentation used by other insurance companies and, therefore, amounts in
its consolidated statements of income may not be comparable with amounts
reported by other insurers.
Policyholder benefits and claims increased by $2,860 million, or 30%, to
$12,414 million for the nine months ended September 30, 2000 from $9,554 million
for the comparable 1999 period. This increase reflected total gross policyholder
benefits and claims of $12,390 million, an increase of $2,847 million from
$9,543 million in 1999, before the offsets for participating contractholder
accounts of $24 million and $11 million
38
<PAGE> 39
directly related to net realized investment gains and losses for the nine months
ended September 30, 2000 and 1999, respectively. Excluding the impact of the
GenAmerica acquisition, policyholder benefits and claims increased $1,575
million, or 16%. This increase was primarily due to increases of $818 million,
or 16%, in Institutional Business, $661 million, or 79%, in Auto & Home, and $93
million, or 29%, in International. The Institutional Business increase was
primarily due to overall growth within this segment's group dental and
disability businesses as well as the BMA and Lincoln National acquisitions. In
addition, policyholder benefits and claims related to the group life and
retirement and savings businesses increased commensurate with the premium
variance discussed above. The increase in Auto & Home was primarily due to the
St. Paul acquisition, which represented $587 million of the increase, as well as
increased volume and higher catastrophe losses and expenses in this segment's
homeowners business. In addition, an 8% increase in the number of auto policies
in force, as well as higher costs due to an increase in the use of original
equipment manufacturer parts and higher labor rates contributed to the variance.
The increase in International was primarily due to overall growth in Taiwan,
Mexico, Korea, Spain and Brazil, commensurate with the increase in premiums
discussed above.
Interest credited increased by $343 million, or 19%, to $2,175 million for
the nine months ended September 30, 2000 from $1,832 million for the comparable
1999 period. Excluding the impact of the GenAmerica acquisition, interest
credited increased by $51 million, or 3%. This increase was primarily due to an
increase of $26 million, or 3%, in Institutional Business and a $23 million, or
2%, increase in Individual Business. The increase in Institutional Business was
primarily due to an increase in group insurance of $55 million, or 18%, due to
asset growth in customer account balances and the bank-owned life insurance
business as well as increases in the cash values of executive and
corporate-owned universal life plans, partially offset by a decrease in
retirement and savings products of $29 million, or 6%, due to a continued shift
in customers' investment preferences from guaranteed interest products to
separate account alternatives. The increase in Individual Business was primarily
due to an increase in policyholder account balances as well as an increase in
crediting rates on annuity and investment products.
Policyholder dividends increased by $201 million, or 16%, to $1,438 million
for the nine months ended September 30, 2000 from $1,237 million for the
comparable 1999 period. Excluding the acquisition of GenAmerica, policyholder
dividends increased by $45 million, or 4%. Policyholder dividends vary from
period to period based on participating group and traditional individual life
insurance contract experience.
Payments of $327 million were made during the second quarter of 2000 to
holders of certain policies transferred to Clarica Life Insurance Company in
connection with the sale of a substantial portion of our Canadian operations in
1998.
Other expenses increased by $1,258 million, or 26%, to $6,188 million for
the nine months ended September 30, 2000 from $4,930 million for the comparable
1999 period. Excluding the capitalization and amortization of deferred policy
acquisition and value of business acquired costs, other expenses increased by
$1,275 million, or 25%, to $6,402
39
<PAGE> 40
million in 2000 from $5,127 million in 1999. Excluding the impact of the
GenAmerica acquisition, other expenses increased by $268 million, or 5%. This
increase was primarily attributable to increases in Auto & Home, Individual
Business, Institutional Business and International. These increases were
partially offset by a $454 million, or 50%, decrease in Corporate. The increase
in Auto & Home of $325 million, or 101%, was primarily due to the St. Paul
acquisition. The increase in Individual Business of $187 million, or 9%, was
primarily due to a $89 million increase in the broker/dealer and other
subsidiaries commensurate with the increase in other revenues discussed above
and an increase in expenses associated with the Company's securities lending
program. The increase in Institutional Business of $139 million, or 13%, was
primarily due to costs incurred in connection with initiatives that focused on
improving our service delivery capabilities through investments in technology
and an increase in volume-related expenses associated with premium growth.
Volume-related expenses include premium taxes, separate account investment
management expenses and commissions. The increase in International of $31
million, or 14%, was primarily due to higher policy acquisition costs related to
premium growth and higher business development costs. The decrease in Corporate
was primarily due to a $499 million charge in 1999 principally related to the
settlement of a multidistrict litigation proceeding involving alleged improper
sales practices, accruals for sales practices claims not covered by the
settlement and other legal costs.
Deferred policy acquisition costs and value of business acquired are
principally amortized in proportion to gross margins or profits, including
realized investment gains or losses. The amortization is allocated to realized
investment gains and losses to provide consolidated statement of income
information regarding the impact of investment gains and losses on the amount of
the amortization, and other expenses to provide amounts related to gross margins
or profits originating from transactions other than investment gains and losses.
Capitalization of deferred policy acquisition costs increased to $1,263
million for the nine months ended September 30, 2000 from $785 million for the
1999 comparable period while amortization of deferred policy acquisition and
value of business acquired costs increased to $1,031 million in 2000 from $562
million in 1999. Excluding the impact of the GenAmerica acquisition,
capitalization of deferred policy acquisition costs increased to $1,050 million
in 2000 from $785 in 1999 while amortization of deferred policy acquisition and
value of business acquired costs increased to $889 million in 2000 from $562
million in 1999. Amortization of deferred policy acquisition and value of
business acquired costs of $1,049 million and $588 million were allocated to
other expenses in 2000 and 1999, respectively, while the remainder of the
amortization in each year was allocated to realized investment losses. Excluding
the impact of the GenAmerica acquisition, amortization of deferred policy
acquisition costs and value of business acquired of $923 million and $588
million were allocated to other expenses in 2000 and 1999, respectively, while
the remainder of the amortization in each year was allocated to realized
investment losses. The increase in amortization of deferred policy acquisition
costs and value of business acquired allocated to other expenses was primarily
attributable to increases in Auto & Home and Individual Businesses. Auto & Home
40
<PAGE> 41
increased to $310 million in 2000 from $126 million in 1999, primarily due to
the St. Paul acquisition. Individual Business increased to $517 million in 2000
from $407 million in 1999, primarily due to refinements in the calculation of
estimated gross margins and profits as well as the acceleration of the
recognition of unearned fees in connection with a product replacement program
discussed above.
Income tax expense for the nine months ended September 30, 2000 was $447
million, or 46% of income before provision for income taxes and extraordinary
item, compared with $353 million, or 45%, for the comparable 1999 period. The
2000 effective tax rate differs from the corporate tax rate of 35% due to
payments made in the second quarter of 2000 to former Canadian policyholders in
connection with the demutualization, the impact of surplus tax and a reduction
in prior year taxes on capital gains associated with the sale of businesses
recorded in the third quarter. The 1999 effective rate differs from the
corporate tax rate of 35% primarily due to the impact of surplus tax. Prior to
its demutualization, the Company was subject to surplus tax imposed on mutual
life insurance companies under Section 809 of the Internal Revenue Code. The
surplus tax results from the disallowance of a portion of a mutual life
insurance company's policyholder dividends as a deduction from taxable income.
Demutualization expenses, net of income taxes, were $170 million and $77
million for the nine months ended September 30, 2000 and 1999, respectively.
These costs related to the Company's demutualization efforts.
41
<PAGE> 42
INDIVIDUAL BUSINESS
The following table presents summary consolidated financial information for
Individual Business for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 1,140 $ 1,023 $ 3,393 $ 3,091
Universal life and investment-type product policy fees 300 233 920 614
Net investment income 1,590 1,310 4,766 3,911
Other revenues 215 150 619 410
Net realized investment gains (losses) (41) (12) (98) 11
------- ------- ------- -------
3,204 2,704 9,600 8,037
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 1,233 1,067 3,642 3,291
Interest credited to policyholder account balances 422 349 1,250 1,017
Policyholder dividends 428 367 1,303 1,103
Other expenses 851 707 2,587 1,930
------- ------- ------- -------
2,934 2,490 8,782 7,341
------- ------- ------- -------
Income before provision for income taxes 270 214 818 696
Provision for income taxes 103 85 296 243
------- ------- ------- -------
Net income $ 167 $ 129 $ 522 $ 453
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 - INDIVIDUAL BUSINESS
Premiums increased by $117 million, or 11%, to $1,140 million for the three
months ended September 30, 2000 from $1,023 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, premiums decreased
by $6 million, or 1%. Premiums from insurance products decreased $14 million, or
1%, to $991 million in 2000 compared to $1,005 million in 1999. This decrease
was primarily due to a decline in sales of traditional life insurance policies,
which reflected a continued shift in policyholders' preferences from those
policies to variable life products. Premiums from annuity and investment
products increased by $8 million, or 44%, to $26 million in 2000 from $18
million in 1999. This increase was primarily due to the increased sales of
supplementary contracts and immediate annuity products.
Universal life and investment-type product policy fees increased by $67
million, or 29%, to $300 million for the three months ended September 30, 2000
from $233 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, universal life and investment-type product policy fees
increased by $17 million, or 7%. Policy fees from insurance products decreased
by $5 million, or 3%, to $149 million in
42
<PAGE> 43
2000 from $154 million in 1999, primarily due to refinements in the calculation
of estimated gross profits which resulted in an increase in unearned revenues in
2000 as compared with 1999. Policy fees from annuity and investment products
increased by $22 million, or 28%, to $101 million in 2000 from $79 million in
1999, primarily due to this segment's continued growth in separate account
assets.
Other revenues increased by $65 million, or 43%, to $215 million for the
three months ended September 30, 2000 from $150 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, other revenues
increased by $6 million, or 4%. Other revenues for insurance products increased
by $11 million, or 8%, to $146 million in 2000 from $135 million in 1999. This
increase was primarily attributable to higher commission and fee income
associated with increased sales in our broker/dealer and other subsidiaries.
Other revenues for annuity and investment products decreased $5 million, or 33%,
to $10 million in 2000 from $15 million in 1999, due to non-recurring
third-party administrative fees received in 1999.
Policyholder benefits and claims increased $166 million, or 16%, to $1,233
million for the three months ended September 30, 2000 from $1,067 million for
the comparable 1999 period. Excluding the impact of the GenAmerica acquisition,
policyholder benefits and claims increased by $20 million, or 2%. Policyholder
benefits and claims for insurance products increased by $7 million, or 1%, to
$1,038 million in 2000 compared with $1,031 in 1999. This increase was primarily
due to an increase in the policyholder dividend obligation driven by favorable
experience in the closed block which was created in April 2000 in connection
with the demutualization. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - The Demutualization" for information
regarding the closed block and the policyholder dividend obligation.
Policyholder benefits and claims for annuity and investment products increased
by $13 million, or 36%, to $49 million in 2000 from $36 million in 1999,
commensurate with the increase in premiums discussed above.
Interest credited to policyholder account balances increased by $73
million, or 21%, to $422 million for the three months ended September 30, 2000
from $349 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, interest credited increased by $4 million, or 1%.
Interest credited to policyholder account balances for insurance products
increased by $2 million, or 2%, to $114 million in 2000 compared with $112
million in 1999, primarily due to higher policyholder account balances. Interest
credited for annuity and investment products increased $2 million, or 1%, to
$239 million in 2000 compared with $237 million in 1999, primarily due to an
increase in crediting rates.
Policyholder dividends increased by $61 million, or 17%, to $428 million
for the three months ended September 30, 2000 from $367 million for the
comparable 1999 period. Excluding the impact of the GenAmerica acquisition,
policyholder dividends increased by $10 million, or 3%. This increase was due to
growth in cash values of policies associated with this segment's large block of
traditional life insurance business.
43
<PAGE> 44
Other expenses increased by $144 million, or 20%, to $851 million for the
three months ended September 30, 2000 from $707 million for the comparable 1999
period. Excluding the capitalization and amortization of deferred acquisition
costs and value of business acquired which are discussed below, other expenses
increased by $119 million, or 15%, to $895 million in 2000 from $776 million in
1999. Excluding the impact of the GenAmerica acquisition, other expenses
increased by $1 million. Other expenses related to insurance products decreased
by $24 million, or 4%, to $594 million in 2000 from $618 million in 1999. This
decrease was primarily due to a $57 million reduction in general and
administrative expenses partially offset by a $17 million increase in expenses
associated primarily with the Company's securities lending program and a $17
million increase in our broker/dealer and other subsidiaries commensurate with
the increase in other revenues discussed above. Other expenses related to
annuity and investment products increased $25 million, or 16%, to $183 million
in 2000 from $158 million in 1999, primarily due to an increase in expenses
associated primarily with the Company's securities lending program.
Deferred policy acquisition costs and value of business acquired are
principally amortized in proportion to gross margins or gross profits, including
realized investment gains or losses. The amortization is allocated to realized
investment gains and losses to provide consolidated statement of income
information regarding the impact of investment gains and losses on the amount of
the amortization, and other expenses to provide amounts related to gross margins
or profits originating from transactions other than investment gains and losses.
Capitalization of deferred policy acquisition costs increased by $40
million to $227 million in 2000 from $187 million in 1999 while total
amortization of deferred policy acquisition costs and value of business acquired
increased by $67 million to $183 million in 2000 from $116 million in 1999.
