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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 2000
REGISTRATION NO. 333-91517
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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METLIFE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 6719 13-4075851
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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ONE MADISON AVENUE
NEW YORK, NEW YORK 10010-3690
(212) 578-2211
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GARY A. BELLER, ESQ.
SENIOR EXECUTIVE VICE-PRESIDENT AND GENERAL COUNSEL
METLIFE, INC.
ONE MADISON AVENUE
NEW YORK, NY 10010-3690
(212) 578-2211
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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WITH COPIES TO:
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WOLCOTT B. DUNHAM, JR., ESQ. PHYLLIS G. KORFF, ESQ.
JAMES C. SCOVILLE, ESQ. SUSAN J. SUTHERLAND, ESQ.
DEBEVOISE & PLIMPTON SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
875 THIRD AVENUE FOUR TIMES SQUARE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10036
(212) 909-6000 (212) 735-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus: (i) one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and (ii) the other to be used in a concurrent offering outside the
United States and Canada (the "International Prospectus"). The two prospectuses
are identical in all material respects except for the front cover pages. The
form of U.S. Prospectus is included herein and is followed by the alternate
cover page to be used in the International Prospectus. The alternate cover page
for the International Prospectus included herein is labeled "Alternate Page for
International Prospectus." Final forms of each Prospectus will be filed with the
Securities and Exchange Commission under Rule 424(b).
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[MetLife SNOOPY LOGO]
SUBJECT TO COMPLETION. DATED APRIL 4, 2000.
179,000,000 SHARES
[METLIFE LOGO]
COMMON STOCK
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This is an initial public offering of shares of common stock of MetLife,
Inc. The offering is being made in connection with the reorganization of
Metropolitan Life Insurance Company from a mutual life insurance company to a
stock life insurance company in a process known as a demutualization.
152,150,000 shares of common stock are initially being offered in the
United States and Canada by the U.S. underwriters and 26,850,000 shares are
initially being concurrently offered outside the United States and Canada by the
international underwriters. The offering price and underwriting discount for
both offerings are identical.
In addition to these shares, in connection with the demutualization we will
issue 493,476,118 shares of our common stock to a trust for the benefit of
eligible policyholders of Metropolitan Life Insurance Company. In addition, we
will issue concurrently with the closing of this offering up to 73,000,000
shares of our common stock in the aggregate to Banco Santander Central Hispano,
S.A. and Credit Suisse Group or their respective affiliates in private
placements at a price per share equal to the initial public offering price.
Prior to this offering, there has been no public market for our common
stock. We anticipate that the initial public offering price per share will be
between $13.00 and $15.00. Our common stock has been approved for listing on the
New York Stock Exchange under the symbol "MET", subject to official notice of
issuance.
Concurrently with this offering, we and a trust we own are offering
20,000,000 % equity security units for an aggregate offering of $1 billion,
plus up to an additional $150 million if the underwriters' options to purchase
additional units are exercised in full, by means of a separate prospectus. Each
unit consists of (a) a contract to purchase shares of our common stock and (b) a
% capital security of MetLife Capital Trust I, a Delaware business trust
wholly-owned by us.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 19.
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<CAPTION>
PER SHARE TOTAL
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Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to MetLife, Inc. ................ $ $
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To the extent that the underwriters sell more than 179,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
26,850,000 shares from us at the initial public offering price less the
underwriting discount.
Delivery of the shares of common stock will be made on or about
, 2000.
None of the Securities and Exchange Commission, any state securities
commission, the New York Superintendent of Insurance or any other regulatory
body has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Joint Bookrunners
CREDIT SUISSE FIRST BOSTON GOLDMAN, SACHS & CO.
BANC OF AMERICA SECURITIES LLC
DONALDSON, LUFKIN AND JENRETTE
LEHMAN BROTHERS
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
CONNING & COMPANY FOX-PITT, KELTON J.P. MORGAN & CO.
SANTANDER INVESTMENT UTENDAHL CAPITAL PARTNERS, L.P. WARBURG DILLON READ LLC
Prospectus dated , 2000.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 19
Use of Proceeds............................................. 33
Dividend Policy............................................. 34
Capitalization.............................................. 35
Selected Financial Information.............................. 36
Pro Forma Consolidated Financial Information................ 43
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 51
The Demutualization......................................... 88
Business.................................................... 101
Management.................................................. 178
Ownership of Common Stock................................... 194
Common Stock Eligible for Future Sale....................... 196
Description of the Equity Security Units.................... 198
Description of Capital Stock................................ 201
Underwriting................................................ 208
Notice to Canadian Residents................................ 213
Validity of Common Stock.................................... 215
Experts..................................................... 215
Additional Information...................................... 215
Glossary.................................................... G-1
Index to Financial Statements............................... F-1
Opinion of Consulting Actuary............................... A-1
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Some statements contained in this prospectus, including those containing
the words "believes", "expects", "intends", "estimates", "assumes" and
"anticipates", are forward looking. Actual results may differ materially from
those suggested by the forward looking statements for various reasons, including
those discussed under "Risk Factors".
You should rely only on the information contained or referred to in this
document. We have not authorized anyone to provide you with information that is
different. This document may only be used where it is legal to sell these
securities. The information in this document may only be accurate as of the date
of this document.
DEALER PROSPECTUS DELIVERY OBLIGATION
Until , 2000 (25 days after the commencement of the offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealer's obligation to deliver a prospectus when acting as an
underwriter and with respect to unsold allotments or subscriptions.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
As a result, it does not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully, including the "Risk Factors" section and the consolidated financial
statements and the notes to those statements. Unless otherwise stated or the
context otherwise requires, references in this prospectus to "we", "our", "us"
or "MetLife" refer to MetLife, Inc., together with Metropolitan Life Insurance
Company, and their respective direct and indirect subsidiaries. All financial
information contained in this prospectus, unless otherwise indicated, has been
derived from the consolidated financial statements of Metropolitan Life
Insurance Company and its subsidiaries and is presented in conformity with
generally accepted accounting principles ("GAAP"). The Glossary beginning on
page G-1 of this prospectus includes definitions of certain insurance terms.
Each term defined in the Glossary is printed in boldface the first time it
appears in this prospectus. Information regarding the number of shares of
MetLife, Inc. common stock to be outstanding after the initial public offering,
the private placements and the concurrent offering of equity security units does
not include shares of common stock issuable upon the settlement of the purchase
contracts that are a part of the units.
We are a leading provider of insurance and financial services to a broad
spectrum of individual and institutional customers. We currently provide
individual insurance, ANNUITIES and investment products to approximately nine
million households, or one of every eleven households in the U.S. We also
provide group insurance and retirement and savings products and services to
approximately 64,000 corporations and other institutions, including 86 of the
FORTUNE 100 largest companies. Our institutional clients have approximately 33
million employees and members.
We are a leader in each of our major U.S. businesses. We are:
- the largest life insurer, with approximately $1.7 trillion of life
insurance IN FORCE at December 31, 1999;
- the largest individual life insurer, with $11.5 billion in individual
life insurance and annuity PREMIUMS and deposits in 1999;
- the largest group life insurer, with $5.3 billion of premiums in 1999;
- a leading group non-medical health insurer, including the second largest
group disability insurer, the second largest commercial dental insurer
and the largest group long-term care insurer;
- a leading issuer of individual variable life insurance and variable
annuities; and
- a leading asset manager, with $373.6 billion of total assets under
management at December 31, 1999.
We believe that our unparalleled franchises and brand names uniquely
position us to be the preeminent provider of insurance and financial services in
the U.S. businesses in which we compete.
We are one of the largest and best capitalized insurance and financial
services companies in the U.S. Our revenues for 1999 were $25.4 billion and our
net income was $617 million. We had total consolidated assets of $225.2 billion
and equity of $13.7 billion at December 31, 1999.
We are organized into five major business segments: Individual Business,
Institutional Business, Asset Management, Auto & Home and International.
INDIVIDUAL BUSINESS. Individual Business offers a wide variety of
protection and asset accumulation products for individuals, including life
insurance and annuities. Individual Business also distributes products
provided by our other business segments, including mutual funds and auto
and homeowners insurance. Reflecting overall trends in the insurance
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industry, sales of our traditional life insurance products have declined in
recent years, while FIRST-YEAR PREMIUMS AND DEPOSITS from variable life
insurance products have grown at a compound annual rate of 33.1% for the
five years ended 1999 and represented 67.4% of our total life insurance
sales for Individual Business in 1999. Our principal distribution channels
are the MetLife career agency and the New England Financial general agency
distribution systems and, after our recent acquisition of GenAmerica
Corporation, GenAmerica's independent general agency system. We also have
dedicated sales forces that market to non-profit organizations and banks
and their customers. In total, we had approximately 11,000 active sales
representatives in 1999. In addition to these distribution channels, we are
increasing the distribution of our products through independent insurance
agents and registered representatives. We believe our ability to
effectively manage these multiple distribution channels represents a
significant competitive advantage. Individual Business had $11.1 billion of
revenues, or 43.5% of our total revenues, and $565 million of operating
income in 1999.
INSTITUTIONAL BUSINESS. Institutional Business offers a broad range
of group insurance and retirement and savings products and services. Our
group insurance products and services include group life insurance and
non-medical health insurance such as short- and long-term disability,
long-term care and dental insurance, as well as other related products and
services. Our group insurance premiums, fees and other income, which
totaled $5.9 billion in 1999, have grown at a compound annual rate of 10.0%
for the three years ended 1999. Our retirement and savings products and
services include administrative services sold to sponsors of 401(k) and
other defined contribution plans, guaranteed interest products and separate
account products. We distribute our Institutional Business products through
a sales force of approximately 300 MetLife employees that is organized by
both customer size and product. In total, we have approximately 64,000
institutional customers, including 86 of the FORTUNE 100 largest companies.
Institutional Business had $10.4 billion of revenues, or 40.8% of our total
revenues, and $585 million of operating income in 1999.
ASSET MANAGEMENT. Through our wholly-owned subsidiary, State Street
Research & Management Company, and our controlling interest in Nvest
Companies, L.P. and its affiliates, Asset Management provides a broad
variety of asset management products and services primarily to third-party
institutions and individuals. Our Asset Management segment managed $189.8
billion of our total assets under management at December 31, 1999,
including $54.9 billion of assets in mutual funds and in SEPARATE ACCOUNTS
supporting individual variable life and annuity products. For the five
years ended 1999, this segment's assets under management grew at a compound
annual rate of 14.2%. We distribute our asset management products through
several distribution channels, including State Street Research's and
Nvest's dedicated sales forces, and also through our Individual Business
and Institutional Business distribution channels. Asset Management had $0.9
billion of revenues, or 3.5% of our total revenues, and $51 million of
operating income in 1999.
AUTO & HOME. Auto & Home offers auto insurance, homeowners insurance
and other personal property and casualty insurance products. We sell these
products directly to employees through employer-sponsored programs, as well
as through a variety of retail distribution channels. These channels
include the MetLife career agency system, approximately 6,000 independent
agents and brokers, which includes those of The St. Paul Companies acquired
in 1999, and approximately 385 Auto & Home specialists. We are the leading
provider of personal auto and homeowners insurance through
employer-sponsored programs in the U.S. Net premiums earned from products
sold through employer-sponsored programs have grown at a 14.3% compound
annual rate for the five years ended 1999. On September 30, 1999, our Auto
& Home segment acquired the standard personal lines property and casualty
insurance operations of The St. Paul Companies, which had in-force premiums
of approximately $1.1 billion, substantially increasing the size of this
segment's business, making us the eleventh largest personal property and
casualty insurer in the U.S.
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based on 1998 net premiums written. See "Business -- Auto & Home". Auto &
Home had $1.9 billion of revenues, or 7.4% of our total revenues, and $54
million of operating income in 1999.
INTERNATIONAL. We have international insurance operations in ten
countries, with a focus on the Asia/Pacific region, Latin America and
selected European countries. Our International segment offers life
insurance, accident and health insurance, annuities and retirement and
savings products and services to both individuals and groups, and auto and
homeowners coverage to individuals. Assets of our International segment, as
adjusted for the recent divestitures of a substantial portion of our U.K.
and Canadian operations, have grown at a compound annual rate of 21.4% for
the five years ended 1999. International had $0.8 billion of revenues, or
3.1% of our total revenues, and $18 million of operating income in 1999.
On January 6, 2000, we acquired GenAmerica Corporation for $1.2 billion in
cash. GenAmerica is a leading provider of life insurance, life reinsurance and
other financial services to affluent individuals, businesses, insurers and
financial institutions. GenAmerica's products and services include individual
life insurance and annuities, life reinsurance, institutional asset management,
group life and health insurance and administration, pension benefits
administration and software products and technology services for the life
insurance industry. GenAmerica distributes its products through approximately
625 agents in its independent general agency system and approximately 1,575
active independent insurance agents and brokers.
GenAmerica is a holding company which owns General American Life Insurance
Company. GenAmerica's subsidiaries also include Reinsurance Group of America,
Inc., one of the largest life reinsurers in the United States, and Conning
Corporation, a manager of investments for General American Life and other
insurance company and pension clients. Upon completion of the acquisition of
GenAmerica, we owned approximately 58% and 61% of the outstanding common stock
of Reinsurance Group of America (also known as RGA) and Conning, respectively.
Both RGA and Conning are publicly-traded. On March 9, 2000, we announced that we
had agreed to acquire all of the outstanding shares of Conning common stock not
already owned by us for $12.50 per share in cash, or approximately $65 million.
The Conning acquisition is subject to customary terms and conditions, including
regulatory approvals.
Subsequent to January 6, 2000, the date on which we acquired GenAmerica,
GenAmerica's businesses will be incorporated into our business segments as
applicable, except for RGA, which will be separately designated as our
Reinsurance segment.
STRATEGY
As we become a public company, we are committed to providing superior
stockholder value through the following growth strategies:
- - INCREASING OUR REVENUES AND ASSETS UNDER MANAGEMENT BY:
Building on widely recognized brand names. We believe that the
MetLife name is one of the most well-known brand names in the U.S. and one
of our most valuable assets. We have also been successful in utilizing
additional brand names, such as New England Financial, Security First Group
and State Street Research, for specific market segments. We believe our
recent acquisition of GenAmerica and RGA further strengthens our brand
portfolio.
Capitalizing on large customer base. We intend to enhance our
relationships with our existing individual customers by offering a broad
array of products, improving the training of our agents and developing
direct marketing programs in partnership with our agency sales force and
increasing sales to our institutional customers by expanding the offering
of voluntary, or employee-paid, products.
Expanding multiple distribution channels. We believe that our
development and successful management of multiple distribution channels
represent a significant competitive
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advantage. We intend to both grow our core distribution channels and to
continue to build complementary distribution channels for sales of our
products.
Continuing to introduce innovative and competitive products. We
intend to be at the forefront of the insurance and financial services
industries in offering innovative and competitive products to our
customers. Recent initiatives include new or revised products covering a
substantial portion of our individual product offerings and new voluntary
institutional products.
Increasing focus on asset accumulation products. We intend to expand
our assets under management in both our insurance operations and our Asset
Management segment by increasing our focus on sales of asset accumulation
products, such as variable life and annuity products, mutual funds and
401(k) products.
Focusing international operations on growing markets. We have
established insurance operations in selected international markets that are
experiencing significant growth in demand for insurance products and where
we believe we can gain significant market share.
- - GROWING OUR EARNINGS AND OPERATING RETURN ON EQUITY BY:
Reducing operating expenses. We are committed to improving
profitability by reducing operating expenses through employee reductions,
increased integration of operations and enhanced use of technology.
Strengthening performance-oriented culture. We have implemented a
number of initiatives to significantly enhance the performance of our
employees, including establishing a new compensation program, selectively
hiring experienced new employees, expanding our training efforts and
implementing a new performance measurement and review program.
Continuing to optimize returns from investment portfolio. The return
on our invested assets has contributed significantly to our earnings
growth. We believe that the expertise of our investment department will
enable us to continue to optimize the operating returns on our invested
assets in the future.
Enhancing capital efficiency of our operations. We seek to maximize
our operating return on equity by enhancing the capital efficiency of our
operations. We have recently implemented a new internal capital allocation
system and, consistent with a more disciplined approach to capital
allocation, have divested operations that did not meet targeted rates of
return or growth.
THE DEMUTUALIZATION
We are conducting the offerings in connection with the reorganization of
Metropolitan Life Insurance Company from a mutual life insurance company to a
stock life insurance company in a process commonly known as a demutualization.
On the date the plan of reorganization becomes effective, which will be the date
of the closing of the initial public offering, the private placements and the
offering of the units described below, Metropolitan Life Insurance Company will
become a wholly-owned subsidiary of MetLife, Inc. In the demutualization, in
exchange for their membership interests, policyholders who are eligible to
receive consideration under the plan of reorganization will be entitled to
receive consideration in the form of shares of our common stock or, in some
cases, cash or an adjustment to their policy values, referred to as "policy
credits".
The shares of our common stock allocated to policyholders who do not
receive cash or policy credits under the plan will be held through the MetLife
Policyholder Trust on behalf of these policyholders. We are establishing the
trust to help us efficiently manage the administration of accounts and the costs
associated with the approximately nine million eligible policyholders that we
estimate will become beneficiaries of the trust. Subject to certain limitations,
trust beneficiaries will be permitted, after specified periods, to instruct the
trustee to withdraw their allocated shares of our common stock from the trust
for sale or to purchase additional shares
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commission-free through a purchase and sale program established and administered
by a program agent. Trust beneficiaries allocated more than 25,000 shares of our
common stock may be limited in their ability to sell shares under the purchase
and sale program for the first 300 days after the plan effective date. Beginning
on the first anniversary of the closing of the initial public offering, trust
beneficiaries may also withdraw all, but not less than all, their allocated
shares of our common stock held in the trust in order to hold or sell such
shares of our common stock on their own.
We will account for the demutualization using the historical carrying
values of our assets and liabilities.
The board of directors of Metropolitan Life Insurance Company adopted the
plan of reorganization on September 28, 1999, and subsequently adopted
amendments to the plan. As required by law, the plan was approved by more than
two-thirds of the eligible policyholders who voted in voting completed on
February 7, 2000. On April , 2000, the New York Superintendent of Insurance
approved the Plan after a public hearing. At the public hearing, which was held
on January 24, 2000, some policyholders and others raised objections to certain
aspects of the plan. Six lawsuits have been filed challenging the fairness of
the plan of reorganization and the adequacy and accuracy of Metropolitan Life
Insurance Company's disclosures to policyholders regarding the plan. The first
of these lawsuits was filed in the Supreme Court of the State of New York for
Kings County on January 14, 2000. It was brought on behalf of a putative class
consisting of all policyholders of Metropolitan Life Insurance Company who
should have membership benefits in Metropolitan Life Insurance Company and were
and are eligible to receive notice, vote and receive consideration in the
demutualization. The complaint seeks to enjoin or rescind the plan, as well as
other relief. The defendants named in the complaint are Metropolitan Life
Insurance Company, the individual members of its board of directors and MetLife,
Inc. Discovery is underway in this case. The five other lawsuits were filed
between March 10, 2000 and March 29, 2000 in the Supreme Court of the State of
New York for New York County. The same defendants are named in these five cases
as in the Kings County case, with the addition of the New York Superintendent.
All five of the New York County cases are brought on behalf of a putative class
consisting of the eligible policyholders of Metropolitan Life Insurance Company
as of September 28, 1999, the adoption date of the plan. The claims in these
five additional cases are substantially similar to those in the Kings County
case, as is the relief sought. Metropolitan Life Insurance Company has entered
into a stipulation with the plaintiffs in the five New York County cases in
which it does not oppose consolidation of the cases, agrees that the plaintiffs
have until April 30, 2000 to file a consolidated amended complaint, and agrees
that the defendants' time to answer, move or otherwise respond to the
consolidated amended complaint will be thirty days after service of the
consolidated amended complaint. Metropolitan Life Insurance Company has agreed
to provide certain information to the plaintiffs in three of the New York County
cases. Metropolitan Life Insurance Company, MetLife, Inc. and the individual
defendants believe they have meritorious defenses to the plaintiffs' claims and
intend vigorously to contest all of the plaintiffs' claims in these six
lawsuits. See "Risk Factors -- A challenge to the New York Superintendent of
Insurance's approval may adversely affect the terms of the demutualization and
the market price of our common stock".