Excluding the impact of the GenAmerica acquisition, capitalization of deferred
policy acquisition costs increased by $9 million, or 5% while total amortization
of deferred policy acquisition costs and value of business acquired increased by
$8 million, or 7%. Amortization of deferred policy acquisition costs and value
of business acquired of $183 million and $118 million were allocated to other
expenses in 2000 and 1999, respectively, while the remainder of the amortization
in each year was allocated to realized investment gains and losses. Excluding
the impact of the GenAmerica acquisition, amortization of deferred policy
acquisition costs and value of business acquired of $137 million and $118
million were allocated to other expenses in 2000 and 1999, respectively, while
the remainder of the amortization in each year was allocated to realized
investment gains and losses. Amortization of deferred policy acquisition costs
and value of business acquired allocated to other expenses related to insurance
products increased by $4 million to $86 million in 2000 from $82 million in
1999. Amortization of deferred policy acquisition costs and value of business
acquired allocated to other expenses related to annuity products and investment
products increased by $15 million to $51 million in 2000 from $36 million in
1999. These increases were primarily due to refinements in the calculation of
estimated gross margins and profits.
44
<PAGE> 45
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 - INDIVIDUAL BUSINESS
Premiums increased by $302 million, or 10%, to $3,393 million for the nine
months ended September 30, 2000 from $3,091 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, premiums decreased
by $28 million, or 1%. Premiums from insurance products decreased by $40
million, or 1%, to $2,998 million in 2000 compared to $3,038 million in 1999.
This decrease was primarily due to a decline in sales of traditional life
insurance policies, which reflected a continued shift in policyholders'
preferences from those policies to variable life products. Premiums from annuity
and investment products increased by $12 million, or 23%, to $65 million in 2000
from $53 million in 1999. This increase was primarily due to increased sales of
supplementary contracts and immediate annuity products.
Universal life and investment-type product policy fees increased by $306
million, or 50%, to $920 million for the nine months ended September 30, 2000
from $614 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, universal life and investment-type fees increased by
$153 million, or 25%. Policy fees from insurance products increased by $86
million, or 22%, to $471 million in 2000 from $385 million in 1999, primarily
due to increased sales of variable life products and continued growth in
separate accounts, reflecting a continued shift in customer preferences from
traditional life products. This increase also reflects the acceleration of the
recognition of unearned fees in connection with a product replacement program
related to universal life policies. Policy fees from annuity and investment
products increased by $67 million, or 29%, to $296 million in 2000 from $229
million in 1999, primarily due to this segment's growing block of separate
account assets and stock market appreciation.
Other revenues increased by $209 million, or 51%, to $619 million for the
nine months ended September 30, 2000 from $410 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, other revenues
increased by $70 million, or 17%. Other revenues for insurance products
increased by $71 million, or 19%, to $453 million in 2000 from $382 million in
1999. This increase was primarily attributable to higher commission and fee
income associated with increased sales in our broker/dealer and other
subsidiaries. Other revenues for annuity products remained essentially unchanged
at $27 million in 2000 compared with $28 million in 1999.
Policyholder benefits and claims increased $351 million, or 11%, to $3,642
million for the nine months ended September 30, 2000 from $3,291 million for the
comparable 1999 period. Excluding the impact of the GenAmerica acquisition,
policyholder benefits and claims decreased by $27 million or 1%. Policyholder
benefits and claims for insurance products decreased by $32 million, or 1%, to
$3,127 million in 2000 from $3,159 million in 1999. This decrease was primarily
due to improved mortality and morbidity experience in the existing block of
policyholder liabilities. Policyholder benefits and claims for annuity and
investment products increased by $5 million, or 4%,
45
<PAGE> 46
to $137 million in 2000 from $132 million in 1999, commensurate with the
increase in premiums discussed above.
Interest credited to policyholder account balances increased by $233
million, or 23%, to $1,250 million for the nine months ended September 30, 2000
from $1,017 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, interest credited increased by $23 million, or 2%.
Interest on insurance products increased by $13 million, or 4%, to $328 million
in 2000 from $315 million in 1999, primarily due to higher policyholder account
balances. Interest on annuity and investment products increased by $10 million,
or 1%, to $712 million in 2000 from $702 million in 1999, primarily due to an
increase in crediting rates.
Policyholder dividends increased by $200 million, or 18%, to $1,303 million
for the nine months ended September 30, 2000 from $1,103 million for the
comparable 1999 period. Excluding the impact of the GenAmerica acquisition,
policyholder dividends increased by $45 million, or 4%. This increase was due to
the growth in cash values of policies associated with this segment's large block
of traditional life insurance business.
Other expenses increased by $657 million, or 34%, to $2,587 million for the
nine months ended September 30, 2000 from $1,930 million for the comparable 1999
period. Excluding the capitalization and amortization of deferred acquisition
costs and value of business acquired which are discussed below, other expenses
increased by $540 million, or 26%, to $2,628 million in 2000 from $2,088 million
in 1999. Excluding the impact of the GenAmerica acquisition, other expenses
increased by $187 million, or 9%. Other expenses related to insurance products
increased by $120 million, or 7%, to $1,758 million in 2000 from $1,638 million
in 1999. This increase was primarily due to a $89 million increase from our
broker/dealer and other subsidiaries commensurate with the increase in other
revenues discussed above as well as a $79 million increase in expenses
associated primarily with the Company's securities lending program, partially
offset by a $45 million reduction in general and administrative expenses. Other
expenses related to annuity and investment products increased by $67 million, or
15%, to $517 million in 2000 from $450 million in 1999. This increase was
primarily due to a $36 million increase in expenses associated principally with
the Company's securities lending program and a $31 million increase in general
and administrative expenses arising from higher sales of annuity products.
Deferred policy acquisition costs and value of business acquired are
principally amortized in proportion to gross margins or gross profits, including
realized investment gains or losses. The amortization is allocated to realized
investment gains and losses to provide consolidated statement of income
information regarding the impact of investment gains and losses on the amount of
the amortization, and other expenses to provide amounts related to gross margins
or profits originating from transactions other than investment gains and losses.
Capitalization of deferred policy acquisition costs increased by $101
million to $666 million in 2000 from $565 million in 1999 while total
amortization of deferred policy
46
<PAGE> 47
acquisition costs and value of business acquired increased by $227 million to
$608 million in 2000 from $381 million in 1999. Excluding the impact of the
GenAmerica acquisition, capitalization of deferred policy acquisition costs
increased by $23 million, or 4%, while total amortization of deferred policy
acquisition costs and value of business acquired increased by $102 million, or
27%. Amortization of deferred policy acquisition costs and value of business
acquired of $625 million and $407 million were allocated to other expenses in
2000 and 1999, respectively, while the remainder of the amortization in each
year was allocated to realized investment gains and losses. Excluding the impact
of the GenAmerica acquisition, amortization of deferred policy acquisition costs
and value of business acquired of $517 million and $407 million were allocated
to other expenses in 2000 and 1999, respectively, while the remainder of the
amortization in each year was allocated to realized investment gains and losses.
Amortization of deferred policy acquisition costs and value of business acquired
allocated to other expenses related to insurance products increased by $78
million to $364 million in 2000 from $286 in 1999. This increase was due to
refinements in the calculation of estimated gross margins and profits as well as
the acceleration of the recognition of unearned fees in connection with the
product replacement program discussed above. Amortization of deferred policy
acquisition costs and value of business acquired allocated to other expenses
related to annuity products and investment products increased by $32 million to
$153 million in 2000 from $121 million in 1999. This increase was primarily due
to refinements in the calculation of estimated gross profits.
47
<PAGE> 48
INSTITUTIONAL BUSINESS
The following table presents summary consolidated financial information for
Institutional Business for the periods as indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 1,678 $ 1,420 $ 5,055 $ 4,174
Universal life and investment-type product policy fees 135 122 408 371
Net investment income 1,020 938 2,902 2,836
Other revenues 163 151 518 456
Net realized investment gains (losses) (175) 20 (216) (52)
------- ------- ------- -------
2,821 2,651 8,667 7,785
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 2,001 1,690 6,017 5,110
Interest credited to policyholder account balances 289 260 803 773
Policyholder dividends 15 81 96 118
Other expenses 450 409 1,276 1,119
------- ------- ------- -------
2,755 2,440 8,192 7,120
------- ------- ------- -------
Income before provision for income taxes 66 211 475 665
Provision for income taxes 18 80 166 248
------- ------- ------- -------
Net income $ 48 $ 131 $ 309 $ 417
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 -- INSTITUTIONAL BUSINESS
Premiums increased by $258 million, or 18%, to $1,678 million for the three
months ended September 30, 2000 from $1,420 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, premiums increased
by $241 million, or 17%, to $1,661 million in 2000 from $1,420 million in 1999.
Group insurance premiums increased by $197 million, or 15%, to $1,491 million in
2000 from $1,294 million in 1999. This increase was primarily due to strong
sales and continued favorable policyholder retention in this segment's dental
and disability businesses as well as significant premiums received from several
existing group life customers in 2000. In addition, the BMA and Lincoln National
acquisitions contributed $40 million to the variance. Retirement and savings
premiums increased by $44 million, or 35%, to $170 million in 2000 from $126
million in 1999, primarily due to significant premiums received from an existing
customer in 2000.
Universal life and investment-type product policy fees increased by $13
million, or 11%, to $135 million for the three months ended September 30, 2000
from $122 million
48
<PAGE> 49
for the comparable 1999 period. Excluding the impact of the GenAmerica
acquisition, universal life and investment-type product policy fees increased by
$4 million, or 3%, to $126 million in 2000 from $122 million in 1999. This
increase reflected growth in group universal life products.
Other revenues increased by $12 million, or 8%, to $163 million for the
three months ended September 30, 2000 from $151 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, other revenues
increased by $11 million, or 7%, to $162 million in 2000 from $151 million in
1999. Group insurance increased by $10 million, or 14%, to $81 million in 2000
from $71 million in 1999, primarily due to sales growth in this segment's dental
and disability administrative services businesses. Retirement and savings other
revenues were essentially unchanged at $81 million in 2000 compared with $80
million in 1999.
Policyholder benefits and claims increased by $311 million, or 18%, to
$2,001 million for the three months ended September 30, 2000 from $1,690 million
for the comparable 1999 period. Excluding the impact of the GenAmerica
acquisition, policyholder benefits and claims increased by $285 million, or 17%,
to $1,975 million in 2000 from $1,690 million in 1999. Group life increased by
$114 million, or 13%, to $982 million in 2000 from $868 million in 1999,
primarily due to growth in the business commensurate with the increase in
premiums discussed above. Non-medical health increased by $128 million, or 37%,
to $476 million in 2000 from $348 million in 1999, due to significant growth in
this segment's dental and disability insurance businesses as well as the BMA and
Lincoln National acquisitions discussed above. Retirement and savings increased
by $43 million, or 9%, to $517 million in 2000 from $474 million in 1999,
commensurate with the premium variance discussed above.
Interest credited to policyholder account balances increased by $29
million, or 11%, to $289 million for the three months ended September 30, 2000
from $260 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, interest credited to policyholder account balances
increased by $27 million, or 10%, to $287 million in 2000 from $260 million in
1999. Group insurance increased by $26 million, or 25%, to $130 million in 2000
from $104 million in 1999, primarily due to asset growth in customer account
balances. In addition, an increase in funding agreements, resulting from the
reinvestment of cash received in connection with the demutualization,
contributed to the variance. Retirement and savings interest credited to
policyholder account balances were essentially unchanged at $157 million in 2000
compared with $156 million in 1999.
Policyholder dividends decreased by $66 million, or 81%, to $15 million for
the three months ended September 30, 2000 from $81 million for the comparable
1999 period. Policyholder dividends vary from period to period based on
participating group insurance contract experience.
Other expenses increased by $41 million, or 10%, to $450 million for the
three months ended September 30, 2000 from $409 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, expenses increased
by $32 million, or 8%, to
49
<PAGE> 50
$441 million for the three months ended September 30, 2000 from $409 million in
1999. Other expenses related to group insurance decreased by $10 million, or 4%,
to $267 million in 2000 from $277 in 1999 primarily due to lower interest
expense in 2000 as compared with 1999. Other expenses related to retirement and
savings increased by $42 million, or 32%, to $174 million in 2000 from $132
million in 1999, primarily due to higher expense levels in the defined
contribution business as well as higher expenses associated with the Company's
securities lending program.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 - INSTITUTIONAL BUSINESS
Premiums increased by $881 million, or 21%, to $5,055 million for the nine
months ended September 30, 2000 from $4,174 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, premiums increased
by $815 million, or 20%, to $4,989 million in 2000 from $4,174 million in 1999.
Group insurance premiums increased by $603 million, or 16%, to $4,438 million in
2000 from $3,835 million in 1999. This increase was primarily due to strong
sales and continued favorable policyholder retention in this segment's group
life, dental and disability businesses and $89 million of additional insurance
coverages purchased by existing customers with funds received in the
demutualization. In addition, the BMA and Lincoln National acquisitions
contributed $68 million to the variance. Retirement and savings premiums
increased by $212 million, or 63%, to $551 million in 2000 from $339 million in
1999, primarily due to significant premiums received from existing customers in
2000.
Universal life and investment-type product policy fees increased by $37
million, or 10%, to $408 million for the nine months ended September 30, 2000
from $371 million for the comparable 1999 period, primarily due to the
acquisition of GenAmerica. Excluding the impact of the GenAmerica acquisition,
universal life and investment-type product policy fees increased by $8 million,
or 2%, to $379 million in 2000 from $371 million in 1999. This increase
reflected growth in group universal life products.