PRIVATE PLACEMENTS
Banco Santander Central Hispano, S.A. and Credit Suisse Group have agreed
that they or their respective affiliates will purchase from us, at a price per
share equal to the initial public offering price, in the aggregate not less than
14,900,000 shares nor more than 73,000,000 shares of our common stock in private
placements that will close concurrently with the initial public offering and the
offering of equity security units described below. We will determine at the time
of the pricing of the initial public offering whether to sell any shares to
these purchasers in excess of the minimum amount. Any shares in excess of the
minimum amount that we determine not to sell to these investors may increase the
number of shares available for sale to the general public
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under this prospectus. The maximum number of shares that each investor,
individually, and the investors, in the aggregate, could be obligated to
purchase in the private placements represents approximately 4.9% and 9.8%,
respectively, of the total number of shares of our common stock to be
outstanding upon consummation of the initial public offering and the private
placements. Each of these purchasers has entered into an agreement with us that
provides that any shares purchased by it will be restricted from sale or
transfer for a period of one year after the initial public offering, except for
sales to affiliates or pursuant to a tender or exchange offer recommended by our
board of directors. In addition, each purchaser has agreed that it will not,
without our consent, increase its ownership of voting securities beyond 4.9% of
the outstanding shares (or 5.0% with the New York Superintendent of Insurance's
approval), except for any increase resulting from transactions in the ordinary
course of the business of Purchaser as underwriter, broker/dealer, investment
manager or investment adviser or from ordinary trading activities, unless such
transactions were made with the purpose of changing or influencing the control
of MetLife, seek to obtain board representation, solicit proxies in opposition
to management or take certain other actions for five years. Although these
investors will receive common stock which has not been registered under the
Securities Act, they will also receive registration rights with respect to such
stock, which rights are not exercisable until one year after the closing of the
initial public offering. Pursuant to these registration rights, the purchasers
will be able to have their shares of common stock registered for resale under
the Securities Act, beginning after the first anniversary of the closing, on not
more than one occasion for each purchaser each year, or not more than five
occasions for each purchaser in total (known as a "demand" registration right).
In addition, we have agreed to use our reasonable efforts to register the shares
for resale on a shelf registration statement on Form S-3 as soon as practicable
after the first anniversary of the closing. If the shares are registered on a
Form S-3, each purchaser will be allowed to make not more than two offerings
under the registration statement each year, subject to a minimum offering size
of $50,000,000 per offering, although underwritten offerings will be subject to
the limitations on the number of demand registrations described above. The
purchasers will also be able to participate, subject to specified limitations,
in registrations effected by us for our own account or others.
OFFERING OF EQUITY SECURITY UNITS
Concurrently with this offering, we and a trust we own are offering
20,000,000 equity security units for an aggregate offering of $1,000 million,
plus up to an additional $150 million if the underwriters' options to purchase
additional units are exercised in full, by means of a separate prospectus. Each
unit initially consists of (a) a contract to purchase shares of our common stock
and (b) a % capital security of MetLife Capital Trust I, a Delaware
business trust wholly-owned by us.
The purchase contract underlying a unit obligates holders to purchase, and
us to sell, for $50, on May 15, 2003, a number of newly issued shares of our
common stock equal to a settlement rate based on the average trading price of
the common stock at that time.
The capital securities represent undivided beneficial ownership interests
in the assets of the trust, consisting solely of debentures issued by us to the
trust. The debentures will have an interest rate and principal amount that are
the same as the distribution rate and stated liquidation amount of the capital
securities.
The capital securities will initially be held as components of the units
and be pledged to secure the holders' obligations under the related purchase
contracts. The holders will initially receive from each unit distributions on
the capital securities at the rate of % of $50 per year, paid quarterly,
subject to the deferral provisions described under "Description of the Equity
Security Units", below. During any period in which payments are deferred, in
general we cannot declare or pay any dividend or distribution on our capital
stock or take specified other actions. The distribution rate will be reset, and
the capital securities remarketed, as described under "Description of the Equity
Security Units".
8
<PAGE> 11
MetLife, Inc. will, on a senior and unsecured basis, irrevocably guarantee
payments on the capital securities to the extent of available trust funds.
The financial statements of MetLife Capital Trust I will be consolidated in
our consolidated financial statements, with the capital securities shown on our
consolidated balance sheets under the caption "Company-obligated mandatorily
redeemable securities of subsidiary trust holding solely debentures of Parent".
The notes to our consolidated financial statements will disclose that the sole
asset of the trust will be the debentures issued by MetLife, Inc. to the trust.
Distributions on the capital securities will be reported as a charge to minority
interest in our consolidated statements of income, whether paid or accrued.
Before the issuance of shares of our common stock upon settlement of the
purchase contracts, the units will be reflected in our diluted earnings per
share calculations using the treasury stock method. Under this method, the
number of shares of our common stock used in calculating earnings per share for
any period is deemed to be increased by the excess, if any, of the number of our
shares issuable upon settlement of the purchase contracts over the number of
shares that could be purchased by us in the market, at the average market price
during that period, using the proceeds receivable upon settlement. Consequently,
there will be no dilutive effect on our earnings per share, except during
periods when the average market price of our common stock is above $ per
share.
The closings of the initial public offering, the private placements and the
offering of the equity security units are each conditioned on the concurrent
closings of the others.
-------------------------
Our principal executive offices are located at One Madison Avenue, New
York, New York 10010-3690. Our telephone number is (212) 578-2211.
9
<PAGE> 12
THE OFFERING
Common stock offered.......... 179,000,000 shares, assuming an initial public
offering price of $14.00 per share, which is
the midpoint of the range stated on the cover
page of this prospectus.
Shares to be outstanding after
the offering.................. 745,476,118 shares, assuming an initial public
offering price of $14.00 per share, which is
the midpoint of the range stated on the cover
page of this prospectus.
New York Stock Exchange
symbol...................... MET
Use of proceeds............... We estimate that we will receive net proceeds
from the initial public offering of $2,381
million, or $2,738 million if the underwriters'
options to purchase additional shares as
described under "Underwriting" are exercised in
full, assuming an initial public offering price
of $14.00 per share, which is the midpoint of
the range stated on the cover page of this
prospectus.
As required by the plan of reorganization, we
will use the net proceeds from the initial
public offering, together with an estimated
$1,022 million of proceeds from the private
placements and an estimated $960 million of net
proceeds, or $1,104 million if the
underwriters' options to purchase additional
units are exercised in full, from the offering
of equity security units, as follows:
- an estimated $397 million to reimburse
Metropolitan Life Insurance Company for the
crediting of policy credits to certain
policyholders in the demutualization;
- an estimated $2,494 million to reimburse
Metropolitan Life Insurance Company for the
payment of cash to certain policyholders in
the demutualization;
- an estimated $315 million to reimburse
Metropolitan Life Insurance Company for cash
payments to be made by its Canadian branch to
certain holders of policies included in its
Canadian business sold to Clarica Life
Insurance Company in 1998;
- an estimated $361 million to reimburse
Metropolitan Life Insurance Company for the
payment of the fees and expenses incurred in
connection with the demutualization; and
- up to $340 million (unless the New York
Superintendent of Insurance approves a larger
amount) to be retained by MetLife, Inc. and
used for working capital, payment of
dividends and other general corporate
purposes, including payments on the
debentures issued by MetLife, Inc. to MetLife
Capital Trust I in connection with the
offering
10
<PAGE> 13
of the units, and to pay the fees and
expenses of the trustee and custodian of the
MetLife Policyholder Trust.
We will contribute any remaining proceeds to
Metropolitan Life Insurance Company for its
general corporate purposes and to repay up to
$450 million of short-term debt that
Metropolitan Life Insurance Company incurred in
connection with the acquisition of GenAmerica
Corporation. 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 Insurance Company as
described above, Metropolitan Life Insurance
Company expects to issue to MetLife, Inc. its
$1 billion % mandatorily convertible
capital note due 2005 having the principal
terms described under "Management's Discussion
and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital
Resources -- MetLife, Inc."
The plan of reorganization requires that the
aggregate net proceeds from the offerings and
the private placements be at least equal to
specified amounts. See "The
Demutualization -- Summary of the Plan of
Reorganization". If the actual proceeds raised
in the initial public offering, the private
placements or the offering of equity security
units are different from the amounts estimated
in this prospectus, we will be required to
change the sizes of the other transactions,
subject to limits set forth in the plan. The
amount of proceeds from the offerings and the
private placements and the final terms of the
units will depend on market conditions and on
our capital needs at the time of issuance.
Dividend policy............... Our board of directors intends to declare an
annual dividend on our common stock of $0.20
per share. For more information on dividends
and potential limitations on our ability to pay
dividends, see "Dividend Policy".
Risk factors.................. For a discussion of certain risks you should
consider before investing in our securities,
see "Risk Factors".
11
<PAGE> 14
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary consolidated financial information
for MetLife. We have derived the consolidated financial information for the
years ended December 31, 1999, 1998 and 1997 and at December 31, 1999 and 1998
from our audited consolidated financial statements included elsewhere in this
prospectus. We have derived the consolidated financial information for the years
ended December 31, 1996 and 1995 and at December 31, 1997, 1996 and 1995 from
our audited consolidated financial statements not included elsewhere in this
prospectus. We have prepared the following consolidated statements of income and
consolidated balance sheet data, other than the statutory data, in conformity
with generally accepted accounting principles. We have derived the statutory
data from Metropolitan Life Insurance Company's ANNUAL STATEMENTS filed with
insurance regulatory authorities and we have prepared the statutory data in
accordance with STATUTORY ACCOUNTING PRACTICES. You should read the following
information in conjunction with the information and consolidated financial
statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA
Revenues:
Premiums(1)................................................. $12,088 $11,503 $11,278 $11,345 $11,178
Universal life and investment-type product policy fees...... 1,438 1,360 1,418 1,243 1,177
Net investment income(1)(2)(3).............................. 9,816 10,228 9,491 8,978 8,837
Other revenues(1)........................................... 2,154 1,994 1,491 1,246 834
Net realized investment gains (losses)(4)................... (70) 2,021 787 231 (157)
------- ------- ------- ------- -------
25,426 27,106 24,465 23,043 21,869
Total expenses(1)(3)(5)..................................... 23,991 25,019 22,794 21,637 21,125
------- ------- ------- ------- -------
Income before provision for income taxes, discontinued
operations and extraordinary item......................... 1,435 2,087 1,671 1,406 744
Provision for income taxes(6)............................... 593 740 468 482 407
------- ------- ------- ------- -------
Income before discontinued operations and extraordinary
item...................................................... 842 1,347 1,203 924 337
(Loss) gain from discontinued operations(7)................. -- -- -- (71) 362
------- ------- ------- ------- -------
Income before extraordinary item............................ 842 1,347 1,203 853 699
Extraordinary item -- demutualization expense, net of income
tax of $35 and $2, respectively........................... 225 4 -- -- --
------- ------- ------- ------- -------
Net income.................................................. $ 617 $ 1,343 $ 1,203 $ 853 $ 699
======= ======= ======= ======= =======
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
General account assets(3)................................. $160,291 $157,278 $154,444 $145,877 $144,277
Separate account assets................................... 64,941 58,068 48,338 43,399 38,861
-------- -------- -------- -------- --------
Total assets.............................................. $225,232 $215,346 $202,782 $189,276 $183,138
Policyholder liabilities(8)............................... $124,955 $124,203 $127,358 $122,895 $122,220
Long-term debt............................................ $ 2,514 $ 2,903 $ 2,884 $ 1,946 $ 2,345
Retained earnings......................................... $ 14,100 $ 13,483 $ 12,140 $ 10,937 $ 10,084
Accumulated other comprehensive income (loss)............. (410) 1,384 1,867 1,046 1,670
-------- -------- -------- -------- --------
Total equity.............................................. $ 13,690 $ 14,867 $ 14,007 $ 11,983 $ 11,754
OTHER DATA
Operating income(4)(9).................................... $ 990 $ 23 $ 617 $ 818 $ 504
Adjusted operating income(4)(10).......................... $ 1,307 $ 1,226 $ 807 $ 921 $ 613
Operating return on equity(11)............................ 7.2% 0.2% 5.3% 7.8% 5.2%
Adjusted operating return on equity(12)................... 9.5% 9.6% 7.0% 8.8% 6.3%
Return on equity(13)...................................... 4.5% 10.5% 10.4% 8.1% 7.2%
Operating cash flows...................................... $ 3,865 $ 842 $ 2,872 $ 3,688 $ 4,823
Total assets under management(14)......................... $373,646 $360,703 $338,731 $297,570 $288,000
STATUTORY DATA(15)
Premiums and deposits..................................... $ 24,643 $ 22,722 $ 20,569 $ 20,611 $ 21,651
Net income (loss)......................................... $ 790 $ 875 $ 589 $ 460 $ (672)
Policyholder surplus...................................... $ 7,630 $ 7,388 $ 7,378 $ 7,151 $ 6,785
Asset valuation reserve................................... $ 3,109 $ 3,323 $ 3,814 $ 2,635 $ 2,038
</TABLE>
- ---------------
(1) Includes the following combined financial statement data of MetLife Capital
Holdings, Inc., which we sold in 1998, and our Canadian operations and U.K.
insurance operations, substantially all of which we sold in 1998 and 1997,
respectively:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Revenues:
Premiums.................................................. $204 $ 463 $ 456 $ 439
Net investment income..................................... 495 914 877 637
Other revenues............................................ 33 225 164 192
---- ------ ------ ------
$732 $1,602 $1,497 $1,268
==== ====== ====== ======
Expenses:
Policyholder benefits and claims.......................... $240 $ 495 $ 459 $ 492
Other expenses............................................ 418 861 606 831
---- ------ ------ ------
$658 $1,356 $1,065 $1,323
==== ====== ====== ======
</TABLE>
As a result of these sales, we recorded net realized investment gains of
$520 million and $139 million for the years ended December 31, 1998 and
1997, respectively.
In July 1998, Metropolitan Life Insurance Company sold a substantial
portion of its Canadian operations to Clarica Life Insurance Company. As
part of that sale, we transferred a large block of policies in effect with
Metropolitan Life Insurance Company in Canada to Clarica Life, and the
holders of the transferred Canadian policies became policyholders of
Clarica Life. Those transferred policyholders are no longer policyholders
of Metropolitan Life Insurance Company and, therefore, are not entitled to
compensation under the plan of reorganization. However, as a result of a
commitment made in connection
13
<PAGE> 16
with obtaining Canadian regulatory approval of that sale, if Metropolitan
Life Insurance Company demutualizes, its Canadian branch will make cash
payments to those who are, or are deemed to be, holders of these
transferred Canadian policies. The payments, which will be recorded in
other expenses in the same period as the effective date of the plan, will
be determined in a manner that is consistent with the treatment of, and
fair and equitable to, eligible policyholders of Metropolitan Life
Insurance Company. The aggregate amount of the payment is dependent upon
the initial public offering price of common stock to be issued at the
effective date of the plan. Assuming an initial public offering price of
$14.00 per share, which is the midpoint of the range stated on the cover
page of this prospectus, and based on actuarial calculations we have made
regarding these payments, we estimate that the aggregate payments will be
$315 million.
(2) During 1997, we changed to the retrospective interest method of accounting
for investment income on structured notes in accordance with Emerging
Issues Task Force Consensus 96-12, Recognition of Interest Income and
Balance Sheet Classification of Structured Notes. As a result, net
investment income increased by $175 million. The cumulative effect of this
accounting change on prior years' income was immaterial.
(3) In 1998, we adopted the provisions of Statement of Financial Accounting
Standards 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, with respect to our securities lending
program. Adoption of the provisions had the effect of increasing assets and
liabilities by $3,769 million at December 31, 1998 and increasing revenues
and expenses by $266 million for the year ended December 31, 1998.
(4) Realized investment gains and losses are presented net of related
policyholder amounts. The amounts netted against realized investment gains
and losses are the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997 1996 1995
----- ------ ------ ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Gross realized investment gains (losses).................... $(137) $2,629 $1,018 $ 458 $ 73
----- ------ ------ ------ -----
Less amounts allocable to:
Future policy benefit loss recognition.................... -- (272) (126) (203) (152)
Deferred policy acquisition costs......................... 46 (240) (70) (4) (78)
Participating pension contracts........................... 21 (96) (35) (20) --
----- ------ ------ ------ -----
Total..................................................... 67 (608) (231) (227) (230)
----- ------ ------ ------ -----
Net realized investment gains (losses)...................... $ (70) $2,021 $ 787 $ 231 $(157)
===== ====== ====== ====== =====
</TABLE>
Realized investment gains (losses) have been reduced by (1) deferred
policy acquisition amortization to the extent that such amortization
results from realized investment gains and losses, (2) additions to future
policy benefits resulting from the need to establish additional
liabilities due to the recognition of investment gains, and (3) additions
to participating contractholder accounts when amounts equal to such
investment gains and losses are credited to the contractholders' accounts.
This presentation may not be comparable to presentations made by other
insurers. This presentation affected operating income and adjusted
operating income. See note 9 below.
(5) Total expenses exclude $(67) million, $608 million, $231 million, $227
million and $230 million for the years ended December 31, 1999, 1998, 1997,
1996 and 1995, respectively, of deferred policy acquisition costs, future
policy benefit loss recognition and credits to participating pension
contracts that have been charged against realized investment gains and
losses as these amounts are directly related to the realized investment
gains and losses. This presentation may not be comparable to presentations
made by other insurers.
(6) Includes $125 million, $18 million, $(40) million, $38 million and $67
million for surplus tax paid (received) by Metropolitan Life Insurance
Company for the years ended December 31, 1999, 1998, 1997, 1996 and 1995,
respectively. As a stock life insurance company,
14
<PAGE> 17
we will no longer be subject to the surplus tax after the effective date of
the demutualization. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
(7) The gain (loss) from discontinued operations was primarily attributable to
the disposition of our group medical insurance business.
(8) Policyholder liabilities include future policy benefits, policyholder
account balances, other policyholder funds and policyholder dividends.
(9) The following provides a reconciliation of net income to operating income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997 1996 1995
------ ------- ------- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net income.................................................. $ 617 $ 1,343 $ 1,203 $ 853 $ 699
------ ------- ------- ----- -----
Adjustments to reconcile net income to operating income:
Gross realized investment (gains) losses.................. 137 (2,629) (1,018) (458) (73)
Income tax on gross realized investment gains and
losses.................................................. (92) 883 312 173 26
------ ------- ------- ----- -----
Realized investment (gains) losses, net of income tax... 45 (1,746) (706) (285) (47)
------ ------- ------- ----- -----
Amounts allocated to investment gains and losses (see note
4)...................................................... (67) 608 231 227 230
Income tax on amounts allocated to investment gains and
losses.................................................. 45 (204) (71) (86) (83)
------ ------- ------- ----- -----
Amounts allocated to investment gains and losses, net of
income tax (benefit) expense.......................... (22) 404 160 141 147
------ ------- ------- ----- -----
Loss (gain) from discontinued operations.................. -- -- -- 71 (362)
------ ------- ------- ----- -----
Surplus tax............................................... 125 18 (40) 38 67
------ ------- ------- ----- -----
Extraordinary item -- demutualization expense, net of
income tax of $35 and $2, respectively.................. 225 4 -- -- --
------ ------- ------- ----- -----
Operating income............................................ $ 990 $ 23 $ 617 $ 818 $ 504
====== ======= ======= ===== =====
</TABLE>
We believe the supplemental operating information presented above allows
for a more complete analysis of results of operations. We have excluded
realized investment gains and losses due to their volatility between
periods and because such data are often excluded when evaluating the
overall financial performance of insurers. You should not consider
operating income as a substitute for any GAAP measure of performance. Our
method of calculating operating income may be different from the method
used by other companies and therefore comparability may be limited.
(10) The following provides a reconciliation of operating income to adjusted
operating income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997 1996 1995
------ ------- ------- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Operating income............................................ $ 990 $ 23 $ 617 $ 818 $ 504
Adjustment for charges for sales practices claims and for
personal injuries caused by exposure to
asbestos-containing products, net of income tax........... 317 1,203 190 103 109
------ ------- ------- ----- -----
Adjusted operating income................................... $1,307 $ 1,226 $ 807 $ 921 $ 613
====== ======= ======= ===== =====
</TABLE>
The charge for the year ended December 31, 1999 was 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. The amount reported for the year
ended December 31, 1998 includes charges for sales practices claims and
claims for personal injuries caused by exposure to asbestos or
asbestos-containing products. See Note 9 of Notes to Consolidated
Financial Statements. We believe that
15
<PAGE> 18
supplemental adjusted operating income data provide information useful in
measuring operating trends by excluding the unusual amounts of expenses
associated with sales practices and asbestos-related claims. These
expenses are not related to our ongoing operations. Adjusted operating
income should not be considered as a substitute for any GAAP measure of
performance.
(11) Operating return on equity is defined as operating income divided by
average total equity, excluding accumulated other comprehensive income
(loss). We believe the operating return on equity information presented
supplementally allows for a more complete analysis of results of
operations. Accumulated other comprehensive income (loss) has been excluded
due to its volatility between periods and because such data are often
excluded when evaluating the overall financial performance of insurers.