Other revenues increased by $62 million, or 14%, to $518 million for the
nine months ended September 30, 2000 from $456 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, other revenues
increased by $57 million, or 13%, to $513 million in 2000 from $456 million in
1999. Group insurance increased by $54 million, or 26%, to $264 million in 2000
from $210 million in 1999. This increase was primarily due to strong sales
growth in this segment's dental and disability administrative services
businesses and higher management fees from group life insurance separate
accounts. Retirement and savings other revenues increased by $3 million, or 1%,
to $249 million in 2000 from $246 million in 1999, primarily due to higher
administrative fees derived from separate accounts.
Policyholder benefits and claims increased by $907 million, or 18%, to
$6,017 million for the nine months ended September 30, 2000 from $5,110 million
for the comparable 1999 period. Excluding the impact of the GenAmerica
acquisition, policyholder benefits and claims increased by $818 million, or 16%,
to $5,928 million in 2000 from $5,110
50
<PAGE> 51
million in 1999. Group life increased by $182 million, or 7%, to $2,877 million
in 2000 from $2,695 million in 1999, primarily due to overall growth in the
business, commensurate with the premium variance discussed above. Non-medical
health increased by $426 million, or 43%, to $1,423 million in 2000 from $997
million in 1999, due to significant growth in this segment's dental and
disability businesses as well as the BMA and Lincoln National acquisitions
discussed above. Retirement and savings increased by $210 million, or 15%, to
$1,628 million in 2000 from $1,418 million in 1999 commensurate with the premium
variance discussed above.
Interest credited to policyholders increased by $30 million, or 4%, to $803
million for the nine months ended September 30, 2000 from $773 million for the
comparable 1999 period. Excluding the impact of the GenAmerica acquisition,
interest credited to policyholder account balances increased by $26 million, or
3%, to $799 million in 2000 from $773 million in 1999. Group insurance increased
by $55 million, or 18%, to $354 million in 2000 from $299 million in 1999. This
increase was primarily due to asset growth in customer account balances and the
bank-owned life insurance business as well as increases in the cash values of
executive and corporate-owned universal life plans. In addition, an increase in
funding agreements, resulting from the reinvestment of cash received in
connection with the demutualization, contributed to the variance. Retirement and
savings decreased by $29 million, or 6%, to $445 million in 2000 from $474
million in 1999, due to a continued shift in customers' investment preferences
from guaranteed interest products to separate account alternatives.
Policyholder dividends decreased by $22 million, or 19%, to $96 million for
the nine months ended September 30, 2000 from $118 million for the comparable
1999 period. Policyholder dividends vary from period to period based on
participating group insurance contract experience.
Other expenses increased by $157 million, or 14%, to $1,276 million for the
nine months ended September 30, 2000 from $1,119 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, expenses increased
by $127 million, or 11%, to $1,246 million in 2000 compared with $1,119 million
in 1999. Other expenses related to group life increased by $47 million, or 18%,
to $315 million in 2000 from $268 million in 1999. Other expenses related to
group non-medical health increased by $22 million, or 5%, to $497 million in
2000 from $475 million in 1999. Other expenses related to retirement and savings
increased $58 million, or 15%, to $434 million in 2000 from $376 million in
1999. These increases were primarily due to costs incurred in connection with
initiatives that focused on improving our service delivery capabilities through
investments in technology and higher expenses associated with the Company's
securities lending program. In addition, an increase in volume-related expenses
associated with premium growth contributed to the variance. Volume-related
expenses include premium taxes, separate account investment management expenses
and commissions.
51
<PAGE> 52
REINSURANCE
As a result of the acquisition of GenAmerica on January 6, 2000, MetLife
beneficially owns approximately 58% of Reinsurance Group of America,
Incorporated ("RGA"). RGA, through its subsidiaries RGA Reinsurance Company and
RGA Life Reinsurance Company of Canada, is among the largest providers of life
reinsurance in North America. In addition to its North American operations, RGA
has subsidiary companies or branch offices in Argentina, Australia, Barbados,
Bermuda, Hong Kong, Japan, Taiwan, South Africa, and the United Kingdom.
Worldwide, RGA has approximately $500 billion of life reinsurance in force and
assets of $5.9 billion.
MetLife has designated the life reinsurance business of RGA, combined with
an existing ancillary life reinsurance business, as its Reinsurance segment. The
existing ancillary life reinsurance business was an immaterial component of
MetLife's Individual segment for periods prior to January 1, 2000. Life
reinsurance is an arrangement under which an insurance company, the "reinsurer,"
agrees to indemnify another insurance company, the "ceding company," for all or
a portion of the insurance risks underwritten by the ceding company. Life
reinsurance is designed to (i) reduce the net liability on individual risks,
thereby enabling the ceding company to increase the volume of business it can
underwrite, as well as increase the maximum risk it can underwrite on a single
life or risk; (ii) stabilize operating results by leveling fluctuations in the
ceding company's loss experience; (iii) assist the ceding company to meet
applicable regulatory requirements; and (iv) enhance the ceding company's
financial strength and surplus position.
52
<PAGE> 53
The following table presents summary consolidated financial information for
Reinsurance for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
2000 2000
-------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
REVENUES
Premiums $ 327 $ 1,055
Net investment income 95 278
Other revenues 9 20
Net realized investment gains (losses) 2 (1)
------- -------
433 1,352
------- -------
EXPENSES
Policyholder benefits and claims 271 845
Interest credited to policyholder account balances 28 79
Policyholder dividends 5 15
Other expenses 81 279
------- -------
385 1,218
------- -------
Income before provision for income taxes 48 134
Provision for income taxes 11 33
Minority interest 21 57
------- -------
Net income $ 16 $ 44
======= =======
</TABLE>
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 - REINSURANCE
Revenues were $433 million and $1,352 million for the three months and nine
months ended September 30, 2000, respectively. Reinsurance revenues are
primarily derived from renewal premiums from existing reinsurance treaties, new
business premiums from existing or new reinsurance treaties and income earned on
invested assets. Premium levels are significantly influenced by large
transactions and reporting practices of ceding companies and, as a result, can
fluctuate from period to period.
Expenses were $385 million and $1,218 million for the three months and nine
months ended September 30, 2000, respectively. Policy benefits and claims were
82.9% and 80.1% of premiums for the three months and nine months ended September
30, 2000, respectively. Mortality is expected to vary from period to period, but
generally remains fairly constant over the long-term. Underwriting, acquisition
and insurance expenses, which are included in other expenses, were 16.70% and
18.71% of premiums for the
53
<PAGE> 54
three months and nine months ended September 30, 2000, respectively. This
percentage fluctuates depending on the mix of the underlying insurance products
being reinsured. Interest credited to policyholder account balances related to
amounts credited on RGA's deposit type contracts and cash value products in this
segment, which have a significant mortality component. This amount fluctuates
with the changes in cash values and changes in interest crediting rates.
Minority interest reflects third-party ownership interests in RGA.
AUTO & HOME
The following table presents summary consolidated financial information for
Auto & Home for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ------------------------
2000 1999 2000 1999
----------- --------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 664 $ 375 $ 1,965 $ 1,102
Net investment income 49 22 132 66
Other revenues 5 5 23 14
Net realized investment gains (losses) (6) 2 -- 1
------- ------- ------- -------
712 404 2,120 1,183
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 485 287 1,495 834
Other expenses 230 107 637 310
------- ------- ------- -------
715 394 2,132 1,144
------- ------- ------- -------
Income (loss) before provision (benefit) for income taxes (3) 10 (12) 39
Provision (benefit) for income taxes (9) -- (17) 4
------- ------- ------- -------
Net income $ 6 $ 10 $ 5 $ 35
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 - AUTO & HOME
Premiums increased by $289 million, or 77%, to $664 million for the three
months ended September 30, 2000 from $375 million for the 1999 comparable
period, primarily due to the St. Paul acquisition. Excluding the impact of the
St. Paul acquisition, premiums increased $42 million or 11%. Automobile premiums
increased by $33 million, or 11%, to $339 million in 2000 from $306 million in
1999. This increase was primarily due to growth in our standard auto insurance
book of business which was attributable to increased new business production and
improved retention in the existing business. Policyholder retention in our
standard auto business increased by 1% to 89%. Homeowner premiums increased by
$7 million or 11% to $72 million in 2000 from $65 million in 1999 due to an
54
<PAGE> 55
increase in policyholder retention of 2% to 91% in 2000 from 89% in 1999.
Premiums from other personal lines increased to $6 million in 2000 from $4
million in 1999.
Other revenues were stable at $5 million for the three months ended
September 30, 2000 and 1999.
Expenses increased by $321 million, or 81%, to $715 million for the three
months ended September 30, 2000 from $394 million for the comparable 1999
period. Excluding the impact of the St. Paul acquisition, expenses increased by
$24 million or 6%. This increase in expenses was more than offset by higher net
earned premiums, which resulted in a decrease in the combined ratio to 100.2% in
2000 from 105.0% in 1999.
Policyholder benefits and claims increased by $198 million, or 69%, to $485
million for the three months ended September 30, 2000 from $287 million for the
comparable 1999 period. The auto loss ratio decreased to 71.9% in 2000 from
76.6% in 1999 while the homeowners loss ratio increased to 78.6% from 73.2% in
1999. The increase in the homeowners loss ratio was primarily due to higher
catastrophe losses and expenses, predominately in the St. Paul book of business.
Catastrophes, including multiple storms and the Cerro Grande Fire, resulted in
an increase in the catastrophe loss ratio to 24.2% for the three months ended
September 30, 2000 from 9.1% for the comparable 1999 period. Excluding the
impact of the St. Paul acquisition, policyholder benefits and claims increased
by $6 million, or 2%. Auto policyholder benefits and claims increased by $12
million, or 5%, to $247 million in 2000 from $235 million in 1999, primarily due
to an 8% increase in the number of policies in force, as well as increased costs
due to an increase in the use of original equipment manufacturer parts and
higher labor rates. Correspondingly, the auto loss ratio decreased to 73% in
2000 from 76.6% in 1999. Homeowners benefits and claims decreased by $6 million,
or 13%, to $41 million in 2000 from $47 million in 1999, primarily due to lower
claim frequency resulting from a lower amount of catastrophe losses in 2000
compared with 1999. The property and casualty industry as a whole experienced a
less than typical amount of losses resulting from events classified as
catastrophes in 2000. Correspondingly, the homeowners loss ratio decreased by
16.4% to 56.9% in 2000 from 73.2% in 1999. Other personal lines benefits and
claims were stable at $5 million for 2000 and 1999.
Other expenses increased by $123 million, or 115%, to $230 million for the
three months ended September 30, 2000 from $107 million for the comparable 1999
period, which resulted in an increase in the expense ratio to 34.6% in 2000 from
28.6% in 1999. Excluding the impact of the St. Paul acquisition, other expenses
increased $18 million, or 17%, resulting in an increase in the expense ratio to
29.9% in 2000 from 28.6% in 1999. This increase is primarily due to additional
administrative costs and a slight increase in acquisition costs commensurate
with increased premiums, as discussed above.
55
<PAGE> 56
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 - AUTO & HOME
Premiums increased by $863 million, or 78%, to $1,965 million for the nine
months ended September 30, 2000 from $1,102 million for the 1999 comparable
period, primarily due to the St. Paul acquisition. Excluding the impact of the
St. Paul acquisition, premiums increased $96 million or 9%. Automobile premiums
increased by $67 million, or 7%, to $975 million in 2000 from $908 million in
1999. This increase was primarily due to growth in our standard auto insurance
book of business which was attributable to increased new business production and
improved retention in the existing business. Policyholder retention in our
standard auto business increased 1% to 89%. Homeowner premiums increased by $19
million, or 10%, to $202 million in 2000 from $183 million in 1999 due to higher
new business production and an increase in policyholder retention of 2% to 91%
in 2000 from 89% in 1999. Premiums from other personal lines increased to $21
million in 2000 from $11 million in 1999.
Other revenues increased by $9 million, or 64%, to $23 million for the nine
months ended September 30, 2000 from $14 million for the comparable 1999 period,
primarily due to a revision of an estimate of amounts recoverable from
reinsurers related to the disposition of this segment's reinsurance business in
1990.
Expenses increased by $988 million, or 86%, to $2,132 million for the nine
months ended September 30, 2000 from $1,144 million for the comparable 1999
period. Excluding the impact of the St. Paul acquisition, expenses increased by
$105 million or 9%, which resulted in an increase in the combined ratio to
104.2% in 2000 from 103.8% in 1999. This increase was primarily due to higher
overall loss costs predominately in the homeowners line, as discussed below.
Policyholder benefits and claims increased by $661 million, or 79%, to
$1,495 million for the nine months ended September 30, 2000 from $834 million
for the comparable 1999 period. The automobile loss ratio decreased to 74.6% in
2000 from 77.5% in 1999 while the homeowners loss ratio increased to 82% from
67.5% in 1999. The increase in the homeowners loss ratio was primarily due to
higher catastrophe losses and expenses, predominately in the St. Paul book of
business. Catastrophes, including multiple storms and the Cerro Grande Fire,
resulted in an increase in the catastrophe loss ratio to 20.0% for the nine
months ended September 30, 2000 from 10.4% for the comparable 1999 period.
Excluding the impact of the St. Paul acquisition, policyholder benefits and
claims increased by $74 million, or 9%. Auto policyholder benefits and claims
increased by $50 million, or 7%, to $754 million in 2000 from $704 million in
1999, primarily due to an 8% increase in the number of policies in force, as
well as increased costs due to an increase in the use of original equipment
manufacturer parts and higher labor rates. The auto loss ratio was stable at
77.3% in 2000 and 1999. Homeowners benefits and claims increased $20 million, or
16%, to $143 million in 2000 from $123 million in 1999, primarily due to the
increased volume of this book of business and increased catastrophe experience
as discussed above. The homeowners loss ratio increased by 3% to 70.5% in 2000
from 67.5% in 1999. Other personal lines
56
<PAGE> 57
benefits and claims increased by $4 million to $11 million in 2000 from $7
million in 1999.
Other expenses increased by $327 million, or 105%, to $637 million for the
nine months ended September 30, 2000 from $310 million for the comparable 1999
period, which resulted in an increase in our expense ratio to 32.4% in 2000 from
28.1% in 1999. Excluding the impact of the St. Paul acquisition, operating
expenses increased by $31 million, or 10%, resulting in a slight increase in our
expense ratio to 28.5% in 2000 from 28.1% in 1999. This increase is primarily
due to increased acquisition costs commensurate with increased premiums, as
discussed above.
ASSET MANAGEMENT
The following table presents summary consolidated financial information for
Asset Management for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
2000 1999 2000 1999
------- --------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Net investment income $ 21 $ 20 $ 63 $ 58
Other revenues 217 196 651 599
---- ---- ---- ----
238 216 714 657
---- ---- ---- ----
OTHER EXPENSES 213 180 625 545
---- ---- ---- ----
Income before provision for income taxes
and minority interest 25 36 89 112
Provision for income taxes 6 10 24 30
Minority interest 10 13 34 41
---- ---- ---- ----
Net Income $ 9 $ 13 $ 31 $ 41
==== ==== ==== ====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1999--ASSET MANAGEMENT
Other revenues, which are primarily comprised of management and advisory
fees, increased by $21 million, or 11%, to $217 million for the three months
ended September 30, 2000 from $196 million for the comparable 1999 period.
Excluding the impact of Conning, which was acquired as part of the GenAmerica
acquisition, other revenues increased by $2 million, or 1%, to $198 million in
2000 from $196 million in 1999, primarily due to an increase in management and
advisory fees commensurate with an increase in average assets under management
in 2000 as compared to 1999. Management and advisory fees are typically
calculated based on a percentage of assets under
57
<PAGE> 58
management, and are not necessarily proportionate to average assets managed due
to changes in account mix.
Other expenses increased by $33 million, or 18%, to $213 million for the
three months ended September 30, 2000 from $180 million for the comparable 1999
period. Excluding the impact of Conning, other expenses increased by $10
million, or 6%, to $190 million in 2000 from $180 million in 1999. Total
compensation and benefits of $103 million consisted of approximately 57% base
compensation and 43% variable compensation. Base compensation increased $3
million, or 5%, to $59 million in 2000 from $56 million in 1999, primarily due
to annual salary increases and higher staffing levels. Variable compensation
decreased by $7 million, or 14%, to $44 million in 2000 from $51 million in
1999. Variable incentive payments are based upon profitability, investment
portfolio performance, new business sales and growth in revenues and profits.
The variable compensation plans reward the employees for growth in their
businesses, but also require them to share in the impact of any declines. In
addition, general and administrative expenses increased $14 million, or 19%, to
$87 million in 2000 from $73 million in 1999, primarily due to increased
discretionary spending.
Minority interest, reflecting third-party ownership interest in Nvest,
decreased by $3 million, or 23%, to $10 million for the three months ended
September 30, 2000 from $13 million for the comparable 1999 period.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1999--ASSET MANAGEMENT
Other revenues, which are primarily comprised of management and advisory
fees, increased by $52 million, or 9%, to $651 million for the nine months ended
September 30, 2000 from $599 million for the comparable 1999 period. Excluding
the impact of Conning, which was acquired as part of the GenAmerica acquisition,
other revenues decreased by $9 million, or 2%, to $590 million in 2000 from $599
million in 1999 despite an increase in average assets under management in 2000
as compared to 1999. The decrease in other revenues was primarily due to a
change in asset mix from value style products to fixed income and other retail
equity products. Management and advisory fees are typically calculated based on
a percentage of assets under management, and are not necessarily proportionate
to average assets managed due to changes in account mix.
Other expenses increased by $80 million, or 15%, to $625 million for the
nine months ended September 30, 2000 from $545 million for the comparable 1999
period. Excluding the impact of Conning, other expenses increased by $13
million, or 2%, to $558 million in 2000 from $545 million in 1999. Total
compensation and benefits of $308 million consisted of approximately 58% base
compensation and 42% variable compensation. Base compensation increased by $10
million, or 6%, to $179 million in 2000 from $169 million in 1999, primarily due
to annual salary increases and higher staffing levels. Variable compensation
decreased by $19 million, or 13%, to $129 million in 2000 from $148 million in
1999. Variable incentive payments are based upon profitability, investment
portfolio performance, new business sales and growth in revenues and profits.
The variable
58
<PAGE> 59
compensation plans reward the employees for growth in their businesses, but also
require them to share in the impact of any declines. In addition, general and
administrative expenses increased $22 million, or 10%, to $250 million in 2000
from $228 million in 1999, primarily due to increased discretionary spending.
Minority interest, reflecting third-party ownership interest in Nvest,
decreased by $7 million, or 17%, to $34 million for the nine months ended
September 30, 2000 from $41 million for the comparable 1999 period.
INTERNATIONAL
The following table presents summary consolidated financial information for
International for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ -----------------------
2000 1999 2000 1999
--------- -------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 162 $ 120 $ 481 $ 357
Universal life and investment-type product policy fees 15 13 39 34
Net investment income 62 53 190 154
Other revenues 2 2 7 5
Net realized investment gains (losses) 1 (3) 9 3
------- ------- ------- -------
242 185 726 553
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 139 109 411 318
Interest credited to policyholder account balances 15 16 43 42
Policyholder dividends 9 5 24 16
Payments to former Canadian policyholders -- -- 327 --
Other expenses 67 64 205 182
------- ------- ------- -------
230 194 1,010 558
------- ------- ------- -------
Income (loss) before provision (benefit) for income taxes 12 (9) (284) (5)
Provision (benefit) for income taxes 5 (6) 12 (13)
------- ------- ------- -------
Net income (loss) $ 7 $ (3) $ (296) $ 8
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 - INTERNATIONAL
Premiums increased by $42 million, or 35%, to $162 million for the three
months ended September 30, 2000 from $120 million for the comparable 1999
period. Korea's premiums increased by $14 million, primarily due to overall
growth and improved policyholder retention, which increased to 78% in 2000 from
70% in 1999, in the individual life business. Mexico's premiums increased by $9
million primarily due to significant growth in the group business in 2000.
Taiwan's premiums increased by $6 million primarily due to overall growth in the
individual life business. Spain's premiums
59
<PAGE> 60
increased by $5 million primarily due to increased sales in the direct auto
business. Brazil's premiums increased $5 million, primarily due to expanded
business operations. The remainder of the increase was primarily due to minor
increases in several other countries.
Universal life and investment-type product policy fees increased by $2
million, or 15%, to $15 million for the three months ended September 30, 2000
compared with $13 million for the comparable 1999 period, primarily due to
expanded business operations in Argentina.
Other revenues were stable at $2 million for the three months ended
September 30, 2000 and 1999.
Policyholder benefits and claims increased by $30 million, or 28%, to $139
million for the three months ended September 30, 2000 from $109 million for the
comparable 1999 period. Korea, Taiwan, Mexico and Spain increased by $9 million,
$8 million, $6 million, and $4 million, respectively, commensurate with the
overall premium growth discussed above. In addition, Brazil increased $3
million, primarily due to expanded business operations.
Interest credited to policyholder account balances remained essentially
unchanged at $15 million for the three months ended September 30, 2000 compared
with $16 million for the comparable 1999 period.
Policyholder dividends increased by $4 million, or 80%, to $9 million for
the three months ended September 30, 2000 from $5 million for the comparable
1999 period. These dividends vary from period to period based on the claims
experience of participating insurance contracts.
Other expenses increased $3 million, or 5%, to $67 million for the three
months ended September 30, 2000 compared with $64 million for the comparable
1999 period. The primary causes of this increase were higher policy acquisition
costs related to premium growth and higher business development costs.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 - INTERNATIONAL
Premiums increased by $124 million, or 35%, to $481 million for the nine
months ended September 30, 2000 from $357 million for the comparable 1999
period. Mexico's premiums increased by $35 million, primarily due to several
large group customers obtained in 2000. Taiwan's premiums increased by $30
million, primarily due to overall growth in the individual life business as well
as an increase in group premiums as a result of a large group customer in the
third quarter of 1999. Korea's premiums increased by $26 million, primarily due
to overall growth and improved policyholder retention, which increased to 78% in
2000 from 70% in 1999, in the individual life business. Spain's premiums
increased by $17 million, primarily due to increased sales from the direct auto
60
<PAGE> 61
businesses. Brazil and Argentina's premiums increased by $10 million and $3
million, respectively, primarily due to expanded business operations. The
remainder of the increase was primarily due to minor increases in several other
countries.
Universal life and investment-type product policy fees increased by $5
million, or 15%, to $39 million for the nine months ended September 30, 2000
compared with $34 million for the comparable 1999 period, primarily due to
expanded business operations in Argentina.
Other revenues were essentially unchanged at $7 million for the nine months
ended September 30, 2000 compared with $5 million for the comparable 1999
period.
Policyholder benefits and claims increased by $93 million, or 29%, to $411
million for the nine months ended September 30, 2000 from $318 million for the
comparable 1999 period. Taiwan, Mexico and Korea increased by $31 million, $25
million and $18 million, respectively, commensurate with the overall premium
growth discussed above. Spain increased by $10 million, primarily due to
increases in auto claims commensurate with the increase in premiums discussed
above. In addition, Brazil and Argentina increased $6 million and $3 million,
respectively, primarily due to expanded business operations.
Interest credited to policyholder account balances were essentially
unchanged at $43 million for the nine months ended September 30, 2000 compared
with $42 million for the comparable 1999 period.
Policyholder dividends increased by $8 million, or 50%, to $24 million for
the nine months ended September 30, 2000 from $16 million for the comparable
1999 period. These dividends vary from period to period based on the claims
experience of participating insurance contracts.
Payments of $327 million were made during the second quarter of 2000 to
holders of certain policies transferred to Clarica Life Insurance Company in
connection with the sale of a substantial portion of our Canadian operations in
1998.
Other expenses increased by $23 million, or 13%, to $205 million for the
nine months ended September 30, 2000 from $182 million for the comparable 1999
period. The primary causes of this increase were higher policy acquisition costs
related to premium growth and higher business development costs.
CORPORATE
Total revenues for the Corporate segment, which consisted of net investment
income and realized investment losses that were not allocated to other business
segments, increased by $53 million, or 60%, to $141 million for the three months
ended September 30, 2000 from $88 million for the comparable 1999 period.
Excluding the impact of the GenAmerica acquisition, total revenues decreased by
$7 million, or 8%, to $81 million in 2000 from $88 million in 1999, primarily
due to the amortization of a gain in 1999
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<PAGE> 62
related to the excess of loss reinsurance agreements obtained to provide
reinsurance with respect to sales practices claims made on or prior to December
31, 1999. In addition, a $55 million increase in realized investment losses
completely offset a $55 million increase in net investment income. These
variances reflect the continuation of the Company's strategy to reposition its
investment portfolio to provide a higher operating return on its invested
assets. Total Corporate expenses increased by $143 million, or 238%, to $203
million in 2000 from $60 million in 1999. Excluding the impact of the GenAmerica
acquisition, total expenses increased by $90 million, or 150%, primarily due
higher interest expense related to the issuance of $1,006 million of 8% equity
security units in MetLife Capital Trust I in connection with the demutualization
and higher interest rates in 2000 as compared to 1999. Demutualization expenses,
net of income taxes, were $33 million for the three months ended September 30,
1999. There were no demutualization expenses for the three months ended
September 30, 2000. This segment reported a net loss of $2 million for the three
months ended September 30, 2000, compared with a net loss of $27 million for the
comparable 1999 period, which was primarily attributable to the aforementioned
events.
Total revenues for the Corporate segment, which consisted of net investment
income and realized investment losses that were not allocated to other business
segments, increased by $177 million, or 60%, to $472 million for the nine months
ended September 30, 2000 from $295 million for the comparable 1999 period.
Excluding the impact of the GenAmerica acquisition, total revenues increased by
$65 million, or 22%. This increase was primarily due to a $120 million increase
in net investment income, partially offset by a $48 million increase in realized
investment losses. These variances reflect the continuation of the Company's
strategy to reposition its investment portfolio to provide a higher operating
return on its invested assets. Total Corporate expenses decreased by $329
million, or 36%, to $574 million in 2000 from $903 million in 1999. Excluding
the impact of the GenAmerica acquisition, total expenses decreased by $449
million, or 50%. During 1999, the Company reported a $499 million charge
principally related to the settlement of a multidistrict litigation proceeding
involving alleged improper sales practices, accruals for sales practices claims
not covered by the settlement and other legal costs. Demutualization expenses,
net of income taxes, increased by $93 million, or 121%. This segment reported a
net loss of $227 million for the nine months ended September 30, 2000, compared
with a net loss of $549 million for the comparable 1999 period, which was
primarily attributable to the aforementioned events.
LIQUIDITY AND CAPITAL RESOURCES
METLIFE, INC.