Operating return on equity should not be considered as a substitute for any
GAAP measure of performance or liquidity. Our method of calculation of
operating return on equity may be different from the calculation used by
other companies and, therefore, comparability may be limited. Operating
return on equity is only presented for annual periods.
(12) Adjusted operating return on equity is defined as adjusted operating income
divided by average total equity, excluding accumulated other comprehensive
income (loss). We believe that supplemental adjusted operating return on
equity data provide information useful in measuring operating trends by
excluding the unusual amounts of expenses associated with sales practices
and asbestos-related claims. Adjusted operating return on equity should not
be considered as a substitute for any GAAP measure of performance. Adjusted
operating return on equity is only presented for annual periods.
(13) Return on equity is defined as net income divided by average total equity,
excluding accumulated other comprehensive income (loss).
(14) Includes MetLife's general account and separate account assets and assets
managed on behalf of third parties.
(15) Metropolitan Life Insurance Company statutory data only.
16
<PAGE> 19
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following summary pro forma financial information is derived from the
pro forma financial information and the notes thereto included elsewhere in this
prospectus. This information gives effect to the demutualization, the
establishment of the closed block, the planned concurrent private placements of
73,000,000 shares at $14.00 per share, which is the midpoint of the range stated
on the cover page of this prospectus, the concurrent offering of 20,000,000
equity security units at $50.00 per unit and the sale of 179,000,000 shares of
common stock in the initial public offering at $14.00 per share, which is the
midpoint of the range stated on the cover page of this prospectus, as if they
each had occurred at December 31, 1999 for purposes of the consolidated balance
sheet information and at January 1, 1999 for purposes of the consolidated
statement of income information for the year ended December 31, 1999. This
information has been prepared based on the terms of the plan of reorganization
and the assumptions described in "Pro Forma Consolidated Financial Information".
This information assumes, among other things, (a) a total of 699,974,077 shares
of common stock is allocated to eligible policyholders under the plan of
reorganization and (b) the underwriters' options to purchase additional shares
of common stock and units in the offerings are not exercised. We have based the
pro forma information on available information and on assumptions management
believes are reasonable and that reflect the effects of these transactions. We
have provided this information for informational purposes only. The number of
shares and units actually sold in the offerings and the private placements and
their respective prices may vary from the amounts assumed. The plan of
reorganization requires that the aggregate net proceeds from the offerings and
the private placements be at least equal to specified amounts. See "The
Demutualization -- Summary of the Plan of Reorganization". If the actual
proceeds raised in the initial public offering, the private placements or the
offering of equity security units are different from the amounts estimated in
this prospectus, we will be required to change the sizes of the other
transactions, subject to the limit in the plan that the proceeds of the units
offering may not exceed one-third of the combined proceeds of that offering, the
offering of MetLife, Inc.'s common stock pursuant to this prospectus and the
private placements. The amount of proceeds from the offerings and the private
placements and the final terms of the units will depend on market conditions and
our capital needs at the time of issuance. This information does not necessarily
indicate our consolidated financial position or results of operations had the
demutualization, the establishment of the closed block, the offering of equity
security units, the initial public offering and the private placements been
consummated on the dates assumed. It also does not project or forecast our
consolidated financial position or results of operations for any future date or
period.
The data set forth below give effect to gross proceeds of $2,506 million
from the issuance of common stock in the initial public offering less an assumed
underwriting discount and estimated initial public offering expenses aggregating
$125 million, or net proceeds from the initial public offering of $2,381
million, assuming an initial public offering price of $14.00 per share. The data
also gives effect to proceeds of $1,022 million from the private placements
assuming a purchase of 73,000,000 shares at an initial public offering price of
$14.00 per share and gross proceeds of $1,000 million from the issuance of the
units, less an assumed underwriting discount and offering expenses aggregating
$40 million, or net proceeds from the offering of $960 million.
Under the plan of reorganization, policyholders eligible to receive
consideration in the demutualization will receive interests in the MetLife
Policyholder Trust, cash or policy credits. The trust will hold the shares of
common stock allocated under the plan to those eligible policyholders receiving
trust interests. The information in the table below assumes that an estimated
$397 million of the net proceeds will be used to reimburse Metropolitan Life
Insurance Company for policy credits made in lieu of 28,331,484 allocated
shares, an estimated $2,494 million of the net proceeds will be used to
reimburse Metropolitan Life Insurance Company for cash payments made in lieu of
178,166,475 allocated shares and an estimated $315 million will
17
<PAGE> 20
be used to reimburse Metropolitan Life Insurance Company for cash payments to be
made by its Canadian branch to certain holders of policies included in its
Canadian business sold to Clarica Life Insurance Company in 1998. We will
account for the payments to the transferred Canadian policyholders in other
expenses in the same period as the effective date of the plan. The consideration
an eligible policyholder receives under the plan of reorganization will be based
on the number of shares of common stock allocated to the eligible policyholder
pursuant to the terms of the plan. For those policyholders receiving policy
credits or for those non-electing eligible policyholders who must receive cash
in the demutualization, we will translate the share allocations into dollar
amounts based on the initial public offering price per share. The pro forma
information reflects $397 million of policy credits and $164 million of cash
payments that will be distributed to non-electing eligible policyholders that
must receive cash in the demutualization, assuming an initial public offering
price of $14.00 per share. The pro forma information also reflects elections to
receive cash made by eligible policyholders holding approximately 23.8% of the
total number of shares allocated to eligible policyholders, representing
estimated cash payments of $2,330 million, assuming an initial public offering
price of $14.00 per share. See "The Demutualization -- Payment of Consideration
to Eligible Policyholders". The pro forma consolidated statement of income also
reflects the elimination of the surplus tax on earnings and the inclusion of the
minority interest related to the units and is presented before the extraordinary
item for demutualization expense. The pro forma consolidated statement of income
does not give effect to any pro forma earnings resulting from the use of the net
proceeds from the offerings and the private placements or the charge related to
the payments to be made to certain transferred Canadian policyholders described
above.
<TABLE>
<S> <C>
Share Data:
Shares allocated to eligible policyholders................ 699,974,077
Less shares allocated to eligible policyholders who
receive cash or policy credits......................... 206,497,959
-----------
Shares issued to the MetLife Policyholder Trust........... 493,476,118
Shares issued in the initial public offering.............. 179,000,000
Shares issued in the private placements................... 73,000,000
-----------
Total shares of common stock outstanding.......... 745,476,118
===========
Percentage Ownership:
MetLife Policyholder Trust................................ 66.2%
Purchasers in the initial public offering................. 24.0%
Purchasers in the private placements...................... 9.8%
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C>
For the year ended December 31, 1999
Pro forma income before extraordinary item............ $ 912
Pro forma income before extraordinary item per
share -- basic and diluted......................... $ 1.22
Pro forma equity...................................... $13,768
Pro forma book value per share -- basic............... $ 18.47
Pro forma tangible book value per share -- basic(1)... $ 17.65
</TABLE>
- ---------------
(1) Excludes goodwill.
18
<PAGE> 21
RISK FACTORS
CHANGES IN INTEREST RATES MAY SIGNIFICANTLY AFFECT OUR PROFITABILITY
In periods of increasing interest rates, policy loans and surrenders and
withdrawals may tend to increase as policyholders seek investments with higher
perceived returns. This process may result in cash outflows requiring that we
sell invested assets at a time when the prices of those assets are adversely
affected by the increase in market interest rates, which may result in realized
investment losses. Conversely, during periods of declining interest rates, life
insurance and annuity products may be relatively more attractive investments,
resulting in increased premium payments on products with flexible premium
features, repayment of policy loans and increased PERSISTENCY during a period
when our new investments carry lower returns. In addition, borrowers may prepay
or redeem mortgages and bonds in our investment portfolio as they seek to borrow
at lower market rates, and we might have to reinvest those funds in lower
interest-bearing investments. Accordingly, during periods of declining interest
rates, a decrease in the spread between interest and dividend rates to
policyholders and returns on our investment portfolio may adversely affect our
profitability. Additionally, customers for whom we provide asset management
services may terminate their relationship with us or reduce the amount of their
assets under management with us in response to changes in interest rates.
DECLINE IN SECURITIES MARKETS MAY ADVERSELY AFFECT OUR ASSET MANAGEMENT BUSINESS
AND SALES OF OUR INVESTMENT PRODUCTS
Fluctuations in the securities markets may affect our asset management
business, as well as sales of our mutual funds, variable life insurance and
variable annuity products. Favorable performance by the U.S. securities markets
over the last five years has attracted a substantial increase in the investments
in these markets and has benefited our asset management business and increased
our assets under management. A decline in the securities markets, failure of the
securities markets to sustain their recent levels of growth, or short-term
volatility in the securities markets could result in investors withdrawing from
the markets or decreasing their rate of investment, either of which could
adversely affect our asset management business and sales of our investment
products. In addition, because the revenues of our asset management business
are, to a large extent, based on the value of assets under management, a decline
in the value of these assets would adversely affect our revenues.
COMPETITIVE FACTORS MAY ADVERSELY AFFECT OUR MARKET SHARE
We believe that competition in our business segments is based on service,
product features, price, commission structure, financial strength, claims paying
ability ratings and name recognition. We compete with a large number of other
insurers, as well as non-insurance financial services companies, such as banks,
broker-dealers and asset managers, for individual customers, employer and other
group customers and agents and other distributors of insurance and investment
products. Some of these companies offer a broader array of products, have more
competitive pricing or, with respect to other insurers, have higher claims
paying ability ratings. Some may also have greater financial resources with
which to compete. National banks, with their pre-existing customer bases for
financial services products, may increasingly compete with insurers, as a result
of court cases that permit national banks to sell annuity products of life
insurers in some circumstances and recently-enacted legislation removing
restrictions on bank affiliations with insurers. This legislation, the
Gramm-Leach-Bliley Act of 1999, permits mergers that combine commercial banks,
insurers and securities firms under one holding company. Until passage of the
Gramm-Leach-Bliley Act, the Glass-Steagall Act of 1933, as amended, had limited
the ability of banks to engage in securities-related businesses, and the Bank
Holding Company Act of 1956, as amended, had restricted banks from being
affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act, among
other things, bank holding companies may acquire insurers, and insurance holding
companies may acquire banks. The ability of banks to affiliate with insurers may
materially adversely affect all of our product lines by substantially
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<PAGE> 22
increasing the number, size and financial strength of potential competitors.
Additionally, proposed health care reforms could cause medical health insurance
providers to enter some of the non-medical health insurance markets in which we
do business, thereby increasing competition.
Many of our insurance products, particularly those offered by our
Institutional Business segment, are UNDERWRITTEN yearly, and, accordingly, group
purchasers may be able to obtain more favorable terms from competitors rather
than renewing coverage with us. The effect of competition may, as a result,
adversely affect the persistency of these and other products, as well as our
ability to sell products in the future.
The investment management and securities brokerage businesses have
relatively few barriers to entry and continually attract new entrants. Many of
these competitors offer a broader array of investment products and services and
are better known as sellers of annuities and other investment products.
WE MAY BE UNABLE TO ATTRACT AND RETAIN SALES REPRESENTATIVES FOR OUR PRODUCTS
We must attract and retain productive sales representatives to sell our
insurance, annuities and investment products. Strong competition exists among
insurers for sales representatives with demonstrated ability. We compete with
other insurers for sales representatives primarily on the basis of our financial
position, support services and compensation and product features. From 1994 to
1998, the number of agents in the MetLife career agency system declined, from
9,521 to 6,853. We believe that this decline was principally the result of the
adverse impact of sales practices litigation brought against us beginning in the
early 1990s, the establishment of more stringent company-wide criteria for
recruiting and retaining agents and a consolidation of sales offices and changes
in compensation practices for our sales force during this period. We have
undertaken several initiatives to grow our career agency force in the future. At
December 31, 1999, the number of agents in the MetLife career agency system was
6,866. We cannot provide assurance that these initiatives will succeed in
attracting and retaining new agents. Sales of individual insurance, annuities
and investment products and our business, results of operations and financial
condition could be materially adversely affected if we are unsuccessful in
attracting and retaining agents.
DIFFERENCES BETWEEN ACTUAL CLAIMS EXPERIENCE AND UNDERWRITING AND RESERVING
ASSUMPTIONS MAY REQUIRE US TO INCREASE LIABILITIES
Our earnings significantly depend upon the extent to which our actual
claims experience is consistent with the assumptions used in setting the prices
for our products and establishing the liabilities for our obligations for future
policy benefits and claims. To the extent that actual claims experience is less
favorable than our underlying assumptions used in establishing such liabilities,
we could be required to increase our liabilities. Such an increase could have a
material adverse effect on our business, results of operations and financial
condition.
Due to the nature of the underlying risks and the high degree of
uncertainty associated with the determination of the liabilities for unpaid
policy benefits and claims, we cannot determine precisely the amounts which we
will ultimately pay to settle these liabilities. Such amounts may vary from the
estimated amounts, particularly when those payments may not occur until well
into the future. We evaluate our liabilities periodically, based on changes in
the assumptions used to establish the liabilities, as well as our actual policy
benefits and claims experience. We charge or credit changes in our liabilities
to expenses in the period the liabilities are established or re-estimated. If
the liabilities originally established for future policy benefits prove
inadequate, we must increase our liabilities, which may have a material adverse
effect on our business, results of operations and financial condition.
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<PAGE> 23
CATASTROPHES MAY ADVERSELY IMPACT LIABILITIES FOR PROPERTY AND CASUALTY
POLICYHOLDER CLAIMS AND REINSURANCE AVAILABILITY
Our Auto & Home segment has experienced, and will likely in the future
experience, CATASTROPHE losses that may have an adverse impact on the business,
results of operations and financial condition of this segment. Catastrophes can
be caused by various events, including hurricanes, windstorms, earthquakes,
hail, tornados, explosions, severe winter weather (including snow, freezing
water, ice storms and blizzards) and fires. Due to their nature, we cannot
predict the incidence and severity of catastrophes. Historically, substantially
all of our catastrophe-related claims have related to homeowners coverages.
However, catastrophes may also affect other Auto & Home coverages. For us, areas
of major hurricane exposure include coastal sections of the northeastern U.S.
(including Long Island and the Connecticut, Rhode Island and Massachusetts
shorelines) and Florida. We also have some earthquake exposure, primarily along
the New Madrid fault line in the central U.S. Losses incurred by us from
catastrophes, net of REINSURANCE but before taxes, were $29.3 million, $56.7
million, $18.0 million, $69.0 million and $38.1 million in 1999, 1998, 1997,
1996 and 1995, respectively.
Consistent with industry practices, we establish liabilities for claims
arising from a catastrophe only after assessing the exposure and damages arising
from the event. We cannot be certain that the liabilities we have established
will be adequate to cover actual claims. Furthermore, we cannot assure that the
reinsurance we purchased will be adequate to protect us against material
catastrophe losses or that such reinsurance will continue to be available to us
in the future at commercially reasonable rates. States have from time to time
passed legislation that has the effect of limiting the ability of insurers to
manage risk, such as legislation restricting an insurer's ability to withdraw
from catastrophe-prone areas. While we attempt to limit our exposure to
acceptable levels, subject to restrictions imposed by insurance regulatory
authorities, a catastrophic event or multiple catastrophic events might have a
material adverse effect on our business, results of operations and financial
condition.
A DOWNGRADE IN OUR RATINGS MAY INCREASE POLICY SURRENDERS AND WITHDRAWALS,
ADVERSELY AFFECT RELATIONSHIPS WITH DISTRIBUTORS AND NEGATIVELY IMPACT NEW SALES
Claims paying ability and financial strength ratings are a factor in
establishing the competitive position of insurers. A rating downgrade (or the
potential for such a downgrade) of Metropolitan Life Insurance Company or any of
its insurance subsidiaries could, among other things, materially increase the
number of policy surrenders and withdrawals by policyholders of CASH VALUES from
their policies, adversely affect relationships with broker-dealers, banks,
agents, wholesalers and other distributors of Metropolitan Life Insurance
Company's and its subsidiaries' products and services, negatively impact new
sales, adversely affect its ability to compete and thereby have a material
adverse effect on our business, results of operations and financial condition.
The current claims paying ability and financial strength ratings of Metropolitan
Life Insurance Company are listed in the table below:
<TABLE>
<CAPTION>
RATING AGENCY RATING RATING STRUCTURE
<S> <C> <C>
Standard & Poor's Ratings Services AA Second highest of nine ratings
("Very Strong") categories and mid-range within the
category based on modifiers (e.g., AA+,
AA and AA- are "Very Strong")
Moody's Investors Service, Inc. Aa2 Second highest of nine ratings
("Excellent") categories and mid-range within the
category based on modifiers (e.g., Aa1,
Aa2 and Aa3 are "Excellent")
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
RATING AGENCY RATING RATING STRUCTURE
<S> <C> <C>
A.M. Best Company, Inc. A+ Highest of nine ratings categories and
("Superior") second highest within the category
based on modifiers (e.g., A++ and A+
are "Superior" while A and A- are
"Excellent")
Duff & Phelps Credit Rating Co. AA+ Second highest of eight ratings
("Very High") categories and highest within the
category based on modifiers (e.g., AA+,
AA and AA- are "Very High")
</TABLE>
The foregoing ratings reflect each rating agency's opinion of Metropolitan
Life Insurance Company's financial strength, operating performance and ability
to meet its obligations to policyholders and are not evaluations directed toward
the protection of holders of our common stock or the units.
CHANGES IN STATE AND FEDERAL REGULATION MAY AFFECT OUR PROFITABILITY
Our insurance business is subject to comprehensive state regulation and
supervision throughout the U.S. The primary purpose of such regulation is to
protect policyholders, not stockholders. The laws of the various states
establish insurance departments with broad powers with respect to such things as
licensing companies to transact business, licensing agents, admitting statutory
assets, mandating certain insurance benefits, regulating premium rates,
approving policy forms, regulating unfair trade and claims practices,
establishing statutory reserve requirements and solvency standards, fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values, restricting certain transactions between
affiliates and regulating the types, amounts and statutory valuation of
investments.
State insurance regulators and the NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS ("NAIC") continually reexamine existing laws and regulations, and
may impose changes in the future that materially adversely affect our business,
results of operations and financial condition.
The U.S. federal government does not directly regulate the insurance
business. However, federal legislation and administrative policies in certain
areas can significantly and adversely affect the insurance industry generally
and MetLife in particular. These areas include employee benefit plan regulation,
financial services regulation and federal taxation and securities laws.
Additionally, interpretation of existing laws may change and the passage from
time to time of new legislation may adversely affect our claims exposure on our
policies.
Metropolitan Life Insurance Company, some of its subsidiaries and certain
policies and contracts offered by them are subject to various levels of
regulation under the federal securities laws administered by the Securities and
Exchange Commission. These laws and regulations are primarily intended to
protect investors in the securities markets, and generally grant supervisory
agencies broad administrative powers, including the power to limit or restrict
the conduct of business for failure to comply with such laws and regulations. We
may also be subject to similar laws and regulations in the states and foreign
countries in which we provide investment advisory services, offer products or
conduct other securities-related activities.
We cannot predict the impact of future state or federal laws or regulations
on our business. Future laws and regulations, or the interpretation thereof, may
materially adversely affect our business, results of operations and financial
condition.
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<PAGE> 25
DEMUTUALIZATION RISKS
OUR BOARD OF DIRECTORS WILL CONTROL THE OUTCOME OF STOCKHOLDER VOTES ON MANY
MATTERS DUE TO THE VOTING PROVISIONS OF THE METLIFE POLICYHOLDER TRUST
Under the plan of reorganization, we will establish the MetLife
Policyholder Trust to hold the shares of MetLife, Inc. common stock allocated to
eligible policyholders not receiving cash or policy credits under the plan. An
estimated 493,476,118 shares of our common stock, or 66.2% of the total number
of shares expected to be outstanding based upon an estimated initial public
offering price of $14.00 per share, which is the midpoint of the range stated on
the cover page of this prospectus, will be issued to the trust on the effective
date of the plan, to be held on behalf of approximately nine million eligible
policyholders. Because of the number of shares held by the trust and the voting
provisions of the trust, the trust may affect the outcome of matters brought to
a stockholder vote.
Except on votes regarding certain fundamental corporate actions described
below, the trustee will vote all of the shares of common stock held in the trust
in accordance with the recommendations given by our board of directors to our
stockholders or, if the board gives no such recommendation, as directed by the
board. As a result of the voting provisions of the trust, the board of directors
will effectively be able to control votes on all matters submitted to a vote of
stockholders, excluding those fundamental corporate actions, so long as the
trust holds a substantial number of shares of common stock.
If the vote relates to fundamental corporate actions specified in the
trust, the trustee will solicit instructions from the trust beneficiaries and
vote all shares held in the trust in proportion to the instructions it receives.