The primary uses of liquidity of MetLife, Inc. include the payment of
common stock dividends, interest payments on debentures issued to MetLife
Capital Trust I and other debt servicing, contributions to subsidiaries and
payment of general operating expenses. The primary source of MetLife's liquidity
will be dividends it may receive from
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<PAGE> 63
Metropolitan Life and the interest received from Metropolitan Life under the
capital note described below. In addition, MetLife retained $340 million from
the proceeds of the offerings and the private placements, which will be
available to pay dividends to stockholders, make contributions to subsidiaries,
make payments on the debentures issued to MetLife Capital Trust I and meet other
obligations. MetLife's ability, on a continuing basis, to meet its cash needs
depends primarily on the receipt of dividends and the interest on the capital
note from Metropolitan Life.
Under the New York Insurance Law, Metropolitan Life is permitted without
prior insurance regulatory clearance to pay a stockholder dividend to MetLife
as long as the aggregate amount of all such dividends in any calendar year does
not exceed the lesser of (i) 10% of its surplus to policyholders as of the
immediately preceding calendar year and (ii) its net gain from operations for
the immediately preceding calendar year (excluding realized capital gains).
Metropolitain Life will be permitted to pay a stockholder dividend to MetLife in
excess of the lesser of such two amounts only if it files notice of its
intention to declare such a dividend and the amount thereof with the New York
Superintendent of Insurance and the New York Superintendent does not disapprove
the distribution. Under the New York Insurance Law, the New York Superintendent
has broad discretion in determining whether the financial condition of a stock
life insurance company would support the payment of such dividends to its
stockholders. The New York Insurance Department has established informal
guidelines for such determinations. The guidelines, among other things, focus on
the insurer's overall financial condition and profitability under statutory
accounting practices. Management of the Company cannot provide assurance that
Metropolitan Life will have statutory earnings to support payment of dividends
to MetLife in an amount sufficient to fund its cash requirements and pay cash
dividends or that the Superintendent will not disapprove any dividends that
Metropolitan Life must submit for the Superintendent's consideration. MetLife's
other insurance subsidiaries are also subject to restrictions on the payment of
dividends.
The dividend limitation is based on statutory financial results. Statutory
accounting practices differ in certain respects from accounting principles used
in financial statements prepared in conformity with generally accepted
accounting principles. The significant differences relate to deferred
acquisition costs, deferred income taxes, required investment reserves, reserve
calculation assumptions, capital notes and surplus notes. Furthermore, although
the impact cannot be determined at this time, the recent adoption of the
Codification of Statutory Accounting Principles by the NAIC and the prescribed
accounting principles that may be adopted by the New York State Insurance
Department may reduce statutory surplus, thereby making the dividend limitation
more restrictive.
In connection with the contribution of the net proceeds from the initial
public offering, the private placements and the offering of equity security
units to Metropolitan Life as described in Note 2 of Notes to Unaudited Interim
Condensed Consolidated Financial Statements, Metropolitan Life issued to MetLife
a $1,006 8.00% mandatorily convertible capital note due 2005.
The Superintendent approved the issuance of the capital note on April 4,
2000. If the payment of interest is prevented by application of the payment
restrictions described above, the interest on the capital note will not be
available as a source of liquidity for MetLife.
Based on the historic cash flows and the current financial results of
Metropolitan Life, subject to any dividend limitations which may be imposed upon
Metropolitan Life or its subsidiaries by regulatory authorities, management
believes that cash flows from operating
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<PAGE> 64
activities, together with the dividends it is permitted to pay without prior
insurance regulatory clearance, the $340 million of proceeds from the offerings
and the private placements retained by MetLife and the interest received on the
capital note from Metropolitan Life, will be sufficient to enable MetLife to
make dividend payments on its common stock, to pay all operating expenses, make
payments on the debentures issued to MetLife Capital Trust I and meet its other
obligations.
THE COMPANY
LIQUIDITY SOURCES. The Company's principal cash inflows from its insurance
activities come from life insurance premiums, annuity considerations and deposit
funds. A primary liquidity concern with respect to these cash inflows is the
risk of early contract holder and policyholder withdrawal. The Company seeks to
include provisions limiting withdrawal rights from general account institutional
pension products (generally group annuities, including guaranteed interest
contracts and certain deposit fund liabilities) sold to employee benefit plan
sponsors.
The Company's principal cash inflows from its investment activities result
from repayments of principal and proceeds from maturities and sales of invested
assets, investment income, as well as dividends and distributions from
subsidiaries. The primary liquidity concerns with respect to these cash inflows
are the risks of default by debtors, interest rate and other market volatilities
and potential illiquidity of subsidiaries. The Company closely monitors and
manages these risks.
Additional sources of liquidity to meet unexpected cash outflows are
available from the Company's portfolio of liquid assets. These liquid assets
include substantial holdings of U.S. treasury securities, short-term
investments, common stocks and marketable fixed maturity securities. The
Company's available portfolio of liquid assets was approximately $100 billion
and $88 billion at September 30, 2000 and December 31, 1999, respectively.
Sources of liquidity also include facilities for short and long-term
borrowing as needed, primarily arranged through MetLife Funding, Inc., a
subsidiary of Metropolitan Life. See "--Financing".
LIQUIDITY USES. The Company's principal cash outflows primarily relate to
the liabilities associated with its various life insurance, annuity and group
pension products, operating expenses, income taxes, contributions to
subsidiaries, as well as principal and interest on its outstanding debt
obligations. Liabilities arising from its insurance activities primarily relate
to benefit payments under the above-named products, as well as payments for
policy surrenders, withdrawals and loans.
The Company's management believes that its sources of liquidity are more
than adequate to meet its current cash requirements.
LITIGATION. Various litigation claims and assessments against the Company
have arisen in the course of the Company's business, including in connection
with its activities as an insurer, employer, investor, investment advisor and
taxpayer. Further, state insurance
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<PAGE> 65
regulatory authorities and other authorities regularly make inquiries and
conduct investigations concerning the Company's compliance with applicable
insurance and other laws and regulations.
In some of these matters, very large and/or indeterminate amounts,
including punitive and treble damages, are sought. While it is not feasible to
predict or determine the ultimate outcome of all pending investigations and
legal proceedings or to provide reasonable ranges of potential losses, it is the
opinion of the Company's management that their outcomes, after consideration of
available insurance and reinsurance and the provisions made in the Company's
consolidated financial statements, are not likely to have a material adverse
effect on its consolidated financial condition. However, given the large and/or
indeterminate amounts sought in certain of these matters and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's operating results or cash flows in particular quarterly or annual
periods. See Note 8 of Notes to Unaudited Interim Condensed Consolidated
Financial Statements.
RISK-BASED CAPITAL. Section 1322 of the New York Insurance Law requires
that New York life insurers report their risk-based capital ("RBC") based on a
formula calculated by applying factors to various asset, premium and statutory
reserve items. The formula takes into account the risk characteristics of the
insurer, including asset risk, insurance risk, interest rate risk and business
risk. Section 1322 gives the Superintendent explicit regulatory authority to
require various actions by, or take various actions against, insurers whose
total adjusted capital does not exceed certain RBC levels. At September 30,
2000, Metropolitan Life's and each of its U.S. insurance subsidiaries' total
adjusted capital was in excess of each of those RBC levels.
The NAIC has recently adopted the Codification of Statutory Accounting
Principles for life insurers, which is to become effective on January 1, 2001.
The Company is in the process of quantifying the impact on statutory surplus of
the insurance subsidiaries of Codification and the state prescribed accounting
principles that may be adopted by the various states of domicile.
FINANCING. MetLife Funding, Inc. serves as a centralized finance unit for
the Company. Pursuant to a support agreement, Metropolitan Life has agreed to
cause MetLife Funding to have a tangible net worth of at least one dollar. At
September 30, 2000 and December 31, 1999, MetLife Funding had a tangible net
worth of $10.8 million and $10.5 million, respectively. MetLife Funding raises
funds from various funding sources and uses the proceeds to extend loans to
MetLife, Metropolitan Life and its other subsidiaries. MetLife Funding manages
its funding sources to enhance the financial flexibility and liquidity of
MetLife. At September 30, 2000 and December 31, 1999, MetLife Funding had total
outstanding liabilities of $1.4 billion and $4.2 billion, respectively,
consisting primarily of commercial paper.
In connection with the Company's acquisition of the stock of GenAmerica,
the Company incurred $900 million of short-term debt, consisting primarily of
commercial
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<PAGE> 66
paper. In April 2000, the entire debt was repaid with proceeds from the
offerings and the private placements. The Company also incurred approximately
$3.2 billion of short-term debt, consisting primarily of commercial paper, in
connection with its October 1, 1999 exchange offer to holders of General
American Life funding agreements. As of September 30, 2000, this debt was
repaid.
The Company also maintained $2 billion in committed credit facilities at
September 30, 2000, as compared with $7 billion ($5 billion of which served as
back-up for the commercial paper incurred in connection with the exchange offer
to holders of General American Life funding agreements and $2 billion in
committed credit facilities) at December 31, 1999. These credit facilities were
not utilized for the nine months ended September 30, 2000 or for the year ended
December 31, 1999.
SUPPORT AGREEMENTS. In addition to its support agreement with MetLife
Funding, Metropolitan Life has entered into a net worth maintenance agreement
with New England Life Insurance Company ("NELICO"), whereby it is obligated to
maintain NELICO's statutory capital and surplus at the greater of $10 million or
the amount necessary to prevent certain regulatory action by Massachusetts, the
state of domicile of this subsidiary. The capital and surplus of NELICO at
September 30, 2000 was significantly in excess of the amount that would trigger
such an event. Furthermore, Metropolitan Life has never been called upon to
provide support to NELICO.
In connection with the Company's acquisition of GenAmerica, Metropolitan
Life entered into a net worth maintenance agreement with General American Life
Insurance Company ("General American Life"), whereby Metropolitan Life is
obligated to maintain General American Life's statutory capital and surplus at
the greater of $10 million or the amount necessary to maintain the capital and
surplus of General American Life at a level not less than 180% of the NAIC Risk
Based Capitalization Model. The capital and surplus of General American Life at
September 30, 2000 was in excess of the required amount.
Metropolitan Life has also entered into arrangements with some of its other
subsidiaries and affiliates to assist such subsidiaries and affiliates in
meeting various jurisdictions' regulatory requirements regarding capital and
surplus. In addition, Metropolitan Life has entered into a support arrangement
with respect to reinsurance obligations of its wholly-owned subsidiary,
Metropolitan Insurance and Annuity Company. Management does not anticipate that
these arrangements will place any significant demands upon the Company's
liquidity resources.
CONSOLIDATED CASH FLOWS. Net cash provided by operating activities was
$1,625 million and $3,564 million for the nine months ended September 30, 2000
and 1999, respectively. The decrease in cash provided by the Company's
operations in 2000 compared with 1999 was primarily due the cash received in
1999 in connection with the GenAmerica funding agreement exchange offer as well
as a $643 million cash transfer in 2000 to the closed block in connection with
the demutualization. Operating cash flows in the periods presented have been
more than adequate to meet liquidity requirements.
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<PAGE> 67
Net cash used in investing activities was $2,534 million and $2,044 million
for the nine months ended September 30, 2000 and 1999, respectively. Purchases
of investments exceeded sales, maturities and repayments by $4,560 million and
$977 million in 2000 and 1999, respectively, while the net change in short-term
investments was $1,167 million and $(3,043) million in 2000 and 1999,
respectively. In addition, cash flows from investing activities also increased
by $1,877 million and $2,356 million in 2000 and 1999, respectively, as a result
of activity from the Company's securities lending program.
Net cash (used in) provided by financing activities was $(280) million and
$232 million for the nine months ended September 30, 2000 and 1999,
respectively. The decrease in cash flows from financing activities was primarily
due to the pay down of short-term debt related the funding agreement exchange
offer in connection with the GenAmerica acquisition, cash payments to eligible
policyholders in connection with the demutualization and the acquisition of
treasury stock. These cash outflows were partially offset by an increase in cash
provided by proceeds from the Company's initial public offering and concurrent
private placements in April 2000 as well as the issuance of mandatorily
convertible securities in connection with the formation of MetLife Capital Trust
I. Withdrawals from policyholders' account balances exceeded deposits by $32
million and $1,453 million in 2000 and 1999, respectively. Short-term financing
decreased by $2,442 million in 2000 compared with a net increase of $2,035
million in 1999, while net additions in long-term debt were $173 million in 2000
compared with net reductions of $350 million in 1999. Cash outflows related to
the purchase of treasury stock were $407 million for the nine months ended
September 30, 2000.
The operating, investing and financing activities described above resulted
in a decrease in cash and cash equivalents of $1,189 million for the nine months
ended September 30, 2000 compared with an increase of $1,752 million in the 1999
comparable period.
INSOLVENCY ASSESSMENTS
Most of the jurisdictions in which the Company is admitted to transact
business require life insurers doing business within the jurisdiction to
participate in guaranty associations, which are organized to pay contractual
benefits owed pursuant to insurance policies issued by impaired, insolvent or
failed life insurers. These associations levy assessments, up to prescribed
limits, on all member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers in the lines of
business in which the impaired, insolvent or failed insurer engaged. Some states
permit member insurers to recover assessments paid through full or partial
premium tax offsets. Assessments levied against the Company from January 1, 1999
through September 30, 2000 aggregated $6 million. The Company maintained a
liability of $58 million at September 30, 2000 for future assessments in respect
of currently impaired, insolvent or failed insurers.
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<PAGE> 68
EFFECTS OF INFLATION
The Company does not believe that inflation has had a material effect on
consolidated results of operations, except insofar as inflation may affect
interest rates.
INVESTMENTS
All investment data and discussion are based on the investments in the
general account combined with the amounts in the closed block.
The Company had total cash and invested assets at September 30, 2000 of
$156.6 billion. In addition, the Company had $75.1 billion held in its separate
accounts, for which the Company generally does not bear investment risk.
The Company's primary investment objective is to maximize after-tax
operating income consistent with acceptable risk parameters. The Company is
exposed to three primary sources of investment risk:
- credit risk, relating to the uncertainty associated with the
continued ability of a given obligor to make timely payments of
principal and interest;
- interest rate risk, relating to the market price and cash flow
variability associated with changes in market interest rates; and
- market valuation risk for equity holdings.
The Company manages credit risk through in-house fundamental analysis of
the underlying obligors, issuers, transaction structures and real estate
properties. The Company also manages credit risk and valuation risk through
industry and issuer diversification and asset allocation. For real estate and
agricultural assets, the Company manages credit risk and valuation risk through
geographic, property type, and product type diversification and asset
allocation. The Company manages interest rate risk as part of its asset and
liability management strategies, product design, such as the use of market value
adjustment features and surrender charges, and proactive monitoring and
management of certain non-guaranteed elements of its products, such as the
resetting of credited interest and dividend rates for policies that permit such
adjustments.
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The following table summarizes the Company's cash and invested assets at
September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
2000 1999
---------------------- ----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
--------- -------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed maturities available-for-sale, at fair value $110,408 70.6 % $ 96,981 69.9 %
Mortgage loans on real estate 21,532 13.7 19,739 14.3
Policy loans 8,053 5.1 5,598 4.0
Equity real estate and real estate joint ventures 5,638 3.6 5,649 4.1
Cash and cash equivalents 2,325 1.5 2,789 2.0
Equity securities and other limited partnership
interests 3,928 2.5 3,337 2.4
Other invested assets 2,695 1.7 1,501 1.1
Short-term investments 2,091 1.3 3,055 2.2
-------- ---- -------- ----
Total cash and invested assets $156,670 100.0 % $138,649 100.0 %
======== ===== ======== =====
</TABLE>
INVESTMENT RESULTS
The annualized yields on general account cash and invested assets,
excluding net realized investment gains and losses, were 7.6% and 6.9% for the
three months ended September 30, 2000 and 1999, respectively, and 7.4% and 7.0%
for the nine months ended September 30, 2000 and 1999, respectively.
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The following table illustrates the annualized yields on average assets for
each of the components of the Company's investment portfolio for the three and
nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED SEPTEMBER 30, AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
--------------------- -------------------- -------------------- ---------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
--------- ------ -------- ------ --------- ------ -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED MATURITIES: (2)
Investment income 7.7% $ 2,138 7.4% $ 1,786 7.7% $ 6,260 7.3% $ 5,308
Net realized losses (349) (61) (593) (337)
--------- --------- --------- ---------
Total $ 1,789 $ 1,725 $ 5,667 $ 4,971
--------- --------- --------- ---------
Ending assets $ 110,408 $ 98,158 $ 110,408 $ 98,158
--------- --------- --------- ---------
MORTGAGE LOANS: (3)
Investment income 7.8% $ 420 8.2% $ 388 7.8% $ 1,254 8.0% $ 1,084
Net realized losses (20) (5) (14) (1)
--------- --------- --------- ---------
Total $ 400 $ 383 $ 1,240 $ 1,083
--------- --------- --------- ---------
Ending assets $ 21,532 $ 19,561 $ 21,532 $ 19,561
--------- --------- --------- ---------
POLICY LOANS:
Investment income 6.4% $ 127 5.9% $ 82 6.4% $ 379 6.0% $ 250
--------- --------- --------- ---------
Ending assets $ 8,053 $ 5,558 $ 8,053 $ 5,558
--------- --------- --------- ---------
EQUITY REAL ESTATE AND REAL
ESTATE JOINT
VENTURES: (4)
Investment income, net of
expenses 10.9% $ 144 8.7% $ 113 10.9% $ 466 8.7% $ 380
Net realized gains 30 3 57 169
--------- --------- --------- ---------
Total $ 174 $ 116 $ 523 $ 549
--------- --------- --------- ---------
Ending assets $ 5,638 $ 5,923 $ 5,638 $ 5,923
--------- --------- --------- ---------
CASH, CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS:
Investment income 5.4% $ 69 2.5% $ 38 5.3% $ 204 2.9% $ 109
Net realized gains (losses) 3 -- 1 (1)
--------- --------- --------- ---------
Total $ 72 $ 38 $ 205 $ 108
--------- --------- --------- ---------
Ending assets $ 4,416 $ 9,581 $ 4,416 $ 9,581
--------- --------- --------- ---------
EQUITY SECURITIES AND OTHER
LIMITED PARTNERSHIP
INTERESTS:
Investment income 3.2% $ 31 2.8% $ 23 5.8% $ 161 7.8% $ 194
Net realized gains 36 54 112 44
--------- --------- --------- ---------
Total $ 67 $ 77 $ 273 $ 238
--------- --------- --------- ---------
Ending assets $ 3,928 $ 3,340 $ 3,928 $ 3,340
--------- --------- --------- ---------
OTHER INVESTED ASSETS:
Investment income 9.1% $ 59 2.2% $ 8 5.9% $ 110 4.0% $ 46
Net realized gains (losses) 2 (10) (45) (88)
--------- --------- --------- ---------
Total $ 61 $ (2) $ 65 $ (42)
--------- --------- --------- ---------
Ending assets $ 2,695 $ 1,447 $ 2,695 $ 1,447
--------- --------- --------- ---------
TOTAL INVESTMENTS:
Investment income 7.7% $ 2,988 7.1% $ 2,438 7.6% $ 8,834 7.2% $ 7,371
Investment expenses and fees (0.1%) (43) (0.2%) (55) (0.2%) (181) (0.2%) (182)
------ --------- ------ --------- ------ --------- ------ ---------
Net investment income 7.6% $ 2,945 6.9% $ 2,383 7.4% $ 8,653 7.0% $ 7,189
Gross realized losses (298) (19) (482) (214)
Adjustments to realized losses(5) 25 (3) 42 37
--------- --------- --------- ---------
$ 2,672 $ 2,361 $ 8,213 $ 7,012
======= ========= ========= =========
</TABLE>
(1) Yields are based on average asset carrying values for the three and
nine months ended September 30, 2000 and 1999, excluding unrealized
gains and losses, and for yield calculation purposes, average assets
exclude fixed maturities associated with the Company's securities
lending program. Fixed maturity investment income has been reduced by
rebates paid under the program.
(2) Included in fixed maturities are equity linked notes of $1,215 million
and $905 million at September 30, 2000 and 1999, respectively, which
include an equity component as part of the notes' return. Investment
income for fixed
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maturities includes prepayment fees and income from the securities
lending program.
(3) Investment income from mortgage loans includes prepayment fees.
(4) Equity real estate and real estate joint venture income is shown net of
depreciation of $56 million and $80 million for the three months ended
September 30, 2000 and 1999, respectively, and $166 million and $209
million for the nine months ended September 30, 2000 and 1999,
respectively.
(5) Adjustments to realized losses include amortization of deferred
acquisition costs as well as charges and credits to participating
contracts.
FIXED MATURITIES
Fixed maturities consist principally of publicly traded and privately
placed debt securities, and represented 70.6% and 69.9% of total cash and
invested assets at September 30, 2000 and December 31, 1999, respectively.
Based on estimated fair value, public fixed maturities and private fixed
maturities comprised 84.2% and 15.8% of total fixed maturities at September 30,
2000, respectively, and 82.6% and 17.4% at December 31, 1999, respectively. The
Company invests in privately placed fixed maturities to enhance the overall
value of the portfolio, increase diversification and obtain higher yields than
can ordinarily be obtained with comparable public market securities. Generally,
private placements provide the Company with protective covenants, call
protection features and, where applicable, a higher level of collateral.
However, the Company may not freely trade its private placements because of
restrictions imposed by federal and state securities laws and illiquid trading
markets.
The Securities Valuation Office of the NAIC evaluates the bond investments
of insurers for regulatory reporting purposes and assigns securities to one of
six investment categories called "NAIC designations". The NAIC designations
parallel the credit ratings of the Nationally Recognized Statistical Rating
Organizations for marketable bonds. NAIC designations 1 and 2 include bonds
considered investment grade (rated "Baa3" or higher by Moody's, or rated "BBB-"
or higher by S&P) by such rating organizations. NAIC designations 3 through 6
include bonds considered below investment grade (rated "Ba1" or lower by
Moody's, or rated "BB+" or lower by S&P).
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The following table presents the Company's total fixed maturities by NAIC
designation and the equivalent ratings of the Nationally Recognized Statistical
Rating Organizations at September 30, 2000 and December 31, 1999, as well as the
percentage, based on estimated fair value, that each designation comprises:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
------------------------------------- -----------------------------------
ESTIMATED ESTIMATED
NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF
RATING EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL
------ ---------------------- --------- ---------- ------- --------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $ 70,131 $ 70,667 64.0 % $ 62,855 $ 62,207 64.2 %
2 Baa 30,281 29,615 26.8 26,883 25,951 26.8
3 Ba 6,432 6,065 5.5 5,808 5,636 5.8
4 B 4,113 3,847 3.5 3,017 2,969 3.1
5 Caa and lower 160 136 0.1 168 141 0.1
6 In or near default 80 58 0.1 68 67 0.0
--------- ---------- ----- --------- --------- -----
Subtotal 111,197 110,388 100.0 98,799 96,971 100.0
Redeemable preferred stock 20 20 0.0 10 10 0.0
--------- ---------- ----- --------- --------- -----
Total fixed maturities $ 111,217 $ 110,408 100.0 % $ 98,809 $ 96,981 100.0 %
========= ========== ===== ========= ========= =====
</TABLE>
Based on estimated fair values, total investment grade public and private
placement fixed maturities comprised 90.8% and 91.0% of total fixed maturities
in the general account at September 30, 2000 and December 31, 1999,
respectively.
The following table shows the amortized cost and estimated fair value of
fixed maturities, by contractual maturity dates (excluding scheduled sinking
funds) at September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
------------------------- -----------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- -------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less $ 3,020 $ 3,011 $ 3,180 $ 3,217
Due after one year through five years 21,227 21,159 18,152 18,061
Due after five years through ten years 24,275 23,848 23,755 23,114
Due after ten years 30,257 30,244 26,316 25,918
-------- -------- -------- --------
Subtotal 78,779 78,262 71,403 70,310
Mortgage-backed and other asset-backed
securities 32,418 32,126 27,396 26,661
-------- -------- -------- --------
Subtotal 111,197 110,388 98,799 96,971
Redeemable preferred stock 20 20 10 10
-------- -------- -------- --------
Total fixed maturities $111,217 $110,408 $ 98,809 $ 96,981
======== ======== ======== ========
</TABLE>
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED FIXED MATURITIES. The Company
monitors fixed maturities to identify investments that management considers to
be
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<PAGE> 73
problems or potential problems. The Company also monitors investments that have
been restructured.
The Company defines problem securities in the fixed maturities category as
securities as to which principal or interest payments are in default or are to
be restructured pursuant to commenced negotiations, or as securities issued by a
debtor that has subsequently entered bankruptcy.
The Company defines potential problem securities in the fixed maturity
category as securities of an issuer deemed to be experiencing significant
operating problems or difficult industry conditions. The Company uses various
criteria, including the following, to identify potential problem securities:
- debt service coverage or cash flow falling below certain
thresholds which vary according to the issuer's industry and
other relevant factors;
- significant declines in revenues or margins;
- violation of financial covenants;
- public securities trading at a substantial discount as a result
of specific credit concerns; and
- other subjective factors.
The Company defines restructured securities in the fixed maturities
category as securities to which the Company has granted a concession that it
would not have otherwise considered but for the financial difficulties of the
obligor. The Company enters into a restructuring when it believes it will
realize a greater economic value under the new terms than through liquidation or
disposition. The terms of the restructuring may involve some or all of the
following characteristics: a reduction in the interest rate, an extension of the
maturity date, an exchange of debt for equity or a partial forgiveness of
principal or interest.
73
<PAGE> 74
The following table presents the estimated fair value of the Company's
total fixed maturities classified as performing, problem, potential problem and
restructured fixed maturities at September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
---------------------- -----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- -------- ----------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Performing $109,419 99.1 % $ 96,464 99.5 %
Problem 246 0.2 20 0.0
Potential Problem 665 0.6 482 0.5
Restructured 78 0.1 15 0.0
-------- ----- -------- -----
Total $110,408 100.0 % $ 96,981 100.0 %
======== ===== ======== =====
</TABLE>
The Company classifies all of its fixed maturities as available-for-sale
and marks them to market. The Company writes down to fair value fixed maturities
that the Company deems to be other than temporarily impaired. The Company
records write-downs as realized losses and includes them in earnings and adjusts
the cost basis of the fixed maturities accordingly. The Company does not change
the revised cost basis for subsequent recoveries in value. Such write-downs were
$84 million and $63 million for the nine months ended September 30, 2000 and
1999, respectively.