These actions include:
- an election or removal of directors in which a stockholder has properly
nominated one or more candidates in opposition to a nominee or nominees
of our board of directors or a vote on a stockholder's proposal to oppose
a board nominee for director, remove a director for cause or fill a
vacancy caused by the removal of a director by stockholders, subject to
certain conditions;
- a merger or consolidation, a sale, lease or exchange of all or
substantially all of the assets, or a recapitalization or dissolution, of
MetLife, Inc., in each case requiring a vote of our stockholders under
applicable Delaware law;
- any transaction that would result in an exchange or conversion of shares
of common stock held by the trust for cash, securities or other property;
- issuances of our common stock during the first year after the effective
date of the plan at a price materially less than the then prevailing
market price of our common stock, if a vote of our stockholders is
required to approve the issuance under Delaware law, other than issuances
in an underwritten public offering or pursuant to an employee benefit
plan;
- for the first year after the effective date of the plan, any matter that
requires a supermajority vote of our outstanding stock entitled to vote
thereon under Delaware law or our certificate of incorporation or
by-laws, and any amendment to our certificate of incorporation or by-laws
that is submitted for approval to our stockholders; and
- any proposal requiring our board of directors to amend or redeem the
rights under our stockholder rights plan, other than a proposal with
respect to which we have received advice of nationally-recognized legal
counsel to the effect that the proposal is not a proper subject for
stockholder action under Delaware law.
If a vote concerns any of these fundamental corporate actions, the trustee will
vote all of the shares of common stock held by the trust in proportion to the
instructions it receives, which will give disproportionate weight to the
instructions actually given by trust beneficiaries.
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<PAGE> 26
WE MAY NEED TO FUND DEFICIENCIES IN OUR CLOSED BLOCK; ASSETS ALLOCATED TO THE
CLOSED BLOCK BENEFIT ONLY THE HOLDERS OF CLOSED BLOCK POLICIES
The plan of reorganization requires that Metropolitan Life Insurance
Company establish and operate an accounting mechanism, known as a closed block,
to ensure that the reasonable dividend expectations of policyholders who own
certain individual insurance policies of Metropolitan Life Insurance Company are
met. We will allocate assets to the closed block in an amount that will produce
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 the policyholder DIVIDEND SCALES in
effect for 1999, if the experience underlying such scales continues, and for
appropriate adjustments in such scales if the experience changes. We cannot
assure that the closed block assets, the cash flows generated by the closed
block assets and the anticipated revenue from the policies included in the
closed block will be sufficient to provide for the benefits guaranteed under
these policies. If they are not sufficient, we must fund the shortfall. Even if
they are sufficient, we may choose, for competitive reasons, to support
policyholder dividend payments with our general account funds. See "The
Demutualization" for a description of the closed block.
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 those policies. In addition, to the extent that
these amounts are greater than the amounts estimated at the time we fund the
closed block, dividends payable in respect of the policies included in the
closed block may be greater than they would be in the absence of a closed block.
Any excess earnings will be available for distribution over time to closed block
policyholders but will not be available to our stockholders.
A CHALLENGE TO THE PLAN OF REORGANIZATION OR TO THE NEW YORK SUPERINTENDENT OF
INSURANCE'S APPROVAL MAY ADVERSELY AFFECT THE TERMS OF THE DEMUTUALIZATION AND
THE MARKET PRICE OF OUR COMMON STOCK AND THE EQUITY SECURITY UNITS
After a public hearing, which was held on January 24, 2000, the New York
Superintendent of Insurance will determine whether the plan of reorganization
meets the standards of applicable New York law, including, among other things,
whether the plan is fair and equitable to the policyholders of Metropolitan Life
Insurance Company. We do not expect that the New York Superintendent's order
approving the plan will address the fairness of the plan to purchasers of common
stock in the initial public offering or purchasers of equity security units in
the offering of units. The New York Superintendent's order approving the plan
was issued on April , 2000.
Section 7312 of the New York Insurance Law provides that any lawsuit
challenging the validity of or arising out of acts taken or proposed to be taken
under the demutualization statute in connection with the demutualization must be
commenced within one year after a copy of the plan of reorganization, with the
New York Superintendent's approval endorsed thereon, is filed in the office of
the New York Superintendent or six months from the effective date of the plan of
reorganization, whichever is later, or if the plan is withdrawn, within six
months of such withdrawal. Although Section 326 of the New York Insurance Law
provides that orders of the New York Superintendent are subject to judicial
review in a proceeding under Article 78 of New York's Civil Practice Law and
Rules, the law is not clear whether a lawsuit challenging an order of the New
York Superintendent under Section 7312 would have to be commenced within four
months after the order became final and binding, as is generally the case for an
Article 78 proceeding, or within the time period specified in Section 7312, if
later.
A successful challenge to the order of the New York Superintendent of
Insurance could result in injunctive relief, monetary damages, a modification of
the plan of reorganization or the New York Superintendent's approval of the plan
being set aside. In order to challenge
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<PAGE> 27
successfully the New York Superintendent's approval of the plan, a challenging
party would have to sustain the burden of showing that approval was arbitrary
and capricious, an abuse of discretion, made in violation of lawful procedures
or affected by an error of law. In addition, Section 7312 provides that an
insurer may require a challenging party to give security for the insurer's
reasonable expenses, including attorneys' fees, which may be incurred or for
which the insurer may become liable, to which security the insurer will have
recourse in such amount as the court shall determine upon the termination of the
action.
The New York Superintendent held a public hearing on the plan on January
24, 2000. At the public hearing, some policyholders and others raised objections
to certain aspects of the plan. These objections alleged, among other things,
that the plan was not fair and equitable to policyholders of Metropolitan Life
Insurance Company. Six lawsuits have been filed challenging the fairness of the
plan of reorganization and the adequacy and accuracy of Metropolitan Life
Insurance Company's disclosures to policyholders regarding the plan. The first
of these lawsuits was filed in the Supreme Court of the State of New York for
Kings County on January 14, 2000. It was brought on behalf of a putative class
consisting of all policyholders of Metropolitan Life Insurance Company who
should have membership benefits in Metropolitan Life Insurance Company and were
and are eligible to receive notice, vote and receive consideration in the
demutualization. The complaint seeks to enjoin or rescind the plan, as well as
other relief. The defendants named in the complaint are Metropolitan Life
Insurance Company, the individual members of its board of directors and MetLife,
Inc. Discovery is underway in this case. The five other lawsuits were filed
between March 10, 2000 and March 29, 2000 in the Supreme Court of the State of
New York for New York County. The same defendants are named in these five cases
as in the Kings County case, with the addition of the New York Superintendent of
Insurance. All five of the New York County cases are brought on behalf of a
putative class consisting of the eligible policyholders of Metropolitan Life
Insurance Company as of September 28, 1999, the adoption date of the plan. The
claims in these five additional cases are substantially similar to those in the
Kings County case, as is the relief sought. Metropolitan Life Insurance Company
has entered into a stipulation with the plaintiffs in the five New York County
cases in which it does not oppose consolidation of the cases, agrees that the
plaintiffs have until April 30, 2000 to file a consolidated amended complaint,
and agrees that the defendants' time to answer, move or otherwise respond to the
consolidated amended complaint will be thirty days after service of the
consolidated amended complaint. Metropolitan Life Insurance Company has agreed
to provide certain information to the plaintiffs in three of the New York County
cases. Metropolitan Life Insurance Company, MetLife, Inc. and the individual
defendants believe they have meritorious defenses to the plaintiffs' claims and
intend vigorously to contest all of the plaintiffs' claims in these six
lawsuits.
We are not aware of any other lawsuits challenging the plan or the approval
thereof. However, there can be no assurance that we are aware of all lawsuits
that have been commenced or that additional lawsuits will not be commenced in
the future. An injunction or other court order delaying consummation of the plan
would likely result in substantial uncertainty relating to the terms and
effectiveness of the plan, and a substantial period of time might be required to
finally resolve these matters. A successful challenge to the plan or its
approval would be materially adverse to purchasers of common stock in the
initial public offering and equity security units in the offering of units and
would have a material adverse effect on our business, results of operations and
financial condition.
LITIGATION AND REGULATORY INVESTIGATIONS MAY ADVERSELY AFFECT OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
We face significant risks of litigation and regulatory investigations and
actions in connection with our activities as an insurer, employer, investment
advisor, investor and taxpayer. These types of lawsuits and regulatory actions
may be difficult to assess or quantify, may seek recovery
25
<PAGE> 28
of very large and/or indeterminate amounts, including punitive and treble
damages, and their existence and magnitude may remain unknown for substantial
periods of time. A substantial legal liability or a significant regulatory
action against us could have a material adverse effect on our business, results
of operations and financial condition.
Metropolitan Life Insurance Company and its affiliates are currently
defendants in approximately 500 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. The settlement class includes most of the owners of
permanent life insurance policies and annuity contracts or certificates issued
pursuant to individual sales in the United States by Metropolitan Life Insurance
Company, Metropolitan Insurance and Annuity Company or Metropolitan Tower Life
Insurance Company between January 1, 1982 and December 31, 1997. This 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 for sales by the
defendant insurers during the class period, effectively resolving all pending
class actions against these insurers. The defendants are in the process of
having these claims dismissed.
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 Insurance Company, 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. Over 400 of the approximately
500 lawsuits noted above are brought by individuals who elected to exclude
themselves from the settlement.
We expect that the total cost to us of the settlement will be approximately
$957 million. 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.
We believe that the cost to us of the settlement will be substantially covered
by available reinsurance and the provisions made in our consolidated financial
statements, and thus will not have a material adverse effect on our business,
results of operations or financial position. We have not yet made a claim under
those reinsurance agreements and, although there is a risk that the carriers
will refuse coverage for all or part of the claim, we believe this is very
unlikely to occur. We believe we have made adequate provision in our
consolidated financial statements for all probable losses for sales practices
claims, including litigation costs involving policyholders who are excluded from
the settlement.
The class action settlement does not resolve nine purported or certified
class actions currently pending against New England Mutual Life Insurance
Company with which we merged in 1996, three putative sales practices class
actions lawsuits which have been brought against General American Life Insurance
Company, two putative class actions involving sales practices claims filed
against Metropolitan Life Insurance Company in Canada, or a certified class
action with conditionally certified subclasses against Metropolitan Life
Insurance Company, Metropolitan Insurance and Annuity Company, Metropolitan
Tower Life Insurance Company and various individual defendants alleging improper
sales abroad.
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<PAGE> 29
Metropolitan Life Insurance Company is also a defendant in numerous
lawsuits seeking compensatory and punitive damages for personal injuries
allegedly caused by exposure to asbestos or asbestos-containing products.
Additional litigation relating to these matters may be commenced in the future.
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 our management that their outcomes,
after consideration of available insurance and reinsurance and the provisions
made in our consolidated financial statements, are not likely to have a material
adverse effect on our 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 our
operating results or cash flows in particular quarterly or annual periods. See
"Business -- Legal Proceedings" and Note 9 of Notes to Consolidated Financial
Statements for a discussion of the material legal matters in which we are
currently involved.
INVESTMENT PORTFOLIO RISKS
DEFAULTS ON OUR FIXED MATURITY PORTFOLIO MAY ADVERSELY AFFECT OUR
PROFITABILITY
We are subject to the risk that the issuers of the fixed maturity
securities we own may default on principal and interest payments due thereon,
particularly if a major economic downturn occurs. At December 31, 1999, fixed
maturities that we classify as either "Problem" or "Potential Problem" totaled
0.5% of our fixed maturity investments. In recent years we have increased the
percentage of our investments in non-investment grade fixed maturity securities.
At December 31, 1999, such securities constituted 9.0% of our total fixed
maturities. Our fixed maturity securities of $97.0 billion represented 69.9% of
our total cash and invested assets at December 31, 1999. An increase in defaults
on these securities could have a material adverse effect on our business,
results of operations and financial condition.
DEFAULTS ON OUR MORTGAGE LOANS MAY ADVERSELY AFFECT OUR PROFITABILITY
Our mortgage loans face default risk. At December 31, 1999, our mortgage
loans of $19.7 billion represented 14.2% of our total cash and invested assets.
At December 31, 1999, loans that were either delinquent or in process of
foreclosure totaled 0.2% of our mortgage loan investments, compared with the
industry average of 0.3%, as reported by the American Council of Life Insurance
at December 31, 1999. The performance of our mortgage loan investments, however,
may fluctuate in the future. In addition, substantially all of our mortgage
loans have balloon payment maturities. An increase in the default rate of our
mortgage loans could have a material adverse effect on our business, results of
operations and financial condition.
SOME OF OUR INVESTMENTS ARE RELATIVELY ILLIQUID
Our investments in private placement fixed maturities, mortgage loans,
equity real estate, including real estate joint ventures and other limited
partnership interests are relatively illiquid. If we require significant amounts
of cash on short notice in excess of our normal cash requirements, we may have
difficulty selling these investments at attractive prices, in a timely manner,
or both.
DERIVATIVES MAY NOT BE HONORED BY COUNTERPARTIES
We use derivative instruments to hedge market risk. Our derivative strategy
employs a variety of instruments including financial futures, foreign exchange
forwards, foreign currency swaps, interest rate swaps, interest rate caps and
options. A failure by a counterparty to honor the terms of its derivatives
contracts with us could have a material adverse effect on our business, results
of operations and financial condition.
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<PAGE> 30
DIVIDENDS AND PAYMENTS ON OUR INDEBTEDNESS MAY BE AFFECTED BY LIMITATIONS
IMPOSED ON METROPOLITAN LIFE INSURANCE COMPANY AND OUR OTHER SUBSIDIARIES
After the effective date of the plan, MetLife, Inc. will be an insurance
holding company. The assets of MetLife, Inc. will consist primarily of all of
the outstanding shares of common stock of Metropolitan Life Insurance Company.
Our ongoing ability to pay dividends to our stockholders and meet our
obligations, including paying operating expenses, making payments on the
debentures issued to MetLife Capital Trust I and any other debt service,
primarily depends upon the receipt of dividends from Metropolitan Life Insurance
Company and the interest received from Metropolitan Life Insurance Company under
its $1 billion mandatorily convertible capital note due 2005 issued to MetLife,
Inc. Any inability of Metropolitan Life Insurance Company to pay dividends or
interest on the capital note to us in the future in an amount sufficient for us
to pay dividends to our stockholders and meet our other obligations could have a
material adverse effect on our business, results of operations and financial
condition.
The payment of dividends by Metropolitan Life Insurance Company is
regulated under state insurance law. Under the New York Insurance Law,
Metropolitan Life Insurance Company may pay a stockholder dividend to MetLife,
Inc. 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 dividend. Under the New York Insurance
Law, the New York Superintendent has broad discretion in determining whether the
financial condition of a stock life insurer would support the payment of
dividends to stockholders. The New York Insurance Department has established
informal guidelines for the New York Superintendent's determinations that focus
on, among other things, an insurer's overall financial condition and
profitability under statutory accounting practices. We cannot assure that
Metropolitan Life Insurance Company will have statutory earnings to support the
payment of dividends to MetLife, Inc. in an amount sufficient to fund our cash
requirements and pay cash dividends or that the New York Superintendent will not
disapprove any dividends that Metropolitan Life Insurance Company may seek to
pay. Our other insurance subsidiaries are also subject to restrictions on the
payment of dividends. In addition, from time to time, the NAIC and various state
insurance regulators have considered, and may in the future consider and adopt,
proposals to further restrict the making of dividend payments by an insurer
without regulatory approval. Such proposals, if enacted, could further restrict
the ability of Metropolitan Life Insurance Company and its subsidiaries to pay
dividends.
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 Insurance Company as described above, Metropolitan
Life Insurance Company expects to issue to MetLife, Inc. its $1 billion %
mandatorily convertible capital note due 2005 having the same interest and
interest payment terms (including reset and deferral provisions) as set forth in
the debentures of MetLife, Inc. issued to the MetLife Capital Trust I. The
principal amount of the capital note is mandatorily convertible into common
stock of Metropolitan Life Insurance Company upon maturity or acceleration of
the capital note and without any further action by MetLife, Inc. or Metropolitan
Life Insurance Company. As required by the New York Insurance Law, the terms of
the capital note must be approved by the New York Superintendent of Insurance as
not adverse to the interests of Metropolitan Life Insurance Company's
policyholders. The New York Superintendent approved the issuance of the capital
note on April , 2000. In addition, the capital note will provide that
Metropolitan Life Insurance Company may not make any payment of the interest on
or the principal of the capital note so long as specified payment restrictions
exist and have not been waived by the New York Superintendent. Payment
restrictions would exist if the level of Metropolitan Life Insurance Company's
statutory total adjusted capital falls below 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. As of the date hereof,
Metropolitan Life Insurance Company's statutory total adjusted capital
significantly exceeds these limitations. If
28
<PAGE> 31
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, Inc.
FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE MAY ADVERSELY IMPACT SYSTEMS OPERATIONS
We have modified or replaced portions of our information technology and
non-information technology systems to address Year 2000 compliance issues. As of
the date of this prospectus, we are not aware of any material Year 2000-related
problems experienced by these systems. We have not been informed by any other
companies, governmental agencies or entities on which we rely that any such
persons experienced any material Year 2000-related problems. However, we cannot
guarantee that we or the other companies, governmental agencies or other
entities on which we rely will not experience any Year 2000-related problems in
the future. If such problems do occur, we cannot assure you that they will not
have any material adverse effect on our business, results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Readiness".
CHANGES IN FEDERAL INCOME TAXATION COULD ADVERSELY IMPACT SALES OF OUR
INSURANCE, ANNUITIES AND INVESTMENT PRODUCTS
Current federal income tax laws generally permit the tax-deferred
accumulation of earnings on the premiums paid by the holders of annuities and
life insurance products. Taxes, if any, are payable on the accumulated
tax-deferred earnings when earnings are actually paid. Congress has, from time
to time, considered possible legislation that would eliminate the deferral of
taxation on the accretion of value within certain annuities and life insurance
products. The 1994 U.S. Supreme Court ruling in NationsBank of North Carolina v.
Variable Annuity Life Insurance Company that annuities are not insurance for
purposes of the National Bank Act may cause Congress to consider legislation
that would eliminate tax deferral at least for certain annuities. Enactment of
other possible legislation, including a simplified "flat tax" income structure
with an exemption from taxation for investment income, could also adversely
affect purchases of life insurance. We cannot foresee whether Congress will
enact legislation or, whether such legislation, if enacted, will contain
provisions with possible adverse effects on our life insurance and annuity
products.
In 1998, the federal income tax rate on capital gains was reduced.
Consequently, some of our annuities and investment products that feature tax
deferral of earnings appear relatively less attractive in comparison with
alternative accumulation products that feature long-term capital gains
treatment, particularly if the tax rates on ordinary income that are ultimately
applied to such tax-deferred earnings substantially exceed the reduced rate on
long-term capital gains.
SALES OF SHARES MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
The MetLife Policyholder Trust will hold 493,476,118 shares of MetLife,
Inc. common stock on behalf of approximately nine million eligible
policyholders, and their permitted assigns, who we estimate will become
beneficiaries of the trust. The trust agreement provides that a beneficiary may
sell the beneficiary's allocated shares of our common stock through the purchase
and sale program that we have established. Sales may be made at any time after
the later of (1) termination of any stabilization arrangements and trading
restrictions in connection with the initial public offering or (2) the closing
of all underwriters' over-allotment options that have been exercised and the
expiration of all unexercised options in connection with the initial public
offering. Generally, sales will be processed on the first or second trading day
after sale instructions are received. However, for the first 300 days after the
plan effective date, if sales on the open market on behalf of trust
beneficiaries holding more than 25,000 trust interests exceed the lesser of (i)
1/20th of 1% of the number of shares of common stock outstanding and (ii) 25% of
the average daily trading volume for the 20 trading days (or such shorter
period, if fewer than 20 trading days have elapsed since the plan effective
date) preceding the trade, sales of such excess shares for those beneficiaries
may be deferred to the next trading day (which will
29
<PAGE> 32
then be subject to the same volume limitations on that day) or sold by a
nationally-recognized brokerage firm that will sell the shares as agent at
market clearing prices or as principal in a block trade. We expect that these
sales may begin within approximately 30 days after the plan effective date. In
addition, subject to certain limitations, a trust beneficiary may withdraw his
or her allocated shares beginning one year after the effective date of the plan.
Counsel has advised us that those beneficiaries who are not "affiliates" of
MetLife, Inc. within the meaning of Rule 144 under the Securities Act may resell
their shares in the purchase and sale program or otherwise without registration
under the Securities Act and without compliance with the time, volume, manner of
sale and other limitations set forth in Rule 144. Substantially all of the
shares allocated in the demutualization will be allocated to non-affiliates of
MetLife, Inc. Accordingly, most trust beneficiaries may freely transfer such
shares, without limitations, through the purchase and sale program. In addition
to the shares issued in the demutualization, the shares of our common stock
issued in the initial public offering and the shares issued upon settlement of
the equity security units will be freely transferable without restriction in the
public market, except to the extent that those shares are acquired by affiliates
of MetLife, Inc. and are therefore subject to restrictions under Rule 144.
Banco Santander Central Hispano, S.A. and Credit Suisse Group have agreed
that they or their respective affiliates will purchase from us, at a price per
share equal to the initial public offering price, in the aggregate not less than
14,900,000 shares nor more than 73,000,000 shares of our common stock in private
placements that will close concurrently with the initial public offering and the
offering of equity security units described below. We will determine at the time
of the pricing of the initial public offering whether to sell any shares to
these purchasers in excess of the minimum amount. Any shares in excess of the
minimum amount that we determine not to sell to these investors may increase the
number of shares available for sale to the general public under this prospectus.
The maximum number of shares that each investor, individually, and the
investors, in the aggregate, could be obligated to purchase in the private
placements represents approximately 4.9% and 9.8%, respectively, of the total
number of shares of our common stock to be outstanding upon consummation of the
initial public offering and the private placements. Each of these purchasers has
entered into an agreement with us that provides that any shares purchased by it
will be restricted from sale or transfer for a period of one year after the
initial public offering, except for sales to affiliates or pursuant to a tender
or exchange offer recommended by our board of directors. In addition, each
purchaser has agreed that it will not, without our consent, increase its
ownership of voting securities above 4.9% of the outstanding shares (or 5.0%
with the New York Superintendent's approval), except for any increase resulting
from transactions in the ordinary course of the business of purchaser as
underwriter, broker/ dealer, investment manager or investment adviser or from
ordinary trading activities, unless such transactions were made with the purpose
of changing or influencing the control of MetLife, seek to obtain board
representation, solicit proxies in opposition to management or take certain
other actions for five years. Although these investors will receive common stock
which has not been registered under the Securities Act, they will also receive
registration rights with respect to such stock, which rights are not exercisable
until one year after the closing of the initial public offering. Pursuant to
these registration rights, the purchasers will be able to have their shares of
common stock registered for resale under the Securities Act, beginning after the
first anniversary of the closing, on not more than one occasion for each
purchaser each year, or not more than five occasions for each purchaser in total
(known as a "demand" registration right). In addition, we have agreed to use our
reasonable efforts to register the shares for resale on a shelf registration
statement on Form S-3 as soon as practicable after the first anniversary of the
closing. If the shares are registered on a Form S-3, each purchaser will be
allowed to make not more than two offerings under the registration statement
each year, subject to a minimum offering size of $50,000,000 per offering,
although underwritten offerings will be subject to the limitations on the number
of demand registrations described above. The purchasers will also be
30
<PAGE> 33
able to participate, subject to specified limitations, in registrations effected
by us for our own account or others.
Sales of substantial amounts of our common stock, or the perception that
such sales could occur, could adversely affect prevailing market prices for our
common stock.
THE INITIAL PUBLIC OFFERING PRICE OF OUR COMMON STOCK MAY NOT BE INDICATIVE OF
THE MARKET PRICE OF OUR STOCK AFTER THE OFFERING
The initial public offering price of our common stock will be determined by
negotiations among MetLife, Inc., Metropolitan Life Insurance Company and the
representatives of the underwriters. In addition, the final terms of the initial
public offering, including the initial public offering price, will be subject to
the approval of the New York Superintendent of Insurance. The initial public
offering price of our common stock will be based on numerous factors and may not
be indicative of the market price for our common stock after the initial public
offering. Factors such as variations in actual or anticipated operating results,
changes in or failure to meet earnings estimates of securities analysts, market
conditions in the financial services and insurance industries, regulatory
actions and general economic and stock market conditions, among others, may have
a significant effect on the market price of our common stock. Accordingly, the
market price of our common stock may decline below the initial public offering
price.
STATE LAWS AND OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DELAY, DETER OR
PREVENT TAKEOVERS AND BUSINESS COMBINATIONS THAT STOCKHOLDERS MIGHT CONSIDER IN
THEIR BEST INTERESTS
State laws and our certificate of incorporation and by-laws may delay,
deter or prevent a takeover attempt that stockholders might consider in their
best interests. For instance, they may prevent stockholders from receiving the
benefit from any premium over the market price of our common stock offered by a
bidder in a takeover context. Even in the absence of a takeover attempt, the
existence of these provisions may adversely affect the prevailing market price
of our common stock if they are viewed as discouraging takeover attempts in the
future.
The insurance laws and regulations of New York, the jurisdiction in which
our principal insurance subsidiary, Metropolitan Life Insurance Company, is
organized, may delay or impede a business combination involving us. Under the
New York Insurance Law, for a period of five years following the effective date
of the demutualization, no person may acquire beneficial ownership of 5% or more
of the outstanding shares of our common stock without the prior approval of the
New York Superintendent of Insurance. In addition, the New York Insurance Law
prohibits any person from acquiring control of us and thus indirect control of
Metropolitan Life Insurance Company, without the prior approval of the New York
Superintendent. That law presumes that control exists where any person, directly
or indirectly, owns, controls, holds the power to vote or holds proxies
representing 10% or more of our outstanding voting stock, unless the New York
Superintendent, upon application, determines otherwise. Even persons who do not
acquire beneficial ownership of more than 10% of the outstanding shares of our
common stock may be deemed to have acquired such control, if the New York
Superintendent determines that such persons, directly or indirectly, exercise a
controlling influence over our management or our policies. Therefore, any person
seeking to acquire a controlling interest in us would face regulatory obstacles
which may delay, deter or prevent an acquisition that stockholders might
consider in their best interests.
In addition, Section 203 of the Delaware General Corporation Law may affect
the ability of an "interested stockholder" to engage in certain business
combinations, including mergers, consolidations or acquisitions of additional
shares, for a period of three years following the time that the stockholder
becomes an "interested stockholder". An "interested stockholder" is defined to
include persons owning directly or indirectly 15% or more of the outstanding
voting stock of a corporation.
31
<PAGE> 34
The stockholder rights plan adopted by our board of directors may also have
antitakeover effects. The stockholder rights plan is designed to protect our
stockholders in the event of unsolicited offers to acquire MetLife, Inc. and
other coercive takeover tactics which, in the opinion of our board of directors,
could impair its ability to represent stockholder interests. The provisions of
the stockholder rights plan may render an unsolicited takeover more difficult or
less likely to occur or might prevent such a takeover, even though such takeover
may offer our stockholders the opportunity to sell their stock at a price above
the prevailing market price and may be favored by a majority of our
stockholders.
RISKS RELATING TO THE ACQUISITION OF GENAMERICA
WE MAY BE EXPOSED TO ADDITIONAL LITIGATION
General American Life is a defendant in three putative class action
lawsuits involving sales practices claims. These lawsuits would not be covered
either by our recent class action settlement pertaining to sales practices
claims or by our excess of loss reinsurance agreements covering some of our
sales practices claims. We are not indemnified under the stock purchase
agreement relating to our acquisition of GenAmerica for any losses relating to
such claims against GenAmerica. While it is not feasible to predict or determine
the ultimate outcome of these matters, we believe that their outcomes will not
have a material adverse effect on our business or financial condition, although
it is possible that an adverse outcome in certain matters could, from time to
time, have a material adverse effect on our operating results or cash flows in
any particular period.
We or General American Life may also become subject to claims brought by
policyholders of General American Life or shareholders of its publicly held
subsidiaries in connection with events leading up to the execution of the stock
purchase agreement, as well as the acquisition itself. Some transactions leading
up to the acquisition and the acquisition itself might be susceptible to
challenge if any of the entities involved is placed in liquidation or
bankruptcy. No claims arising out of these events have yet been made. However,
we cannot assure that claims will not be made in the future. We are indemnified
under the terms of the stock purchase agreement for some of those matters. We
have a first priority perfected security interest in the purchase price proceeds
under the stock purchase agreement to cover losses that we incur for which
General American Mutual Holding Company has indemnified us under the stock
purchase agreement. Such indemnified losses include breaches of representations
and warranties, legal proceedings brought within three years after the date of
closing, alleged breaches of General American Life's funding agreements and
GUARANTEED INTEREST CONTRACTS ("GICS") and the acceleration of payments under
certain compensation arrangements and benefit plans. However, we cannot assure
that the purchase price proceeds which may be available for indemnified losses
will adequately protect us from liabilities if any claims are brought.
WE MAY BE UNABLE TO RESTORE THE ONGOING BUSINESS OF GENAMERICA IN A TIMELY
MANNER
After General American Life was placed under the supervision of the
Missouri Department of Insurance, sales of new insurance policies and annuity
contracts by GenAmerica declined significantly and surrender levels for existing
policyholders and annuity owners increased. Although we intend to quickly
integrate GenAmerica into our existing operations following the acquisition, we
cannot guarantee that we will be able to do so or that sales by GenAmerica of
new insurance policies and annuity contracts and surrender rates for existing
policies and contracts will return to pre-supervision levels. GenAmerica
incurred a net loss in 1999, principally due to losses from the sale of invested
assets to meet funding agreement and other policy obligations and the write-down
of other assets to their current market value. There can be no assurance that
future profitability of GenAmerica will not be adversely affected.
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<PAGE> 35
USE OF PROCEEDS
Our net proceeds from the initial public offering are estimated to be
$2,381 million, or $2,738 million if the underwriters' options to purchase
additional shares of common stock as described under "Underwriting" are
exercised in full, assuming an initial public offering price of $14.00 per
share, which is the midpoint of the range stated on the cover page of this
prospectus, and after deducting an assumed underwriting discount and estimated
offering expenses payable by us. Our proceeds from the private placements are
estimated to be $1,022 million, assuming the purchase of 73,000,000 shares at an
initial public offering price of $14.00 per share, which is the midpoint of the
range stated on the cover page of this prospectus. Our net proceeds from the
offering of equity security units (net of the purchase price of the common
securities by MetLife, Inc.) are estimated to be $960 million, or $1,104 million
if the underwriters' options to purchase additional units are exercised in full,
after deducting an assumed underwriting discount and estimated offering expenses
payable by us.
As required by the plan of reorganization, we will use the net proceeds
from the offerings as follows:
- an estimated $397 million to reimburse Metropolitan Life Insurance
Company for the crediting of policy credits to certain policyholders in
the demutualization;
- an estimated $2,494 million to reimburse Metropolitan Life Insurance
Company for the payment of cash to certain policyholders in the
demutualization;
- an estimated $315 million to reimburse Metropolitan Life Insurance
Company for cash payments to be made by its Canadian branch to certain
holders of policies included in its Canadian business sold to Clarica
Life Insurance Company in 1998;
- an estimated $361 million to reimburse Metropolitan Life Insurance
Company for the payment of the fees and expenses incurred in connection
with the demutualization; and
- MetLife, Inc. will retain up to $340 million (unless the New York
Superintendent of Insurance approves a larger amount) for working
capital, payment of dividends and other general corporate purposes,
including payments on the debentures issued by MetLife, Inc. to MetLife
Capital Trust I in connection with the offering of the units, and to pay
the fees and expenses of the trustee and custodian of the MetLife
Policyholder Trust.
We will contribute any remaining proceeds to Metropolitan Life Insurance
Company for its general corporate purposes and to repay up to $450 million of
short-term debt that Metropolitan Life Insurance Company incurred in connection
with the acquisition of GenAmerica Corporation. 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
Insurance Company as described above, Metropolitan Life Insurance Company
expects to issue to MetLife, Inc. its $1 billion % mandatorily convertible
capital note due 2005 having the principal terms described under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- MetLife, Inc."
The plan of reorganization requires that the aggregate net proceeds from
the offerings and the private placements be at least equal to specified amounts.
See "The Demutualization -- Summary of the Plan of Reorganization". If the
actual proceeds raised in the initial public offering, the private placements or
the offering of equity security units are different than the amount estimated in
this prospectus, we will be required to change the sizes of the other
transactions, subject to the limit in the plan that the proceeds of the units
offering may not exceed one-third of the combined proceeds of that offering and
the offering of MetLife, Inc.'s common stock pursuant to this prospectus and the
private placements. The amount of proceeds from the offerings and the private
placements and the final terms of the units will depend on market conditions and
our capital needs at the time of issuance.
We will not receive any proceeds from the issuance of our common stock to
the MetLife Policyholder Trust in exchange for policyholders' membership
interests.
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<PAGE> 36
DIVIDEND POLICY
Our board of directors intends to declare an annual dividend on our common
stock of $0.20 per share. The declaration and payment of dividends is subject to
the discretion of our board of directors, and will depend on our financial
condition, results of operations, cash requirements, future prospects,
regulatory restrictions on the payment of dividends by Metropolitan Life
Insurance Company and our other insurance subsidiaries and other factors deemed
relevant by the board. There is no requirement or assurance that we will declare
and pay any dividends. In addition, the indenture governing the terms of our
debentures issued to MetLife Capital Trust I in connection with the offering of
units prohibits the payment of dividends on our common stock during a deferral
of interest payments on the debentures or an event of default under the
indenture or the related guarantee. For a discussion of our cash sources and
needs, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- MetLife, Inc."
Following the effective date of the plan, we will be an insurance holding
company. Our assets will consist primarily of all of the outstanding shares of
common stock of Metropolitan Life Insurance Company. Our ongoing ability to pay
dividends to our stockholders and to meet our obligations, including paying our
operating expenses, making payments on the debentures issued to MetLife Capital
Trust I and any other debt service, depends primarily upon the receipt of
dividends from Metropolitan Life Insurance Company and the interest received
from Metropolitan Life Insurance Company under its $1 billion mandatorily
convertible capital note due 2005 issued to MetLife, Inc. The payment of
dividends by Metropolitan Life Insurance Company is regulated under the New York
Insurance Law. See "Risk Factors -- Dividends and payments on our indebtedness
may be affected by limitations imposed on Metropolitan Life Insurance Company"
and "Business -- Regulation -- Insurance regulation -- Holding company
regulation".
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<PAGE> 37
CAPITALIZATION
The information in the following table is derived from and should be read
in conjunction with the Consolidated Financial Statements and the related Notes
and with the Pro Forma Consolidated Financial Information and Notes thereto
included elsewhere in this prospectus. The table presents our consolidated
capitalization at December 31, 1999 and after giving effect to (1) the
demutualization as if it had occurred at December 31, 1999, (2) the initial
public offering of 179,000,000 shares of our common stock, (3) the planned
private placements of 73,000,000 shares of common stock, (4) the offering of
20,000,000 equity security units in the offering to be conducted concurrently
with the initial public offering and (5) the application of the proceeds from
the initial public offering of our common stock, the private placements and the
offering of equity security units as described in "Use of Proceeds".
The data set forth below assumes that the underwriters' options to purchase
additional shares of common stock and units in the offerings are not exercised.
See "The Demutualization -- Payment of Consideration to Eligible Policyholders".
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
------------------------------------------------------------------
THE INITIAL THE
THE PUBLIC PRIVATE THE UNIT PRO
HISTORICAL DEMUTUALIZATION OFFERING PLACEMENTS OFFERING FORMA
---------- --------------- ----------- ---------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
DEBT:
Short-term debt.......................... $ 4,208 $ -- $ -- $ -- $ -- $ 4,208
------- -------- ------ ------ ---- -------
Long-term debt
Surplus notes and other................ 1,666 -- -- -- -- 1,666
Investment-related debt................ 369 -- -- -- -- 369
Non-insurance subsidiary debt.......... 479 -- -- -- -- 479
------- -------- ------ ------ ---- -------
Total long-term debt............ 2,514 -- -- -- -- 2,514
------- -------- ------ ------ ---- -------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
SECURITIES OF SUBSIDIARY TRUST HOLDING
SOLELY DEBENTURES OF PARENT............ -- -- -- -- 947 947
------- -------- ------ ------ ---- -------
EQUITY:
Preferred stock, par value $.01 per
share; 200,000,000 shares authorized;
none issued............................ -- -- -- -- -- --
Series A Junior Participating Preferred
Stock; 10,000,000 shares authorized,
none issued............................ -- -- -- -- -- --
Common stock, par value $.01 per share;
3,000,000,000 shares authorized; pro
forma 493,476,118 shares for the
demutualization, 179,000,000 shares for
the initial public offering and
73,000,000 shares for the private
placements; total pro forma 745,476,118
shares issued and outstanding.......... -- 5 2 1 -- 8
Additional paid-in capital............... -- 10,757 2,379 1,021 13 14,170
Retained earnings........................ 14,100 (14,100) -- -- -- --
Accumulated other comprehensive loss..... (410) -- -- -- -- (410)
------- -------- ------ ------ ---- -------
Total equity.................... 13,690 (3,338) 2,381 1,022 13 13,768
------- -------- ------ ------ ---- -------
TOTAL CAPITALIZATION............ $16,204 $ (3,338) $2,381 $1,022 $960 $17,229
======= ======== ====== ====== ==== =======
</TABLE>
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<PAGE> 38
SELECTED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial information
for MetLife. The consolidated financial information for the years ended December
31, 1999, 1998 and 1997 and at December 31, 1999 and 1998 has been derived from
our audited consolidated financial statements included elsewhere in this
prospectus. The consolidated financial information for the years ended December
31, 1996 and 1995 and at December 31, 1997, 1996 and 1995 has been derived from
our audited consolidated financial statements not included elsewhere in this
prospectus. The following consolidated statements of income and consolidated
balance sheet data, other than the statutory data, have been prepared in
conformity with generally accepted accounting principles. The statutory data
have been derived from Metropolitan Life Insurance Company's Annual Statements
filed with insurance regulatory authorities and have been prepared in accordance
with statutory accounting practices. The following information should be read in
conjunction with and is qualified in its entirety by the information and
consolidated financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA
Revenues:
Premiums(1)............................................... $12,088 $ 11,503 $ 11,278 $ 11,345 $ 11,178
Universal life and investment-type product policy fees.... 1,438 1,360 1,418 1,243 1,177
Net investment income(1)(2)(3)............................ 9,816 10,228 9,491 8,978 8,837
Other revenues(1)......................................... 2,154 1,994 1,491 1,246 834
Net realized investment gains (losses)(4)................. (70) 2,021 787 231 (157)
------- -------- -------- -------- --------
25,426 27,106 24,465 23,043 21,869
------- -------- -------- -------- --------
Expenses:
Policyholder benefits and claims(1)(5).................... 13,105 12,638 12,403 12,432 12,043
Interest credited to policyholder account balances........ 2,441 2,711 2,878 2,868 3,143
Policyholder dividends.................................... 1,690 1,651 1,742 1,728 1,786
Other expenses(1)(3)(6)................................... 6,755 8,019 5,771 4,609 4,153
------- -------- -------- -------- --------
23,991 25,019 22,794 21,637 21,125
------- -------- -------- -------- --------
Income before provision for income taxes, discontinued
operations and extraordinary item......................... 1,435 2,087 1,671 1,406 744
Provision for income taxes(7)............................... 593 740 468 482 407
------- -------- -------- -------- --------
Income before discontinued operations and extraordinary
item...................................................... 842 1,347 1,203 924 337
(Loss) gain from discontinued operations(8)................. -- -- -- (71) 362
------- -------- -------- -------- --------
Income before extraordinary item............................ 842 1,347 1,203 853 699
Extraordinary item -- demutualization expense, net of income
tax of $35 and $2, respectively........................... 225 4 -- -- --
------- -------- -------- -------- --------
Net income.................................................. $ 617 $ 1,343 $ 1,203 $ 853 $ 699
======= ======== ======== ======== ========
</TABLE>
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<PAGE> 39
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
General account assets(3)............................... $160,291 $157,278 $154,444 $145,877 $144,277
Separate account assets................................. 64,941 58,068 48,338 43,399 38,861
-------- -------- -------- -------- --------
Total assets............................................ $225,232 $215,346 $202,782 $189,276 $183,138
======== ======== ======== ======== ========
Liabilities:
Life and health policyholder liabilities(9)........... $122,637 $122,726 $125,849 $121,333 $120,782
Property and casualty policyholder liabilities(9)..... 2,318 1,477 1,509 1,562 1,438
Short-term debt....................................... 4,208 3,585 4,587 3,311 3,235
Long-term debt........................................ 2,514 2,903 2,884 1,946 2,345
Separate account liabilities.......................... 64,941 58,068 48,338 43,399 38,861
Other liabilities(3).................................. 14,924 11,720 5,608 5,742 4,723
-------- -------- -------- -------- --------
Total liabilities....................................... 211,542 200,479 188,775 177,293 171,384
-------- -------- -------- -------- --------
Retained earnings....................................... 14,100 13,483 12,140 10,937 10,084
Accumulated other comprehensive income (loss)........... (410) 1,384 1,867 1,046 1,670
-------- -------- -------- -------- --------
Total equity............................................ 13,690 14,867 14,007 11,983 11,754
-------- -------- -------- -------- --------
Total liabilities and equity............................ $225,232 $215,346 $202,782 $189,276 $183,138
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OTHER DATA
Operating income(4)(10)................................. $ 990 $ 23 $ 617 $ 818 $ 504
Adjusted operating income(4)(11)........................ $ 1,307 $ 1,226 $ 807 $ 921 $ 613
Operating return on equity(12).......................... 7.2% 0.2% 5.3% 7.8% 5.2%
Adjusted operating return on equity(13)................. 9.5% 9.6% 7.0% 8.8% 6.3%
Return on equity(14).................................... 4.5% 10.5% 10.4% 8.1% 7.2%
Operating cash flows.................................... $ 3,865 $ 842 $ 2,872 $ 3,688 $ 4,823
Total assets under management(15)....................... $373,646 $360,703 $338,731 $297,570 $288,000
STATUTORY DATA(16)
Premiums and deposits................................... $ 24,643 $ 22,722 $ 20,569 $ 20,611 $ 21,651
Net income (loss)....................................... $ 790 $ 875 $ 589 $ 460 $ (672)
Policyholder surplus.................................... $ 7,630 $ 7,388 $ 7,378 $ 7,151 $ 6,785
Asset valuation reserve................................. $ 3,109 $ 3,323 $ 3,814 $ 2,635 $ 2,038
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
OPERATING DATA(21)
INDIVIDUAL BUSINESS
Total revenues.......................................... $ 11,067 $ 11,753 $ 10,630
Operating income(10).................................... $ 565 $ 631 $ 325
Net income.............................................. $ 555 $ 1,069 $ 599
Total assets............................................ $109,401 $103,614 $ 95,323
Policyholder liabilities(9)............................. $ 72,956 $ 71,571 $ 70,686
Separate account liabilities............................ $ 28,828 $ 23,013 $ 17,345
INSTITUTIONAL BUSINESS
Total revenues.......................................... $ 10,380 $ 10,651 $ 9,271
Operating income(10).................................... $ 585 $ 482 $ 310
Net income.............................................. $ 567 $ 846 $ 339
Total assets............................................ $ 88,127 $ 88,741 $ 83,473
Policyholder liabilities(9)............................. $ 47,781 $ 49,406 $ 49,547
Separate account liabilities............................ $ 35,236 $ 35,029 $ 30,473
AUTO & HOME
Total revenues.......................................... $ 1,876 $ 1,642 $ 1,459
Operating income(10).................................... $ 54 $ 81 $ 69
Net income.............................................. $ 56 $ 161 $ 74
Total assets............................................ $ 4,443 $ 2,763 $ 2,542
Combined ratio.......................................... 103.7% 100.8% 99.9%
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSET MANAGEMENT
Total revenues.......................................... $ 883 $ 892 $ 760
Operating income(10).................................... $ 51 $ 46 $ 45
Net income.............................................. $ 51 $ 49 $ 45
Assets under management(17)............................. $189,800 $191,000 $175,100
INTERNATIONAL OPERATIONS
Total revenues(18)...................................... $ 790 $ 1,179 $ 1,745
Operating income (loss)................................. $ 18 $ (35) $ 6
Net income.............................................. $ 21 $ 56 $ 126
Total assets............................................ $ 4,381 $ 3,432 $ 7,412
Separate account liabilities............................ $ 877 $ 26 $ 520
CORPORATE(19)
Total revenues(20)...................................... $ 623 $ 1,472 $ 1,045
Total expenses.......................................... $ 1,031 $ 2,591 $ 966
Net income (loss)....................................... $ (583) $ (695) $ 163
</TABLE>
- ---------------
(1) Includes the following combined financial statement data of MetLife Capital
Holdings, Inc., which was sold in 1998, and our Canadian operations and
U.K. insurance operations, substantially all of which were sold in 1998 and
1997, respectively:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Revenues:
Premiums.................................................... $204 $ 463 $ 456 $ 439
Net Investment Income....................................... 495 914 877 637
Other revenues.............................................. 33 225 164 192
---- ------ ------ ------
$732 $1,602 $1,497 $1,268
==== ====== ====== ======
Expenses:
Policyholder benefits and claims............................ $240 $ 495 $ 459 $ 492
Other expenses.............................................. 418 861 606 831
---- ------ ------ ------
$658 $1,356 $1,065 $1,323
==== ====== ====== ======
</TABLE>
As a result of these sales, we recorded net realized investment gains of
$520 million and $139 million for the years ended December 31, 1998 and
1997, respectively.