FIXED MATURITIES BY SECTOR. The Company diversifies its fixed maturities by
security sector. The following table sets forth the estimated fair value of the
Company's fixed maturities by sector, as well as the percentage of the total
fixed maturities holdings that each security sector comprised at September 30,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
------------------------ -----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. treasuries/agencies $ 9,111 8.3 % $ 6,299 6.5 %
Corporate bonds 61,582 55.8 55,543 57.3
Foreign government securities 4,964 4.5 4,206 4.3
Mortgage-backed securities 24,215 21.9 20,279 20.9
Asset-backed securities 7,536 6.8 6,382 6.6
Other fixed income assets 3,000 2.7 4,272 4.4
-------- ----- -------- -----
Total $110,408 100.0 % $ 96,981 100.0 %
======== ===== ======== =====
</TABLE>
74
<PAGE> 75
CORPORATE FIXED MATURITIES. The table below shows the major industry types
that comprise the corporate bond holdings at the dates indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
--------------------- --------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Industrial $28,282 46.0 % $26,480 47.6 %
Utility 6,768 11.0 6,487 11.7
Finance 12,884 20.9 11,631 21.0
Yankee/Foreign (1) 13,323 21.6 10,423 18.8
Other 325 0.5 522 0.9
------- ----- ------- -----
Total $61,582 100.0 % $55,543 100.0 %
======= ===== ======= =====
</TABLE>
(1) Includes publicly traded, dollar-denominated debt obligations of foreign
obligors, known as Yankee bonds, and other foreign investments.
The Company diversifies its corporate bond holdings by industry and issuer.
The portfolio has no significant exposure to any single issuer. At September 30,
2000, the Company's combined holdings in the ten issuers to which it had the
greatest exposure totaled $3,888 million, which was less than 5% of the
Company's total invested assets at such date. The exposure to the largest single
issuer of corporate bonds the Company held at September 30, 2000 was $461
million, which was less than 1% of its total invested assets at such date.
At September 30, 2000, investments of $6,283 million, or 52.6% of the
Yankee/Foreign sector, represented exposure to traditional "Yankee" bonds, which
are dollar-denominated debt obligations of foreign obligors. The balance of this
exposure was primarily dollar-denominated, foreign private placements and
project finance loans. The Company diversifies the Yankee/Foreign portfolio by
country and issuer.
The Company does not have material exposure to foreign currency risk in its
invested assets. In the Company's international insurance operations, both its
assets and liabilities are denominated in local currencies. Foreign currency
denominated securities supporting U.S. dollar liabilities are generally swapped
back into U.S. dollars.
75
<PAGE> 76
MORTGAGE-BACKED SECURITIES. The following table shows the types of
mortgage-backed securities the Company held at September 30, 2000 and December
31, 1999:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
--------------------- --------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Pass-through securities $10,186 42.1 % $ 8,478 41.8 %
Collateralized mortgage obligations 8,915 36.8 7,694 37.9
Commercial mortgage-backed securities 5,114 21.1 4,107 20.3
------- ----- ------- -----
Total $24,215 100.0 % $20,279 100.0 %
======= ===== ======= =====
</TABLE>
At September 30, 2000, pass-through and collateralized mortgage obligations
totaled $19,101 million, or 78.9% of total mortgage-backed securities, and a
majority of this amount represented agency-issued pass-through and
collateralized mortgage obligations guaranteed or otherwise supported by the
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation or
Government National Mortgage Association. Other types of mortgage-backed
securities comprised the balance of such amounts reflected in the table. At
September 30, 2000, approximately $3,374 million, or 66.0% of the commercial
mortgage-backed securities and $15,276 million, or 80.0% of the pass-through
securities and collateralized mortgage obligations were rated Aaa/AAA by Moody's
or S&P.
Mortgage-backed securities are purchased to diversify the portfolio risk
characteristics from primarily corporate credit risk to a mix of credit risk and
cash flow risk. The majority of the mortgage-backed securities in the Company's
investment portfolio have relatively low cash flow variability.
The principal risks inherent in holding mortgage-backed securities are
prepayment and extension risks, which will affect the timing of when cash flow
will be received. The Company's active monitoring of its mortgage-backed
securities mitigates exposure to losses from cash flow risk associated with
interest rate fluctuations.
Mortgage-backed pass-through certificates are the most liquid assets in the
mortgage-backed sector. Pass-through securities distribute, on a pro rata basis
to their holders, the monthly cash flows of principal and interest, both
scheduled and prepayments, generated by the underlying mortgages. Collateralized
mortgage obligations ("CMOs") have a greater degree of cash flow stability than
pass-throughs.
ASSET-BACKED SECURITIES. Asset-backed securities, which include credit card
and automobile receivables and home equity loans, are purchased both to
diversify the overall risks of the Company's fixed maturities assets and to
provide attractive returns. The Company's asset-backed securities are
diversified both by type of asset and by issuer. Home equity loans constitute
the largest exposure in the Company's asset-backed securities investments.
Except for asset-backed securities backed by home equity loans, the asset-backed
securities investments generally have little sensitivity to changes in interest
76
<PAGE> 77
rates. At September 30, 2000, approximately $3,446 million, or 45.7%, of the
total was rated Aaa/AAA by Moody's or S&P.
The principal risks in holding asset-backed securities are structural,
credit and capital market risks. Structural risks include the security's
priority in the issuer's capital structure, the adequacy of and ability to
realize proceeds from the collateral and the potential for prepayments. Credit
risks include consumer or corporate credits such as credit card holders,
equipment lessees, and corporate obligors. Capital market risks include the
general level of interest rates and the liquidity for these securities in the
market place.
MORTGAGE LOANS
The Company's mortgage loans are collateralized by commercial, agricultural
and residential properties. Mortgage loans comprised 13.7% and 14.3% of the
Company's total cash and invested assets at September 30, 2000 and December 31,
1999, respectively. The carrying value of mortgage loans is stated at original
cost net of repayments, amortization of premiums, accretion of discounts and
valuation allowances. The following table shows the carrying value of the
Company's mortgage loans by such types at September 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
--------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Commercial $16,579 77.0 % $14,862 75.3 %
Agricultural 4,844 22.5 4,798 24.3
Residential 109 0.5 79 0.4
------- ----- ------- -----
Total $21,532 100.0 % $19,739 100.0 %
======= ===== ======= =====
</TABLE>
77
<PAGE> 78
COMMERCIAL MORTGAGE LOANS. The Company diversifies its commercial mortgage
loans by both geographic region and property type, and manages these investments
through a network of regional offices overseen by its investment department. The
following table presents the distribution across geographic regions and property
types for commercial mortgage loans at September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
--------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REGION
South Atlantic $ 4,477 27.0 % $ 4,098 27.6 %
Pacific 3,074 18.5 2,596 17.5
Middle Atlantic 2,887 17.4 2,703 18.2
East North Central 1,860 11.2 1,865 12.5
West South Central 1,193 7.2 1,012 6.8
New England 1,107 6.7 1,095 7.4
Mountain 741 4.5 490 3.3
West North Central 759 4.6 652 4.4
International 326 2.0 202 1.3
East South Central 155 0.9 149 1.0
------- ----- ------- -----
Total $16,579 100.0 % $14,862 100.0 %
======= ===== ======= =====
PROPERTY TYPE
Office $ 7,592 45.8 % $ 6,789 45.7 %
Retail 3,969 23.9 3,620 24.4
Apartments 2,605 15.7 2,382 16.0
Industrial 1,440 8.7 1,136 7.6
Hotel 859 5.2 843 5.7
Other 114 0.7 92 0.6
------- ----- ------- -----
Total $16,579 100.0 % $14,862 100.0 %
======= ===== ======= =====
</TABLE>
78
<PAGE> 79
The following table presents the scheduled maturities for the Company's
commercial mortgage loans at September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
--------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less $ 658 4.0 % $ 806 5.4 %
Due after one year through two years 1,426 8.6 482 3.2
Due after two years through three years 1,668 10.1 708 4.8
Due after three years through four years 1,271 7.7 787 5.3
Due after four years through five years 2,342 14.1 1,608 10.8
Due after five years 9,214 55.5 10,471 70.5
------- ----- ------- -----
Total $16,579 100.0 % $14,862 100.0 %
======= ===== ======= =====
</TABLE>
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED MORTGAGE LOANS. The Company
monitors its mortgage loan investments on a continual basis. Through this
monitoring process, the Company reviews loans that are restructured, delinquent
or under foreclosure and identifies those that management considers to be
potentially delinquent. These loan classifications are generally consistent with
those used in industry practice.
The Company defines restructured mortgage loans, consistent with industry
practice, as loans in which the Company, for economic or legal reasons related
to the debtor's financial difficulties, grants a concession to the debtor that
it would not otherwise consider. This definition provides for loans to exit the
restructured category under certain conditions. The Company defines delinquent
mortgage loans, consistent with industry practice, as loans in which two or more
interest or principal payments are past due. The Company defines mortgage loans
under foreclosure, consistent with industry practice, as loans in which
foreclosure proceedings have formally commenced. The Company defines potentially
delinquent loans as loans that, in management's opinion, have a high probability
of becoming delinquent.
The Company reviews all mortgage loans on an annual basis. These reviews
may include an analysis of the property financial statement and rent roll, lease
rollover analysis, property inspections, market analysis and tenant
creditworthiness. The Company also reviews loan-to-value ratios and debt
coverage ratios for restructured loans, delinquent loans, loans under
foreclosure, potentially delinquent loans, loans with an existing valuation
allowance, loans maturing within two years and loans with a loan-to-value ratio
greater than 90% as determined in the prior year.
The Company establishes valuation allowances for loans that it deems
impaired, as determined through its annual review process. The Company defines
impaired loans consistent with Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, as loans which it
probably will not collect all amounts due according to applicable contractual
terms of the agreement. The Company bases
79
<PAGE> 80
valuation allowances upon the present value of expected future cash flows
discounted at the loan's original effective interest rate or the value of the
loan's collateral. The Company records valuation allowances as realized losses
and includes them in earnings. The Company records subsequent adjustments to
allowances as realized gains or losses and includes them in earnings.
The following table presents the amortized cost and valuation allowances
for commercial mortgage loans distributed by loan classification at September
30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
------------------------------------------------- ------------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
-------- ----- --------- ---- -------- ----- --------- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Performing $15,847 95.1 % $ 20 0.1 % $14,098 94.5 % $ 11 0.1 %
Restructured 663 4.0 45 6.8 % 810 5.4 52 6.4 %
Delinquent or under
foreclosure 50 0.3 14 28.8 % 17 0.1 4 25.0 %
Potentially delinquent 99 0.6 1 0.9 % 6 0.0 2 33.3 %
------- ----- ------- ------- ----- -------
Total $16,659 100.0 % $ 80 0.5 % $14,931 100.0 % $ 69 0.5 %
======= ===== ======= ======= ===== =======
</TABLE>
(1) Amortized cost is equal to carrying value before valuation allowances.
The following table presents the changes in valuation allowances for
commercial mortgage loans for the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------
(DOLLARS IN MILLIONS)
<S> <C>
Balance, beginning of period $ 69
Additions 48
Deductions for writedowns and dispositions (37)
----
Balance, end of period $ 80
====
</TABLE>
The principal risks in holding commercial mortgage loans are property
specific, supply and demand, financial and capital market risks. Property
specific risks include the geographic location of the property, the physical
condition of the property, the diversity of tenants and the rollover of their
leases and the ability of the property manager to attract tenants and manage
expenses. Supply and demand risks include changes in the supply and/or demand
for rental space which cause changes in vacancy rates and/or rental rates.
Financial risks include the overall level of debt on the property and the amount
of principal repaid during the loan term. Capital market risks include the
general level of interest rates, the liquidity for these securities in the
marketplace and the capital available for refinancing of a loan.
80
<PAGE> 81
AGRICULTURAL MORTGAGE LOANS. The Company diversifies its agricultural
mortgage loans by both geographic region and product type. The Company manages
these investments through a network of regional offices and field professionals
overseen by its investment department.
Approximately 59% of the $4,852 million of agricultural mortgage loans
outstanding at September 30, 2000 was subject to rate resets prior to maturity.
A substantial portion of these loans were successfully renegotiated and remain
outstanding to maturity. The process and policies for monitoring the
agricultural mortgage loans and classifying them by performance status are
generally the same as those for the commercial loans.
The following table presents the amortized cost and valuation allowances
for agricultural mortgage loans distributed by loan classification at September
30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
--------------------------------------------------- -----------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
-------- ----- --------- ---- -------- ----- --------- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Performing $4,586 94.6% $ -- 0.0 % $4,616 95.8 % $ 1 0.0 %
Restructured 172 3.5 5 2.9 % 165 3.4 11 6.7 %
Delinquent or under
foreclosure 82 1.7 3 3.7 % 27 0.6 2 7.4 %
Potentially delinquent 12 0.2 -- 0.0 % 8 0.2 4 50.0 %
------ ----- ------ ------ ----- ------
Total $4,852 100.0% $ 8 0.2 % $4,816 100.0 % $ 18 0.4 %
====== ===== ====== ====== ===== ======
</TABLE>
(1) Amortized cost is equal to carrying value before valuation allowances.
The following table presents the changes in valuation allowances for
agricultural mortgage loans for the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------
(DOLLARS IN MILLIONS)
<S> <C>
Balance, beginning of period $ 18
Additions 4
Deductions for writedowns and dispositions (13)
----
Balance, end of period $ 8
====
</TABLE>
The principal risks in holding agricultural mortgage loans are property
specific, supply and demand, financial and capital market risks. Property
specific risks include the location of the property, soil types, weather
conditions and the other factors that may impact the borrower's personal
guaranty. Supply and demand risks include the supply and demand for the
commodities produced on the specific property and the related price for those
commodities. Financial risks include the overall level of debt on the property
and the amount of principal repaid during the loan term. Capital market risks
include the general
81
<PAGE> 82
level of interest rates, the liquidity for these securities in the marketplace
and the capital available for refinancing of a loan.