In July 1998, Metropolitan Life Insurance Company sold a substantial
portion of its Canadian operations to Clarica Life Insurance Company. As
part of that sale, a large block of policies in effect with Metropolitan
Life Insurance Company in Canada were transferred to Clarica Life, and the
holders of the transferred Canadian policies became policyholders of
Clarica Life. Those transferred policyholders are no longer policyholders
of Metropolitan Life Insurance Company and, therefore, are not entitled to
compensation under the plan of reorganization. However, as a result of a
commitment made in connection with obtaining Canadian regulatory approval
of that sale, if Metropolitan Life Insurance Company demutualizes, its
Canadian branch will make cash payments to those who are, or are deemed to
be, holders of these transferred Canadian policies. The payments, which
will be recorded in other expenses in the same period as the effective
date of the plan, will be determined in a manner that is consistent with
the treatment of, and fair and equitable to, eligible policyholders of
Metropolitan Life Insurance Company. The aggregate amount of the payment
is dependent upon the initial public offering price of common stock to be
issued at the effective date of the plan. Assuming an initial public
offering price of $14.00 per share, which is the midpoint of the range
stated on the cover page of this prospectus, and based on actuarial
calculations we have made regarding these payments, we estimate that the
aggregate payments will be $315 million.
38
<PAGE> 41
(2) During 1997, we changed to the retrospective interest method of accounting
for investment income on structured notes in accordance with Emerging
Issues Task Force Consensus 96-12, Recognition of Interest Income and
Balance Sheet Classification of Structured Notes. As a result, net
investment income increased by $175 million. The cumulative effect of this
accounting change on prior years' income was immaterial.
(3) In 1998, we adopted the provisions of Statement of Financial Accounting
Standards 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, with respect to our securities lending
program. Adoption of the provisions had the effect of increasing assets and
liabilities by $3,769 million at December 31, 1998, and increasing revenues
and expenses by $266 million for the year ended December 31, 1998.
(4) Realized investment gains and losses are presented net of related
policyholder amounts. The amounts netted against realized investment gains
and losses are the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Gross realized investment gains (losses).................... $(137) $2,629 $1,018 $ 458 $ 73
----- ------ ------ ----- -----
Less amounts allocable to:
Future policy benefit loss recognition.................... -- (272) (126) (203) (152)
Deferred policy acquisition costs......................... 46 (240) (70) (4) (78)
Participating pension contracts........................... 21 (96) (35) (20) --
----- ------ ------ ----- -----
Total..................................................... 67 (608) (231) (227) (230)
----- ------ ------ ----- -----
Net realized investment gains (losses)...................... $ (70) $2,021 $ 787 $ 231 $(157)
===== ====== ====== ===== =====
</TABLE>
Realized investment gains (losses) have been reduced by (1) deferred
policy acquisition amortization to the extent that such amortization
results from realized investment gains and losses, (2) additions to future
policy benefits resulting from the need to establish additional
liabilities due to the recognition of investment gains, and (3) additions
to participating contractholder accounts when amounts equal to such
investment gains and losses are credited to the contractholders' accounts.
This presentation may not be comparable to presentations made by other
insurers. This presentation affected operating income and adjusted
operating income. See note 10 below.
(5) Policyholder benefits and claims exclude $(21) million, $368 million, $161
million, $223 million and $152 million for the years ended December 31,
1999, 1998, 1997, 1996 and 1995, respectively, of future policy benefit
loss recognition and credits to participating pension contracts that have
been charged against net realized investment gains and losses as such
amounts are directly related to such gains and losses. This presentation
may not be comparable to presentations made by other insurers.
(6) Other expenses exclude $(46) million, $240 million, $70 million, $4 million
and $78 million for the years ended December 31, 1999, 1998, 1997, 1996 and
1995, respectively, of amortization of deferred policy acquisition costs
that have been charged against net realized investment gains and losses as
such amounts are directly related to such gains and losses. This
presentation may not be comparable to presentations made by other insurers.
(7) Includes $125 million, $18 million, $(40) million, $38 million and $67
million for surplus tax paid (received) by Metropolitan Life Insurance
Company for the years ended December 31, 1999, 1998, 1997, 1996 and 1995,
respectively. As a stock life insurance company, we will no longer be
subject to the surplus tax after the effective date of the demutualization.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
(8) The gain (loss) from discontinued operations was primarily attributable to
the disposition of our group medical insurance business.
(9) Policyholder liabilities include future policy benefits, policyholder
account balances, other policyholder funds and policyholder dividends.
39
<PAGE> 42
(10) The following provides a reconciliation of net income to operating income
on a consolidated basis:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997 1996 1995
---- ------- ------- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net income.................................................. $617 $ 1,343 $ 1,203 $ 853 $ 699
---- ------- ------- ----- -----
Adjustments to reconcile net income to operating income:
Gross realized investment (gains) losses.................. 137 (2,629) (1,018) (458) (73)
Income tax on gross realized investment gains and
losses.................................................. (92) 883 312 173 26
---- ------- ------- ----- -----
Realized investment (gains) losses, net of income tax... 45 (1,746) (706) (285) (47)
---- ------- ------- ----- -----
Amounts allocated to investment gains and losses (see note
4)...................................................... (67) 608 231 227 230
Income tax on amounts allocated to investment gains and
losses.................................................. 45 (204) (71) (86) (83)
---- ------- ------- ----- -----
Amount allocated to investment gains and losses, net of
income tax............................................ (22) 404 160 141 147
---- ------- ------- ----- -----
Loss (gain) from discontinued operations.................. -- -- -- 71 (362)
---- ------- ------- ----- -----
Surplus tax............................................... 125 18 (40) 38 67
---- ------- ------- ----- -----
Extraordinary item -- demutualization expense, net of
income tax of $35 and $2, respectively.................. 225 4 -- -- --
---- ------- ------- ----- -----
Operating income............................................ $990 $ 23 $ 617 $ 818 $ 504
==== ======= ======= ===== =====
</TABLE>
The following provides a reconciliation of net income to operating income
for our Individual Business segment:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net income.................................................. $555 $1,069 $ 599
---- ------ -----
Adjustments to reconcile net income to operating income:
Gross realized investment (gains) losses.................. 60 (914) (433)
Income tax on gross realized investment gains and
losses.................................................. (14) 306 100
---- ------ -----
Realized investment (gains) losses, net of income tax... 46 (608) (333)
---- ------ -----
Amounts allocated to investment gains and losses (see note
4)........................................................ (46) 255 77
Income tax on amounts allocated to investment gains and
losses.................................................... 10 (85) (18)
---- ------ -----
Amount allocated to investment gains and losses, net of
income tax.............................................. (36) 170 59
---- ------ -----
Operating income............................................ $565 $ 631 $ 325
==== ====== =====
</TABLE>
The following provides a reconciliation of net income to operating income
for our Institutional Business segment:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net income.................................................. $567 $ 846 $ 339
---- ----- -----
Adjustments to reconcile net income to operating income:
Gross realized investment (gains) losses.................. 53 (943) (181)
Income tax on gross realized investment gains and
losses.................................................. (22) 324 64
---- ----- -----
Realized investment (gains) losses, net of income tax... 31 (619) (117)
---- ----- -----
Amounts allocated to investment gains and losses (see note
4)...................................................... (22) 386 136
Income tax on amounts allocated to investment gains and
losses.................................................. 9 (131) (48)
---- ----- -----
Amount allocated to investment gains and losses, net of
income tax............................................ (13) 255 88
---- ----- -----
Operating income............................................ $585 $ 482 $ 310
==== ===== =====
</TABLE>
40
<PAGE> 43
The following provides a reconciliation of net income to operating income
for our Auto & Home segment:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net income.................................................. $56 $ 161 $74
--- ----- ---
Adjustments to reconcile net income to operating income:
Gross realized investment gains........................... (2) (122) (9)
Income tax on gross realized investment gains............. -- 42 4
--- ----- ---
Realized investment gains, net of income tax............ (2) (80) (5)
--- ----- ---
Operating income............................................ $54 $ 81 $69
=== ===== ===
</TABLE>
The following provides a reconciliation of net income to operating income
(loss) for our International segment:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net income.................................................. $21 $ 56 $ 126
--- ----- -----
Adjustments to reconcile net income to operating income
(loss):
Gross realized investments gains.......................... (1) (117) (160)
Income tax on gross realized investment gains............. (2) 26 24
--- ----- -----
Realized investment gains, net of income tax............ (3) (91) (136)
--- ----- -----
Amounts allocated to investment gains (see note 4)........ -- -- 18
Income tax on amounts allocated to investment gains....... -- -- (2)
--- ----- -----
Amount allocated to investment gains, net of income
tax................................................... -- -- 16
--- ----- -----
Operating income (loss)..................................... $18 $ (35) $ 6
=== ===== =====
</TABLE>
We believe the supplemental operating information presented above allows for
a more complete analysis of results of operations. Realized investment gains
and losses have been excluded due to their volatility between periods and
because such data are often excluded when evaluating the overall financial
performance of insurers. Operating income should not be considered as a
substitute for any GAAP measure of performance. Our method of calculating
operating income may be different from the method used by other companies
and therefore comparability may be limited.
(11) The following provides a reconciliation of operating income to adjusted
operating income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997 1996 1995
------ ------ ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Operating income............................................ $ 990 $ 23 $617 $818 $504
Adjustment for charges for sales practices claims and for
personal injury claims caused by exposure to asbestos or
asbestos-containing products, net of income tax........... 317 1,203 190 103 109
------ ------ ---- ---- ----
Adjusted operating income................................... $1,307 $1,226 $807 $921 $613
====== ====== ==== ==== ====
</TABLE>
The charge for the year ended December 31, 1999 was 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. The amount reported for the year ended
December 31, 1998 includes charges for sales practices claims and claims for
personal injuries caused by exposure to asbestos or asbestos-containing
products. See Note 9 of Notes to Consolidated Financial Statements. We
believe that supplemental adjusted operating income data provide information
useful in measuring operating trends by excluding the unusual amounts of
expenses associated with sales
41
<PAGE> 44
practices and asbestos-related claims. These expenses are not related to our
ongoing operations. Adjusted operating income should not be considered as a
substitute for any GAAP measure of performance.
(12) Operating return on equity is defined as operating income divided by
average total equity excluding accumulated other comprehensive income
(loss). We believe the operating return on equity information presented
supplementally allows for a more complete analysis of results of
operations. Accumulated other comprehensive income (loss) has been excluded
due to its volatility between periods and because such data are often
excluded when evaluating the overall financial performance of insurers.
Operating return on equity should not be considered as a substitute for any
GAAP measure of performance. Our method of calculation of operating return
on equity may be different from the calculation used by other companies
and, therefore, comparability may be limited. Operating return on equity is
only presented for annual periods.
(13) Adjusted operating return on equity is defined as adjusted operating income
divided by average total equity, excluding accumulated other comprehensive
income (loss). We believe that supplemental adjusted operating return on
equity data provide information useful in measuring operating trends by
excluding the unusual amounts of expenses associated with sales practices
and asbestos-related claims. Adjusted operating return on equity should not
be considered as a substitute for any GAAP measure of performance. Adjusted
operating return on equity is only presented for annual periods.
(14) Return on equity is defined as net income divided by average total equity,
excluding accumulated other comprehensive income (loss).
(15) Includes MetLife's general account and separate account assets and assets
managed on behalf of third parties.
(16) Metropolitan Life Insurance Company statutory data only.
(17) Includes $0.2 billion, $4.2 billion and $5.6 billion of MetLife's general
account assets managed by our Asset Management segment at December 31,
1999, 1998 and 1997, respectively, as well as assets managed on behalf of
third parties.
(18) Includes our Canadian operations and U.K. insurance operations,
substantially all of which were sold in 1998 and 1997, respectively. Total
revenues for these entities were $469 million, $1,060 million, $1,001
million and $998 million for the years ended December 31, 1998, 1997, 1996
and 1995, respectively.
(19) We maintain a Corporate segment through which we report items that are not
directly allocable to any of our business segments, including unallocated
capital, revenues and expenses.
(20) Includes MetLife Capital Holdings, Inc., which was sold in 1998. Total
revenues for this entity were $263 million, $542 million, $496 million and
$270 million for the years ended December 31, 1998, 1997, 1996 and 1995,
respectively.
(21) Segment data does not include consolidation and elimination entries related
to intersegment amounts. See Note 15 of Notes to Consolidated Financial
Statements.
42
<PAGE> 45
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma consolidated financial information presented below gives
effect to:
- the demutualization, including the issuance of an estimated 493,476,118
shares of our common stock to the MetLife Policyholder Trust in
connection therewith;
- the establishment of the closed block;
- the sale of 179,000,000 shares of our common stock in the initial public
offering at $14.00 per share, which is the midpoint of the range stated
on the cover page of this prospectus;
- the concurrent private placements of 73,000,000 shares of common stock in
the aggregate at $14.00 per share, which is the midpoint of the range
stated on the cover page of this prospectus; and
- the concurrent offering of 20,000,000 equity security units at $50.00 per
unit;
as if they each had occurred at December 31, 1999, for the purposes of the pro
forma consolidated balance sheet, and at January 1, 1999 for the purposes of the
pro forma consolidated statement of income for the year ended December 31, 1999.
The pro forma financial information excludes the effects of various
acquisitions, including the acquisition of GenAmerica Corporation, and
dispositions because they are not significant. This pro forma information is
presented to depict only the effects of the demutualization, the establishment
of the closed block, the offering of the units, the private placements and the
initial public offering. Metropolitan Life Insurance Company incurred $900
million of short-term debt in connection with the acquisition of GenAmerica
Corporation. We intend to repay up to $450 million of this short-term debt with
proceeds from the offerings and the private placements in excess of those
amounts required under the plan of reorganization.
The pro forma information reflects gross and estimated net proceeds from
the initial public offering of $2,506 million and $2,381 million, respectively,
assuming an initial public offering price per share of $14.00 and the use of
proceeds set forth elsewhere in this prospectus. The data also gives effect to
proceeds of $1,022 million from the private placements and gross proceeds of
$1,000 million from the issuance of the units, less an assumed underwriting
discount and offering expenses aggregating $40 million, or net proceeds from the
offering of $960 million. We expect to use an estimated $397 million of the
aggregate net proceeds of these offerings and the private placements to
reimburse Metropolitan Life Insurance Company for policy credits made to certain
policyholders in lieu of 28,331,484 allocated shares of our common stock, an
estimated $2,494 million of the aggregate net proceeds to reimburse Metropolitan
Life Insurance Company for cash payments made to certain policyholders in lieu
of 178,166,475 allocated shares of our common stock and an estimated $315
million to reimburse Metropolitan Life Insurance Company for cash payments to be
made by its Canadian branch to certain holders of policies included in its
Canadian business sold to Clarica Life Insurance Company in 1998. We will
account for the payments to the transferred Canadian policyholders in other
expenses in the same period as the effective date of the plan. The consideration
an eligible policyholder receives under the plan of reorganization will be based
on the number of shares of our common stock allocated to the eligible
policyholder pursuant to the terms of the plan. For those policyholders
receiving policy credits or for those non-electing eligible policyholders who
must receive cash in the demutualization, we will translate the share
allocations into dollar amounts based on the initial public offering price per
share. The cash payments made in lieu of allocated shares consist of $164
million of cash payments that will be distributed to non-electing eligible
policyholders that must receive cash in the demutualization and $2,330 million
in cash payments to eligible policyholders holding approximately 23.8% of the
total number of shares of our common stock allocated to eligible policyholders
who elected to receive cash, assuming an initial public offering price of $14.00
per share. See "The Demutualization -- Payment of Consideration to Eligible
Policyholders". The pro forma consolidated statement of income also reflects the
elimination of the surplus tax on
43
<PAGE> 46
earnings and the inclusion of the minority interest related to the units and is
presented before the extraordinary item for demutualization expense. The pro
forma consolidated statement of income does not give effect to any pro forma
earnings resulting from the use of the net proceeds from the offerings or the
charge related to the payments to be made to certain transferred Canadian
policyholders described above.
We will account for the demutualization using the historical carrying
values of our assets and liabilities.
We have based the pro forma information on available information and on
assumptions management believes are reasonable and that reflect the effects of
these transactions. We have provided this information for informational purposes
only. The number of shares and units actually sold in the offerings and the
private placements and their respective prices may vary from the amounts
assumed. The plan of reorganization requires that the aggregate net proceeds
from the offerings and the private placements be at least equal to specified
amounts. See "The Demutualization -- Summary of the Plan of Reorganization". If
the actual proceeds raised in the initial public offering, the private
placements or the offering of the equity security units are different than the
amount estimated, we will be required to change the sizes of the other
transactions, subject to the limit in the plan that the proceeds of the units
offering may not exceed one-third of the combined proceeds of that offering, the
private placements and the offering of MetLife, Inc.'s common stock pursuant to
this prospectus. The amount of proceeds from the offerings and the private
placements and the final terms of the units will depend on market conditions and
our capital needs at the time of issuance. This information does not necessarily
indicate our consolidated financial position or results of operations had the
demutualization, the establishment of the closed block, the offering of units,
the initial public offering and the private placements been consummated on the
dates assumed. It also does not project or forecast our consolidated financial
position or results of operations for any future date or period. You should read
the pro forma information in conjunction with our historical consolidated
financial statements included elsewhere in this prospectus and with the
information set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "The Demutualization" and "Business".
44
<PAGE> 47
METLIFE, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
AS ADJUSTED
ESTABLISHMENT FOR THE CLOSED THE
OF THE THE BLOCK AND THE UNIT
HISTORICAL CLOSED BLOCK(1) DEMUTUALIZATION DEMUTUALIZATION OFFERING PRO FORMA
---------- --------------- --------------- --------------- -------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Premiums......................... $12,088 $(3,924) $ -- $ 8,164 $ -- $ 8,164
Universal life and
investment-type product policy
fees........................... 1,438 -- -- 1,438 -- 1,438
Net investment income............ 9,816 (2,177) -- 7,639 -- 7,639
Other revenues................... 2,154 -- -- 2,154 -- 2,154
Net realized investment losses
(net of amounts allocable to
other accounts of $67)......... (70) 6 -- (64) -- (64)
Contribution from the closed
block.......................... -- (87) -- (87) -- (87)
------- ------- ----- ------- ---- -----------
25,426 (6,182) -- 19,244 -- 19,244
------- ------- ----- ------- ---- -----------
EXPENSES
Policyholder benefits and claims
(excludes amounts directly
related to net realized
investment losses of $21)...... 13,105 (4,002) -- 9,103 -- 9,103
Interest credited to policyholder
account balances............... 2,441 -- -- 2,441 -- 2,441
Policyholder dividends........... 1,690 (1,456) -- 234 -- 234
Other expenses (excludes amounts
directly related to net
realized investment losses of
$46)........................... 6,755 (724) -- 6,031 87(7) 6,118
------- ------- ----- ------- ---- -----------
23,991 (6,182) -- 17,809 87 17,896
------- ------- ----- ------- ---- -----------
Income (loss) before provision
(benefit) for income taxes and
extraordinary item............... 1,435 -- -- 1,435 (87) 1,348
Provision (benefit) for income
taxes............................ 593 -- (125)(9) 468 (32)(7) 436
------- ------- ----- ------- ---- -----------
Income before extraordinary item... $ 842 $ -- $ 125 $ 967 $(55) $ 912
======= ======= ===== ======= ==== ===========
Per share data:
Income before extraordinary item
per share -- basic and
diluted........................ $ 1.22
===========
Number of shares used in
calculation of per share data--
basic and diluted.............. 745,476,118(2)(3)
===========
</TABLE>
The accompanying Notes are an integral part of this
Pro Forma Consolidated Statement of Income.
45
<PAGE> 48
METLIFE, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
AS ADJUSTED FOR
ESTABLISHMENT THE CLOSED
OF THE CLOSED THE BLOCK AND THE
HISTORICAL BLOCK(1) DEMUTUALIZATION DEMUTUALIZATION
---------- ------------- --------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Investments:
Fixed maturities available-
for-sale, at fair value... $ 96,981 $(21,729) $ -- $ 75,252
Equity securities, at fair
value..................... 2,006 -- -- 2,006
Mortgage loans on real
estate.................... 19,739 (4,785) -- 14,954
Real estate and real estate
joint ventures............ 5,649 -- -- 5,649
Policy loans................ 5,598 (3,747) -- 1,851
Other limited partnership
interests................. 1,331 -- -- 1,331
Short-term investments...... 3,055 (8) -- 3,047
Other invested assets....... 1,501 (404) -- 1,097
-------- -------- -------- --------
135,860 (30,673) -- 105,187
Cash and cash equivalents..... 2,789 (251) (2,809)(2) (271)
Accrued investment income..... 1,725 (223) -- 1,502
Premiums and other
receivables................. 6,681 (129) -- 6,552
Deferred policy acquisition
costs....................... 8,492 (4,076) -- 4,416
Deferred income taxes......... 603 36 -- 639
Other......................... 4,141 -- -- 4,141
Closed block assets........... -- 35,316 -- 35,316
Separate account assets....... 64,941 -- -- 64,941
-------- -------- -------- --------
$225,232 $ -- $ (2,809) $222,423
======== ======== ======== ========
LIABILITIES AND EQUITY
LIABILITIES:
Future policy benefits........ $ 73,582 $(38,576) $ 397(2) $ 35,403
Policyholder account
balances.................... 45,901 (4) -- 45,897
Other policyholder funds...... 4,498 (308) -- 4,190
Policyholder dividends
payable..................... 974 (712) -- 262
Short-term debt............... 4,208 -- -- 4,208
Long-term debt................ 2,514 -- -- 2,514
Current income taxes
payable..................... 548 (14) (46)(4) 488
Other......................... 14,376 (13) 178(4) 14,541
Closed block liabilities...... -- 39,627 -- 39,627
Separate account
liabilities................. 64,941 -- -- 64,941
-------- -------- -------- --------
211,542 -- 529 212,071
-------- -------- -------- --------
Company-obligated mandatorily
redeemable securities of
subsidiary trust holding
solely debentures of Parent... -- -- -- --
-------- -------- -------- --------
EQUITY:
Preferred stock............... -- -- -- --
Common stock.................. -- -- 5(2)(8) 5
Additional paid-in capital.... -- -- 10,757(2)(8) 10,757
Retained earnings............. 14,100 -- (14,100)(8) --
Accumulated other comprehen-
sive loss................... (410) -- -- (410)
-------- -------- -------- --------
13,690 -- (3,338) 10,352
-------- -------- -------- --------
$225,232 $ -- $ (2,809) $222,423
======== ======== ======== ========
<CAPTION>
THE
INITIAL THE THE
PUBLIC PRIVATE UNIT
OFFERING PLACEMENTS OFFERING PRO FORMA
-------- ---------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Investments:
Fixed maturities available-
for-sale, at fair value... $ -- $ -- $ -- $ 75,252
Equity securities, at fair
value..................... -- -- -- 2,006
Mortgage loans on real
estate.................... -- -- -- 14,954
Real estate and real estate
joint ventures............ -- -- -- 5,649
Policy loans................ -- -- -- 1,851
Other limited partnership
interests................. -- -- -- 1,331
Short-term investments...... -- -- -- 3,047
Other invested assets....... -- -- -- 1,097
------ ------ ---- --------
-- -- -- 105,187
Cash and cash equivalents..... 2,381(5) 1,022(6) 960(7) 4,092
Accrued investment income..... -- -- -- 1,502
Premiums and other
receivables................. -- -- -- 6,552
Deferred policy acquisition
costs....................... -- -- -- 4,416
Deferred income taxes......... -- -- -- 639
Other......................... -- -- -- 4,141
Closed block assets........... -- -- -- 35,316
Separate account assets....... -- -- -- 64,941
------ ------ ---- --------
$2,381 $1,022 $960 $226,786
====== ====== ==== ========
LIABILITIES AND EQUITY
LIABILITIES:
Future policy benefits........ $ -- $ -- $ -- $ 35,403
Policyholder account
balances.................... -- -- -- 45,897
Other policyholder funds...... -- -- -- 4,190
Policyholder dividends
payable..................... -- -- -- 262
Short-term debt............... -- -- -- 4,208
Long-term debt................ -- -- -- 2,514
Current income taxes
payable..................... -- -- -- 488
Other......................... -- -- -- 14,541
Closed block liabilities...... -- -- -- 39,627
Separate account
liabilities................. -- -- -- 64,941
------ ------ ---- --------
-- -- -- 212,071
------ ------ ---- --------
Company-obligated mandatorily
redeemable securities of
subsidiary trust holding
solely debentures of Parent... -- -- 947(7) 947
------ ------ ---- --------
EQUITY:
Preferred stock............... -- -- -- --
Common stock.................. 2(5) 1(6) -- 8
Additional paid-in capital.... 2,379(5) 1,021(6) 13(7) 14,170
Retained earnings............. -- -- -- --
Accumulated other comprehen-
sive loss................... -- -- -- (410)
------ ------ ---- --------
2,381 1,022 13 13,768
------ ------ ---- --------
$2,381 $1,022 $960 $226,786
====== ====== ==== ========
</TABLE>
The accompanying Notes are an integral part of this
Pro Forma Consolidated Balance Sheet.
46
<PAGE> 49
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(1) The pro forma consolidated balance sheet and pro forma consolidated
statement of income reflect the assets which have been set aside to establish
the closed block, and the related liabilities, revenues and expenses, in each
case based on provisions in the plan of reorganization. Closed block assets and
liabilities on the pro forma consolidated balance sheet are reflected at their
historical carrying values. See "The Demutualization -- Establishment and
Operation of the Closed Block". We have established bookkeeping records to
specifically segregate the assets, liabilities, revenues and expenses in the pro
forma closed block, as if the closed block had been formed on January 1, 1999.
These amounts include any new individual participating policies issued during
1999 and the revenues and expenses associated with individual participating
policies eligible to be included in the closed block. The closed block will
actually be formed on the effective date of the plan and, accordingly, the
actual assets and liabilities ultimately assigned to the closed block and their
carrying values will not be final until that date. In management's opinion, the
assets and liabilities of the closed block as of the effective date of the plan
are not expected to differ materially from the assets and liabilities reflected
in the pro forma consolidated balance sheet.
The pro forma consolidated statement of income reflects actual revenues and
expenses related to the segregated assets and liabilities of the closed block
and certain estimates that management believes are reasonable. We have
determined the closed block amounts in the pro forma consolidated statement of
income using the underlying policyholder administrative records supporting this
business. Actual revenues and expenses related to the segregated closed block
liabilities and closed block assets were used to derive the pro forma
consolidated statement of income for the year ended December 31, 1999. Net
investment income and realized investment gains and losses for the year ended
December 31, 1999 reflect the actual income from assets set aside for assignment
to the closed block. In management's opinion, the revenues and expenses of the
individual participating policies to be included in the closed block as of the
effective date of the plan are not expected to differ materially from the pro
forma consolidated statement of income.
The closed block amounts in the pro forma consolidated statement of income
for the year ended December 31, 1999 reflect new individual participating
policies issued during such period, which will ultimately be included in the
closed block if such policies remain in force as of the effective date of the
plan. Closed block amounts were determined as follows: (1) premiums and benefits
related to the policies to be included within the closed block were used; (2)
net investment income for the year ended December 31, 1999 reflects the actual
income from assets set aside for assignment to the closed block; (3)
policyholder dividends were based on dividend scales of policies to be included
within the closed block; (4) maintenance expenses were based on per policy
charges provided in the plan of reorganization; and (5) realized investment
gains and losses of the closed block for the year ended December 31, 1999
reflect the actual gains and losses from the assets set aside for assignment to
the closed block.
Deferred policy acquisition costs on business included in the closed block
has been reported as an asset of the closed block in the pro forma consolidated
balance sheet. Amortization of closed block deferred policy acquisition costs,
other than amounts arising from realized investment gains and losses on assets
not allocated to the closed block, has been included in other expenses in the
closed block.
The pre-tax contribution from the closed block will include only those
revenues, benefit payments, dividends, premium taxes, administrative expenses
and investment expenses considered in funding the closed block. See "The
Demutualization -- Establishment and Operation of the Closed Block". We will
report the pre-tax contribution from the closed block as a single line item of
total revenues. We will reflect income tax expense applicable to the closed
block, which the closed block will pay, as a component of income tax expense.
The excess of
47
<PAGE> 50
closed block liabilities over closed block assets at the effective date of the
demutualization will represent the estimated maximum future contribution from
the closed block expected to result from operations attributed to the closed
block after income taxes. The contribution from the closed block will be
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, only such expected contribution will be recognized in income
with the excess recorded as a policyholder dividend obligation, because the
excess of the actual cumulative contribution from the closed block over such
expected cumulative contribution will be paid to closed block policyholders as
additional policyholder dividends unless offset by future unfavorable experience
of the closed block. If over such period, the actual cumulative contribution
from the closed block is less than the expected cumulative contribution from the
closed block, only such actual contribution will be recognized in income.
However, we 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.
Pursuant to the plan of reorganization, Metropolitan Life Insurance Company
has set aside assets for assignment to the closed block in an amount that
produces cash flows which, together with anticipated revenue from the individual
life insurance policies included in the closed block, are reasonably expected to
be sufficient to support obligations and liabilities relating to these policies,
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 excess of
closed block liabilities over closed block assets at the effective date of the
demutualization equals the estimated maximum future after tax contribution from
the closed block. As noted above, we will recognize in income the contribution
from the closed block over the period the policies and contracts in the closed
block remain in force.
As a result of the establishment of the closed block, certain line items in
our consolidated financial statements subsequent to the establishment of the
closed block will reflect material reductions in reported amounts, compared with
periods prior to the establishment of the closed block. These changes will have
no effect on net income. We will reflect the results of the closed block
business as a single line item in our consolidated statement of income entitled,
"Contribution from the closed block". Prior to the establishment of the closed
block, the results from the underlying business were reported in various line
items in our consolidated statement of income, including premiums, net
investment income, policyholder benefits and claims and other expenses. In
addition, all assets and liabilities allocated to the closed block will be
reported in our consolidated balance sheet separately under the captions,
"Closed block assets" and "Closed block liabilities," respectively.
(2) The number of shares of our common stock used in the calculation of pro
forma income before extraordinary item per share -- basic and diluted is as
follows:
<TABLE>
<S> <C>
Shares allocated to eligible policyholders.................. 699,974,077
Less shares allocated to eligible policyholders who receive
cash or policy credits.................................... 206,497,959
-----------
Shares issued to the MetLife Policyholder Trust............. 493,476,118
Shares issued in the initial public offering................ 179,000,000
Shares issued in the private placements..................... 73,000,000
-----------
Total shares of common stock outstanding.................... 745,476,118
===========
</TABLE>
48
<PAGE> 51
We expect to contribute $4,023 million of the aggregate net proceeds from
the offerings and the private placements to Metropolitan Life Insurance Company,
of which:
- an estimated $397 million will be used to reimburse Metropolitan Life
Insurance Company for the crediting of policy credits to certain
policyholders in the demutualization in lieu of 28,331,484 allocated
shares of our common stock;
- an estimated $2,494 million will be used to reimburse Metropolitan Life
Insurance Company for cash payments to certain policyholders in the
demutualization in lieu of 178,166,475 allocated shares of our common
stock;
- an estimated $315 million will be used to reimburse Metropolitan Life
Insurance Company for cash payments to be made by its Canadian branch to
certain holders of policies included in its Canadian business sold to
Clarica Life Insurance Company in 1998. See "The
Demutualization -- Transferred Canadian Policies";
- an estimated $361 million to reimburse Metropolitan Life Insurance
Company for the payment of fees and expenses incurred in connection with
the demutualization; and
- an estimated $456 million will be used for general corporate purposes and
to repay up to $450 million of short-term debt incurred in connection
with our acquisition of GenAmerica.
We have reflected the amounts expected to be used to fund those policy
credits referred to above as an increase in future policy benefits and a
reduction of retained earnings in the pro forma consolidated balance sheet. We
have reflected the amounts we expect to use to make the cash payments referred
to above as a reduction in retained earnings in the pro forma consolidated
balance sheet.
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 Insurance Company as described above, Metropolitan
Life Insurance Company expects to issue to MetLife, Inc. its $1 billion
% mandatorily convertible capital note due 2005 having the principal
terms described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- MetLife, Inc."
(3) Each unit in the unit offering consists of (a) a contract to purchase
shares of our common stock and (b) a % capital security of MetLife Capital
Trust I. Before the issuance of shares of our common stock upon settlement of
the purchase contracts, the units will be reflected in our diluted earnings per
share calculations using the treasury stock method. Under this method, the
number of shares of our common stock used in calculating earnings per share for
any period is deemed to be increased by the excess, if any, of the number of
shares issuable upon settlement of the purchase contracts over the number of
shares that could be purchased by us in the market, at the average market price
during that period, using the proceeds receivable upon settlement. Consequently,
there will be no dilutive effect on our earnings per share except during periods
when the average market price of our common stock is above $ per share.
(4) The pro forma consolidated balance sheet reflects estimated additional
nonrecurring expenses of $132 million (net of income taxes of $46 million)
related to the demutualization assumed to be incurred at the date of the pro
forma consolidated balance sheet. The pro forma consolidated statement of income
does not reflect such nonrecurring expenses since they will be reported as an
extraordinary item.
(5) Represents gross proceeds of $2,506 million from the issuance of
179,000,000 shares of our common stock at an assumed initial public offering
price of $14.00 per share, less an assumed underwriting discount and estimated
offering expenses aggregating $125 million, in the initial public offering.
49
<PAGE> 52
(6) Represents proceeds of $1,022 million from the issuance of 73,000,000
shares of our common stock at an assumed initial public offering price of $14.00
in the planned private placements.
(7) Represents gross proceeds of $1,000 million from the issuance of the
equity security units, less an assumed underwriting discount and estimated
offering expenses aggregating $40 million. The financial statements of the trust
will be consolidated in our consolidated financial statements, with the capital
securities shown on our consolidated balance sheet under the caption
"Company-obligated mandatorily redeemable securities of subsidiary trust holding
solely debentures of Parent". The proceeds from the units will be allocated to
the underlying purchase contracts and capital securities based on their relative
fair values at the offering date. For purposes of the pro forma consolidated
balance sheet, the fair value of the underlying purchase contracts and capital
securities was assumed to be $13 million and $947 million, respectively. The
forward contracts will be reported in additional paid-in capital and subsequent
changes in fair value will not be recognized. The notes to our consolidated
financial statements will disclose that the sole assets of the trust will be the
debentures. Distributions on the capital securities will be reported as a charge
to minority interest in our consolidated statements of income, whether paid or
accrued. The charge to other expenses in the pro forma consolidated statement of
income reflects distributions on the capital securities at an assumed rate of
7.60% ($76 million) and the accretion of the discount ($11 million) on the
carrying value of the Company-obligated mandatorily redeemable securities of
subsidiary trust holding solely debentures of Parent. The income tax benefit
related to such charges is $32 million.
(8) Represents the reclassification of the retained earnings of
Metropolitan Life Insurance Company to reflect the demutualization as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Historical retained earnings............................. $14,100
Less proceeds of offerings used to fund policy credits
and cash payments to certain eligible policyholders.... 2,891
Less cash payments made by Metropolitan Life Insurance
Company's Canadian branch to certain holders of
policies included in its Canadian business sold to
Clarica Life Insurance Company. We will account for the
payments to the transferred Canadian policyholders in
other expenses in the same period as the effective date
of the plan of reorganization.......................... 315
Less additional demutualization expenses (net of income
taxes of $46 million).................................. 132
-------
Retained earnings related to eligible policyholders
receiving common stock................................. $10,762
=======
</TABLE>
(9) Represents the elimination of the surplus tax. As a stock life
insurance company, we will no longer be subject to the surplus tax after the
effective date of the plan.
50
<PAGE> 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results
of operations of MetLife should be read in conjunction with "Selected Financial
Information", the consolidated financial statements and notes thereto and "Pro
Forma Consolidated Financial Information" included elsewhere in this prospectus.
BACKGROUND
We are a leading provider of insurance and financial services to a broad
spectrum of individual and institutional customers. We offer insurance, annuity
and investment products to individuals and group insurance and retirement and
savings products and services to corporations and other institutions. We derive
our revenues principally from:
- premiums from individual and group insurance, including those annuities
that have a death benefit component;
- fees from universal and variable life insurance products, annuity,
investment products and administrative services contracts;
- premiums from property and casualty insurance;
- asset management fees; and
- net investment income and realized investment gains or losses on general
account assets.