EQUITY REAL ESTATE AND REAL ESTATE JOINT VENTURES
The Company's equity real estate and real estate joint venture investments
consist of commercial and agricultural properties located throughout the U.S.
and Canada. The Company manages these investments through a network of regional
offices overseen by its investment department. At September 30, 2000 and
December 31, 1999, the carrying value of the Company's equity real estate and
real estate joint ventures was $5,638 million and $5,649 million, respectively,
or 3.6% and 4.1% of total cash and invested assets. The carrying value of equity
real estate was stated at depreciated cost net of impairments and valuation
allowances. The carrying value of real estate joint ventures was stated at the
Company's equity in the real estate joint ventures net of impairments and
valuation allowances. These holdings consist of equity real estate, interests in
real estate joint ventures and real estate acquired upon foreclosure of
commercial and agricultural mortgage loans. The following table presents the
carrying value of the Company's equity real estate and real estate joint
ventures at September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
--------------------- --------------------
CARRYING % OF CARRYING % OF
TYPE VALUE TOTAL VALUE TOTAL
---- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Equity real estate $5,180 91.9 % $5,271 93.3 %
Real estate joint ventures 380 6.7 331 5.9
------ ----- ------ -----
Subtotal 5,560 98.6 5,602 99.2
Foreclosed real estate 78 1.4 47 0.8
------ ----- ------ -----
Total $5,638 100.0 % $5,649 100.0 %
====== ===== ====== =====
</TABLE>
Office properties representing 64.4% and 68.1% of the Company's equity real
estate and real estate joint venture holdings at September 30, 2000 and December
31, 1999, respectively, are well diversified geographically, principally in the
East, West and South regions of the United States. The average occupancy level
of office properties was 93% and 92% at September 30, 2000 and December 31,
1999, respectively.
The Company classifies equity real estate and real estate joint ventures as
held for investment or held for sale. The carrying value of equity real estate
and real estate joint ventures held for investment was $5,143 million and $5,151
million at September 30, 2000 and December 31, 1999, respectively. The carrying
value of equity real estate and real estate joint ventures held for sale was
$495 million and $498 million at September 30, 2000 and December 31, 1999,
respectively.
Ongoing management of these investments includes quarterly appraisals as
well as an annual market update and review of each property's budget, financial
returns, lease rollover
82
<PAGE> 83
status and the Company's exit strategy. In addition to individual property
reviews, the Company employs an overall strategy of selective dispositions and
acquisitions as market opportunities arise.
The Company adjusts the carrying value of equity real estate and real
estate joint ventures held for investment for impairments whenever events or
changes in circumstances indicate that the carrying value of the property may
not be recoverable. The Company writes down impaired real estate to estimated
fair value, which it generally computes using the present value of future cash
flows from the property, discounted at a rate commensurate with the underlying
risks. The Company records write-downs as realized losses through earnings and
reduces the cost basis of the properties accordingly. The Company does not
change the new cost basis for subsequent recoveries in value.
The Company records real estate acquired upon foreclosure of commercial and
agricultural mortgage loans at the lower of estimated fair value or the carrying
value of the mortgage loan at the date of foreclosure.
Once the Company identifies a property to be sold and commences a firm plan
for marketing the property, the Company establishes and periodically revises, if
necessary, a valuation allowance to adjust the carrying value of the property to
its expected sales value, less associated selling costs, if it is lower than the
property's carrying value. The Company records allowances as realized losses and
includes them in earnings. The Company records subsequent adjustments to
allowances as realized gains or losses and includes them in earnings.
The Company's carrying value of equity real estate and real estate joint
ventures held for sale, including real estate acquired upon foreclosure of
commercial and agricultural mortgage loans, in the amounts of $495 million and
$498 million at September 30, 2000 and December 31, 1999, respectively, are net
of impairments of $128 million and $187 million and net of valuation allowances
of $28 million and $34 million, respectively.
EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
The Company's carrying value of equity securities which primarily consist
of investments in common stocks was $2,309 million and $2,006 million at
September 30, 2000 and December 31, 1999, respectively. Substantially all of the
common stock is publicly traded on major securities exchanges. The carrying
value of the other limited partnership interests which primarily represent
ownership interests in pooled investment funds that make private equity
investments in companies in the U.S. and overseas was $1,619 million and $1,331
million at September 30, 2000 and December 31, 1999, respectively. The Company
classifies its investments in common stocks as available-for-sale and marks them
to market except for non-marketable private equities which are generally carried
at cost. The Company accounts for its investments in limited partnership
interests in which it does not have a controlling interest in accordance with
the equity method of accounting. The Company's investments in equity securities
represented 1.5% of cash and invested assets at September 30, 2000 and December
31, 1999.
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<PAGE> 84
Equity securities include, at September 30, 2000 and December 31, 1999,
$439 million and $237 million, respectively, of private equity securities. The
Company may not freely trade its private equity securities because of
restrictions imposed by federal and state securities laws and illiquid trading
markets.
At September 30, 2000 and December 31, 1999, approximately $412 million and
$380 million, respectively, of the Company's equity securities holdings were
effectively fixed at a minimum value of $355 million in these respective
periods, primarily through the use of convertible securities and other
derivatives. The exchangeable subordinated debt securities mature through 2002
and the Company may terminate them earlier at its discretion.
The Company makes commitments to fund partnership investments in the normal
course of business. The amount of these unfunded commitments was $1,344 million
and $1,131 million at September 30, 2000 and December 31, 1999, respectively.
The Company anticipates that these amounts will be invested in the partnerships
over the next three to five years.
PROBLEM AND POTENTIAL PROBLEM EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP
INTERESTS
The Company monitors its equity securities and other limited partnership
interests on a continual basis. Through this monitoring process, the Company
identifies investments that management considers to be problems or potential
problems.
Problem equity securities and other limited partnership interests are
defined as securities (1) in which significant declines in revenues and/or
margins threaten the ability of the issuer to continue operating or (2) where
the issuer has subsequently entered bankruptcy.
Potential problem equity securities and other limited partnership interests
are defined as securities issued by a company that is experiencing significant
operating problems or difficult industry conditions. Criteria generally
indicative of these problems or conditions are (1) cash flows falling below
varying thresholds established for the industry and other relevant factors, (2)
significant declines in revenues and/or margins, (3) public securities trading
at a substantial discount as a result of specific credit concerns and (4) other
information that becomes available.
Equity securities or other limited partnership interests which are deemed
to be other than temporarily impaired are written down to fair value.
Write-downs are recorded as realized investment losses and are included in
earnings and the cost basis of the equity securities and other limited
partnership interests are adjusted accordingly. The new cost basis is not
changed for subsequent recoveries in value. For the nine months ended September
30, 2000 and 1999, such write-downs were $10 million and $30 million,
respectively.
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<PAGE> 85
OTHER INVESTED ASSETS
The Company's other invested assets consisted principally of leveraged
leases, which were recorded net of non-recourse debt. The Company participates
in lease transactions which are diversified by geographic area. The Company
regularly reviews residual values and writes down residuals to expected values
as needed. The Company's other invested assets represented 1.7% and 1.1% of cash
and invested assets at September 30, 2000 and December 31, 1999, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative instruments to manage market risk through one
of four principal risk management strategies: the hedging of invested assets,
liabilities, portfolios of assets or liabilities and anticipated transactions.
The Company's derivative strategy employs a variety of instruments including
financial futures, foreign exchange contracts, foreign currency swaps, interest
rate swaps, interest rate caps and options.
The Company held the following positions in derivative financial
instruments at September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
--------------------- ----------------------
NOTIONAL % OF NOTIONAL % OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Financial futures $ 2,050 12.3 % $ 3,140 15.1 %
Foreign exchange contracts 5 0.0 -- 0.0
Foreign currency swaps 3,842 23.0 4,002 19.2
Interest rate swaps 1,822 10.9 1,316 6.3
Interest rate caps 8,950 53.8 12,376 59.4
Options 7 0.0 -- 0.0
------- ----- ------- -----
Total $16,676 100.0 % $20,834 100.0 %
======= ===== ======= =====
</TABLE>
SECURITIES LENDING
Pursuant to the Company's securities lending program, it lends securities
to major brokerage firms. The Company's policy requires a minimum of 102% of the
fair value of the loaned securities as collateral, calculated on a daily basis.
The Company's securities on loan at September 30, 2000 and December 31, 1999 had
estimated fair values of $12,217 million and $6,391 million, respectively.
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SEPARATE ACCOUNT ASSETS
The Company manages each separate account's assets in accordance with the
prescribed investment policy that applies to that specific separate account. The
Company establishes separate accounts on a single client and multi-client
commingled basis in conformity with insurance laws. Generally, separate accounts
are not chargeable with liabilities that arise from any other business of the
Company. Separate account assets are subject to the Company's general account's
claims only to the extent that the value of such assets exceeds the separate
account liabilities, as defined by the account's contract. If the Company uses a
separate account to support a contract providing guaranteed benefits, the
Company must comply with the asset maintenance requirements stipulated under
Regulation 128 of the New York Insurance Department. The Company monitors these
requirements at least monthly and in addition performs cash flow analyses,
similar to that conducted for the general account, on an annual basis. The
Company reports separately as assets and liabilities investments held in
separate accounts and liabilities of the separate accounts. The Company reports
substantially all separate account assets at their fair market value. Investment
income and gains or losses on the investments of separate accounts accrue
directly to contract holders, and, accordingly, the Company does not reflect
them in its consolidated statements of income and cash flows. The Company
reflects in its revenues fees charged to the separate accounts by the Company,
including mortality charges, risk charges, policy administration fees,
investment management fees and surrender charges.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has material exposure to interest rate, equity market and
foreign exchange risk. The Company analyzes interest rate risk using various
models including multi-scenario cash flow projection models that forecast cash
flows of the liabilities and their supporting investments, including derivative
instruments. There have been no material changes in market risk exposures from
December 31, 1999, a description of which may be found in MetLife's Registration
Statements on Form S-1 (registration no. 333-91517) filed with the Securities
and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 8 to Unaudited
Interim Condensed Consolidated Financial Statements in Part 1 of this Report
("Note 8").
Sales practices class action litigation against New England and General
American Life Insurance Company has been settled. The New England case, a
consolidated multidistrict litigation in the United States District Court for
the District of Massachusetts, involves approximately 600,000 life insurance
policies sold during the period January 1, 1983 through August 31, 1996. The
settlement of this case was approved by the District Court on October 4, 2000,
and one or more appeals may be filed. The Company
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expects that the total cost of this settlement to it will be approximately $150
million. The settlement of the consolidated multidistrict sales practices class
action case against General American was preliminarily approved by the United
States District Court for the Eastern District of Missouri. The fairness hearing
for the General American settlement is scheduled for December 15, 2000. The
General American case involves approximately 250,000 life insurance policies
sold during the period 1982 through 1996.
Several lawsuits have been brought challenging the fairness of Metropolitan
Life's plan of reorganization and the adequacy and accuracy of Metropolitan
Life's disclosures to policyholders regarding the plan. The defendants have
moved to dismiss each of these actions, except for the Kings County action and
the Article 78 proceeding, which are being voluntarily held in abeyance.
Two lawsuits were filed in July 2000 against Metropolitan Life alleging
racial discrimination in the marketing, sale, and administration of life
insurance policies, including "industrial" life insurance policies, sold by
Metropolitan Life decades ago. The first lawsuit was filed in the United States
District Court for the Southern District of New York, and the second was filed
in the United States District Court for the Eastern District of Louisiana. The
plaintiffs in these purported class actions seek unspecified compensatory
damages, punitive damages, reformation, imposition of a constructive trust, a
declaration that the alleged practices are discriminatory and illegal,
injunctive relief requiring Metropolitan Life to discontinue the alleged
discriminatory practices and adjust policy values, and other relief.
Metropolitan Life believes it has meritorious defenses to the plaintiffs' claims
and intends to contest vigorously all of the plaintiffs' claims in these
actions. Metropolitan Life has moved for summary judgment dismissing the New
York action and has moved to transfer the Louisiana action to the United States
District Court for the Southern District of New York.
Various litigation, claims and assessments against the Company, in addition
to those discussed above and those otherwise provided for in the Company's
consolidated financial statements, have arisen in the course of its 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.
In some of the matters referred to above and in Note 8, very large and/or
indeterminate amounts, including punitive and treble damages, are sought. While
it is not feasible to predict or determine the ultimate outcome of all pending
investigations and legal proceedings or provide reasonable ranges of potential
losses, it is the opinion of the Company's management that their outcomes, after
consideration of available insurance and reinsurance and the provisions made in
its consolidated financial statements, are not likely to have a material adverse
effect on our consolidated financial position. However, given the large and/or
indeterminate amounts sought in certain of these matters and the inherent
unpredictably of litigation, it is possible that an adverse outcome in certain
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matters could, from time to time, have a material adverse effect on the
Company's operating results or cash flows in particular quarterly or annual
periods.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the three months ended September 30, 2000, the following
current reports were filed on Form 8-K:
1. Current Report on Form 8-K filed July 10, 2000 attaching press
release dated July 10, 2000 announcing an agreement between
Metropolitan Life Insurance Company and Banco Santander Central
Hispano to restructure their insurance joint venture in Spain.
2. Current Report on Form 8-K filed August 9, 2000 attaching press
release dated August 9, 2000 announcing second quarter 2000
results.
3. Current Report on Form 8-K filed August 16, 2000 attaching press
release dated August 16, 2000 announcing the signing of a
definitive agreement to acquire Grand Bank, N.A.
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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.
METLIFE, INC.
By: /s/ Virginia M. Wilson
-----------------------------
Virginia M. Wilson
Senior Vice-President and
Controller
(Authorized signatory and
principal accounting officer)
Date: November 14, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT NAME PAGE NUMBER
-------------- ------------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
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