Our operating expenses consist of insurance benefits, increases in
liabilities, interest credited on general account liabilities, marketing and
administrative costs relating to products we sell, including commissions to our
sales representatives, net of deferrals, and general business expenses. Our
profitability depends largely on the adequacy of our product pricing,
underwriting and methodology for the establishment of liabilities for future
policyholder benefits, our ability to earn appropriate spreads between earned
investment rates on general account assets and dividend and interest credited
rates to customers, the amount of assets under management and our ability to
manage our expenses.
We are organized into five major business segments: Individual Business,
Institutional Business, Asset Management, Auto & Home and International.
Subsequent to January 6, 2000, the date on which we acquired GenAmerica,
GenAmerica's businesses will be incorporated into our business segments as
applicable, except for RGA, which will be separately designated as our
Reinsurance segment. We also maintain a Corporate segment through which we
report items that are not directly allocable to any of our business segments,
including unallocated capital, income and expenses. We manage and allocate our
general account assets among our business segments through distinct portfolios
for each product group. Capital is allocated among each of our business segments
based on a percentage of the "risk-based capital" levels of the assets allocated
to the segments. RISK-BASED CAPITAL ("RBC") is a regulatory measure designed to
aid in the evaluation of the statutory capital and surplus of life and health
insurers. We also allocate net investment income to each business segment based
upon the assets allocated to the segment.
Sales of our insurance, annuity and investment products have been affected
by overall trends in the insurance industry generally, as Americans have begun
to rely less on traditional life insurance, defined benefit retirement plans,
social security and other government programs, and the "baby-boom" generation
has begun to enter its prime savings years. Reflecting these trends, as well as
the impact of a strong equities market in recent years, sales of our traditional
insurance products have declined in recent years, while sales of variable life
and annuities, mutual funds and other savings products have increased. During
the five years ended 1999, the separate account liabilities related to our
individual variable annuity products grew at a 38.2%
51
<PAGE> 54
compound annual rate, and totaled $20.7 billion and $15.8 billion at December
31, 1999 and 1998, respectively. During the five years ended 1999, first-year
premiums and deposits from variable life insurance products grew at a compound
annual rate of 33.1% and were $389 million and $371 million for the years ended
December 31, 1999 and 1998, respectively.
In addition, as the U.S. employment market has become more competitive,
employers are seeking to enhance their ability to hire and retain employees by
providing attractive benefit plans. Current trends in the work environment also
reflect increasing concern of employees about the future of government-funded
retirement and "safety-net" programs, an increasingly mobile workforce and the
desire of employers to share the market risk from the investment of pension
assets with employees. We believe these trends are facilitating the introduction
of new benefits such as long-term care and auto and homeowners insurance, and
are leading more employers to adopt defined contribution pension arrangements
and 401(k) plans. A related trend has been the increased offering of voluntary
products, which provide valued benefits to employees at little or no cost to the
employer. These benefits, while paid for by employees, appeal to them because
they are generally priced at group rates and are usually paid for by payroll
deduction, making them convenient to purchase and maintain.
We enter into reinsurance agreements to spread the risk and minimize the
effect of losses. The amount of each risk retained by us depends on our
evaluation of the specific risk, subject, in certain circumstances, to maximum
limits based on characteristics of coverages. In recent periods, in response to
the reduced cost of reinsurance coverage, we have increased the amount of
MORTALITY risk coverage purchased from third party reinsurers. Since 1996, we
have continually entered into reinsurance agreements that CEDED substantially
all of the mortality risk on term insurance policies issued during 1996 and
subsequent years, and on whole life and survivorship whole life insurance
policies issued in 1997 and subsequent years. In 1998, we reinsured
substantially all of the mortality risk on universal life policies we issued
since 1983. We are continuing to reinsure substantially all of the mortality
risk on our universal life policies as well as insurance face amounts which are
above our retention limits. Generally, as a result of these transactions, we now
reinsure up to 90% of the mortality risk for all new individual insurance
policies that we write.
We also maintain and manage a significant amount of mortality risk,
including through our ownership of RGA, which retains mortality risk from many
insurers, including MetLife. Furthermore, many of our individual life products,
as well as some of our group insurance and annuity products, include elements of
mortality risk.
Our reinsurance agreements generally provide for payments to the reinsurers
for the risks transferred to them, reduced by reimbursements to us of our policy
issuance costs. The amounts presented in our consolidated statements of income
for revenues and policyholder benefits are net of amounts ceded to the
reinsurers. We report amounts reimbursed related to administrative costs for
maintaining policies covered under reinsurance agreements in other revenues.
Over the past three years, we have repositioned our investment portfolio in
order to provide a higher operating rate of return on our invested assets. In
connection with this strategy, we have reduced our investments in treasury
securities, corporate equities and equity real estate and increased our
investments in fixed maturities with a higher current operating yield.
We have selectively acquired and disposed of businesses during the past
several years as part of our business strategies and to enhance our overall
returns. We expanded the distribution channels of Individual Business in the
bank and broker-dealer distribution channels through the acquisitions of
Security First Group in 1997 and of Nathan & Lewis in 1998. We became a leading
provider of administrative services in the 401(k) market through the
acquisitions of Benefit Services Corporation and the defined contribution
record-keeping and participant services business formerly owned by Bankers Trust
Corporation. We sold our commercial finance subsidiary in 1998 because it was
not part of our core business strategy and disposed of a
52
<PAGE> 55
substantial portion of our insurance operations in the U.K. and Canada to exit
mature markets with little opportunity for growth. We expect to continue to make
selective acquisitions and dispositions that augment our business strategies.
On January 6, 2000, we acquired GenAmerica Corporation for $1.2 billion in
cash. In connection with our acquisition of the stock of GenAmerica, we incurred
$900 million of short-term debt, consisting primarily of commercial paper. We
intend to repay up to $450 million of that debt with proceeds from the offerings
and the private placements in excess of those amounts required under the plan.
In addition, we incurred approximately $3.2 billion of short-term debt,
consisting primarily of commercial paper, in connection with our exchange offer
to holders of General American Life funding agreements. On September 29, 1999,
MetLife Funding, Inc. and Metropolitan Life Insurance Company obtained an
additional committed credit facility for $5 billion, which serves as back-up for
this commercial paper. For a description of the acquisition and related
transactions, see "Business -- Acquisition of GenAmerica".
On September 30, 1999, our Auto & Home segment acquired the standard
personal lines property and casualty insurance operations of The St. Paul
Companies, which had in-force premiums of approximately $1.1 billion and
approximately 3,000 independent agencies and brokers. We funded this
acquisition, plus an additional investment in the business, with available cash
and the issuance of commercial paper. This acquisition substantially increased
the size of this segment's business, making us the eleventh largest personal
property and casualty insurer in the U.S. based on 1998 net premiums written.
In recent years, we have implemented programs to reduce operating expenses
and enhance the efficiency of our operations. For the year ended December 31,
1999, we reduced the number of non-sales positions by 1,856, or 7%. These
reductions are in addition to the elimination of 2,267, or 11%, of the non-sales
positions in 1998. In 1999, we began an internal reorganization to integrate the
operations of New England Financial, which since its merger with MetLife had
been operated as a separate division, with the individual insurance operations
of MetLife. The objective of this internal reorganization is to identify
opportunities to eliminate redundant processes and costs, while maintaining the
brand identities of our distribution channels and products.
THE DEMUTUALIZATION
Pursuant to the New York Insurance Law, the board of directors of
Metropolitan Life Insurance Company adopted the plan of reorganization on
September 28, 1999, and subsequently adopted amendments to the plan. On the date
the plan becomes effective, Metropolitan Life Insurance Company will convert
from a mutual life insurance company to a stock life insurance company and
become a wholly-owned subsidiary of MetLife, Inc. This process is commonly known
as a demutualization. We estimate that costs relating to the demutualization,
excluding costs relating to the offerings and the private placements, will total
$361 million, net of income taxes of $83 million. We have recorded
demutualization costs of $229 million, net of income taxes of $37 million,
through December 31, 1999. Demutualization expenses consist of our cost of
printing and mailing materials to policyholders and our aggregate cost of
engaging independent accounting, actuarial, compensation, financial, investment
banking and legal advisors and other consultants to advise us in the
demutualization process and related matters, as well as other administrative
costs. The New York Superintendent of Insurance has also engaged experts to
provide actuarial, investment banking, legal and auditing advice. Pursuant to
the New York Insurance Law, we must pay the fees and expenses of such
consultants, which fees and expenses are included in the above amounts. We have
also agreed to indemnify certain of our consultants and consultants to the New
York Superintendent against liabilities arising out of their engagements in
connection with the demutualization.
In addition, if Metropolitan Life Insurance Company demutualizes, we will
incur costs related to payments to certain holders of Canadian policies included
in the Canadian business sold by
53
<PAGE> 56
Metropolitan Life Insurance Company to Clarica Life Insurance Company in 1998.
See "The Demutualization -- Transferred Canadian Policies". These costs will be
charged to other expenses in the same period as the effective date of the plan.
The payments will be determined in a manner that is consistent with the
treatment of, and fair and equitable to, eligible policyholders of Metropolitan
Life Insurance Company. The amount to be paid to the holders of Canadian
policies is dependent upon the initial public offering price of our common
stock. Assuming an initial public offering price of $14.00 per share, and based
on calculations we have made regarding these payments, we estimate the aggregate
payments will be $315 million.
The plan of reorganization requires us to complete an initial public
offering of our common stock on the effective date of the plan. The plan also
permits us to complete one or more private placements and other specified
capital raising transactions on the effective date of the plan. Concurrently
with this offering, we have agreed to sell not less than 14,900,000 shares nor
more than 73,000,000 shares in the aggregate, at a price per share equal to the
initial public offering price, to Banco Santander Central Hispano, S.A. and
Credit Suisse Group or their respective affiliates in private placements. In
addition, we and a trust we own are offering 20,000,000 equity security units
for an aggregate offering of $1,000 million, plus up to an additional $150
million if the underwriters' options to purchase additional units are exercised
in full. Each unit consists of (a) a contract to purchase shares of our common
stock and (b) a capital security of MetLife Capital Trust I, a Delaware business
trust wholly-owned by us. For a description of the units see "Description of the
Equity Security Units". Under the plan of reorganization, the total proceeds
raised in the offering of units cannot exceed one-third of the combined proceeds
raised in that offering, the initial public offering of our common stock and the
private placements. The amount of proceeds from the offerings and the private
placements and final terms of the units will depend on market conditions and our
capital needs at the time of issuance. We cannot proceed with any offering
relating to the units and the private placements without the approval of the New
York Superintendent. The final terms of the initial public offering, the
offering of units and the private placements must be approved by the New York
Superintendent. The New York Superintendent approved the final terms of the
offerings and the private placements as part of its order, issued on April ,
2000, approving the plan. We will be required to use the net proceeds from the
initial public offering, as well as the net proceeds from the offering of units
and the private placements, in the manner set forth under the caption "Use of
Proceeds" above.
The plan of reorganization requires that Metropolitan Life Insurance
Company establish and operate a closed block for the benefit of holders of
certain individual life insurance policies of Metropolitan Life Insurance
Company. We will allocate assets 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
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 our 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.
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<PAGE> 57
We do not expect the closed block will affect our net income or our
liquidity after its establishment. We will use the same accounting principles to
account for the PARTICIPATING POLICIES included in the closed block as we used
prior to the date of demutualization. However, we will establish a policyholder
dividend obligation for earnings that will be paid to policyholders as
additional dividends in the amounts 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. We will recognize the contributions 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, we will recognize only the expected cumulative contribution in
income with the excess recorded as a policyholder dividend obligation, because
we 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. If over such period, the actual cumulative contribution
from the closed block is less than the expected cumulative contribution from the
closed block, we will recognize only the actual contribution in income. However,
we 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.
As required by law, the plan was approved by more than two-thirds of
eligible policyholders who voted in voting completed on February 7, 2000. The
plan of reorganization will not become effective unless, after conducting a
public hearing on the plan, the New York Superintendent of Insurance approves it
based on a finding, among other things, that the plan is fair and equitable to
policyholders. The New York Superintendent held a public hearing on the plan on
January 24, 2000 and issued an order approving the plan on April , 2000.
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RESULTS OF OPERATIONS
The following table presents summary consolidated financial information for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Premiums.................................................... $12,088 $11,503 $11,278
Universal life and investment-type product policy fees...... 1,438 1,360 1,418
Net investment income....................................... 9,816 10,228 9,491
Other revenues.............................................. 2,154 1,994 1,491
Net realized investment gains (losses) (net of amounts
allocable to other accounts of $(67), $608 and $231,
respectively)............................................. (70) 2,021 787
------- ------- -------
25,426 27,106 24,465
------- ------- -------
EXPENSES
Policyholder benefits and claims (excludes amounts directly
related to net realized investment gains and losses of
$(21), $368 and $161, respectively)....................... 13,105 12,638 12,403
Interest credited to policyholder account balances.......... 2,441 2,711 2,878
Policyholder dividends...................................... 1,690 1,651 1,742
Other expenses (excludes amounts directly related to net
realized investment gains and losses of $(46), $240 and
$70, respectively)........................................ 6,755(1) 8,019(1) 5,771
------- ------- -------
23,991 25,019 22,794
------- ------- -------
Income before provision for income taxes and extraordinary
item...................................................... 1,435 2,087 1,671
Provision for income taxes.................................. 593 740 468
------- ------- -------
Income before extraordinary item............................ 842 1,347 1,203
Extraordinary item -- demutualization expense, net of income
tax of $35 and $2, respectively........................... 225 4 --
------- ------- -------
Net income.................................................. $ 617 $ 1,343 $ 1,203
======= ======= =======
</TABLE>
- ---------------
(1) Other expenses in 1999 includes a pre-tax charge of $499 million 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. During 1998, we obtained
certain excess of loss reinsurance and excess insurance policies and
agreements providing coverage for risks associated primarily with sales
practices claims and claims for personal injuries caused by exposure to
asbestos or asbestos-containing products. In 1998, we recorded a pre-tax
charge of $1,895 million, included in other expenses, for related insurance
and reinsurance premiums and for potential liabilities related to certain of
these claims. See "Business -- Legal Proceedings".
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Premiums increased by 5% to $12,088 million in 1999 from $11,503 million in
1998. This increase was attributable to strong growth in Institutional Business
of $366 million, or 7%, and Auto & Home of $348 million, or 25%. These increases
were partially offset by decreases in International of $95 million, or 15%, and
in Individual Business of $34 million, or 1%. Institutional Business' growth was
primarily driven by an increase in non-medical health premiums due to increased
sales and improved policyholder retention in our dental and disability
businesses. Auto & Home's premium increase was primarily due to the acquisition
of the standard personal lines property and casualty insurance operations of The
St. Paul Companies, representing $262
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<PAGE> 59
million of the premiums, as well as growth in both standard and non-standard
auto insurance businesses. International's premium decrease was primarily due to
the disposition of a substantial portion of our Canadian operations in July
1998. The Individual Business decrease was primarily attributable to the decline
in sales of traditional life insurance policies, which reflected a continued
shift in customers' investment preferences from those policies to variable life
products as well as decreased sales of supplementary contracts with life
contingencies.
Universal life and investment-type product policy fees increased by 6% to
$1,438 million in 1999 from $1,360 million in 1998. This increase was
attributable to increases of $71 million, or 9%, in Individual Business and $27
million, or 6%, in Institutional. These increases were partially offset by a
decrease in International of $20 million, or 29%. The Individual Business policy
fee increase was primarily due to the continued growth in deposits for
investment products as well as stock market appreciation. The $27 million
increase in Institutional Business' policy fees was primarily due to continued
growth in sales of products used in executive and corporate-owned benefit plans.
The majority of International's policy fee decrease resulted from the sale of a
substantial portion of our Canadian operations.
Net investment income decreased by 4% to $9,816 million in 1999 from
$10,228 million in 1998. This decrease was primarily due to reductions in (i)
investment income related to mortgage loans on real estate of $93 million, or
6%, (ii) investment income on other invested assets of $340 million, or 40%,
(iii) equity securities income of $38 million, or 49%, (iv) policy loan income
of $47 million, or 12% and (v) real estate and real estate joint ventures
income, after investment expenses and depreciation, of $106 million, or 15%.
These reductions in net investment income were partially offset by higher income
from fixed maturities of $203 million, or 3%. The reduction in investment income
from mortgage loans on real estate to $1,479 million in 1999 from $1,572 million
in 1998 was due to a reduction in principal balances in MetLife Capital
Holdings, Inc. and a substantial portion of our Canadian operations, which were
sold in 1998, the proceeds from which were reinvested in fixed maturities.
Likewise, the increase in fixed maturity investment income to $6,766 million in
1999 from $6,563 million in 1998 was primarily attributable to increased average
principal balances due, in part, to the reinvestment of proceeds from the sale
of MetLife Capital Holdings, as well as from sales of equity securities, the
dispositions of which were part of our 1998 year-end asset repositioning
program. The reduction in investment income from other invested assets to $501
million in 1999 from $841 million in 1998 was due to a reduction in leveraged
lease balances as a result of the sale of MetLife Capital Holdings and lower
fees received from bond prepayments, calls and tenders. The reduction in real
estate and real estate joint ventures income was primarily attributable to the
timing of sales of investments held by our real estate joint ventures.
Other revenues, which are primarily comprised of expense reimbursements
from reinsurers and fees related to investment management and administrative
services and securities lending activities, increased by 8% to $2,154 million in
1999 from $1,994 million in 1998. This increase was primarily attributable to
growth of $84 million, or 18%, in Individual Business and $54 million, or 9%, in
Institutional Business. The Individual Business increase is primarily due to a
full year of activity from our acquisition of Nathan & Lewis, which was acquired
in April 1998. The increase in Institutional Business is due to increases in our
non-medical health and retirement and savings businesses, partially offset by a
decrease in our group life business. Our non-medical health business increased
$61 million primarily due to growth in our dental administrative service
business. The increase in our retirement and savings business of $44 million
reflected higher administrative fees derived from separate accounts and our
defined contribution record-keeping services. The decrease in the group life
business of $51 million was primarily due to lower income in 1999 related to
funds used to seed separate accounts.
Our 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 costs attributable to the increase
or decrease in product gross margins or
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profits resulting from realized investment gains and losses, (ii) additional
policyholder liabilities, which are required when investment gains are realized
and we reinvest 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 gains (losses) decreased by 103% to $(70) million
in 1999 from $2,021 million in 1998. This decrease reflected total gross
realized investment losses of $(137) million, a decrease of 105%, from total
gross realized investment gains of $2,629 million in 1998, before the offsets
for the amortization of deferred policy acquisition costs of $46 million and
$(240) million, loss recognition of $0 million and $(272) million and credits to
participating contracts of $21 million and $(96) million related to assets sold
in 1999 and 1998, respectively. A significant portion of our net realized
investment gains in 1998 was attributable to a sales program initiated in the
fourth quarter of 1998, which we conducted as part of our strategy to reposition
our investment portfolio in order to provide a higher operating rate of return
on our invested assets. In connection with this repositioning, we reduced our
investments in treasury securities and corporate equities and increased our
investments in fixed maturities with a higher current yield. Net realized
investment losses in 1999 reflect the continuation of our strategy to reposition
our investment portfolio in order to provide a higher operating rate of return
on our invested assets.
We believe the policy of netting related policyholder amounts against
realized investment gains and losses provides important information in
evaluating our operating performance. Realized investment gains and losses are
often excluded by investors when evaluating the overall financial performance of
insurers. We believe our presentation enables readers of our consolidated
statements of income to easily exclude realized investment gains and losses and
the related effects on the consolidated statements of income when evaluating our
operating performance. Our presentation of realized investment gains and losses
net of related policyholder amounts may be different from the presentation used
by other insurance companies and, therefore, amounts in our consolidated
statements of income may not be comparable with amounts reported by other
insurers.
Policyholder benefits and claims increased by 4% to $13,105 million in 1999
from $12,638 million in 1998. This increase reflected total gross policyholder
benefits and claims of $13,084 million, an increase of $78 million from $13,006
million in 1998, before the offsets for loss recognition of $272 million in 1998
period (there were no offsets for loss recognition in 1999) and (reductions) in
or additions to participating contractholder accounts of $(21) million and $96
million directly related to net realized investment gains and losses for the
years ended December 31, 1999 and 1998, respectively. This increase was
primarily attributable to increases of $296 million, or 5%, in Institutional
Business and $272 million, or 26%, in Auto & Home, partially offset by a
decrease of $134 million, or 22%, in International. The Institutional Business
increase was primarily due to overall premium growth within our group dental and
disability businesses. The increase in Auto & Home was primarily due to the St.
Paul acquisition of $195 million, a 6% increase in the number of policies in
force and $23 million of unfavorable claims development due to lower than
expected savings resulting from the implementation of a new technology platform.
The decrease in International was attributable to the sale of a substantial
portion of our Canadian operations.
Interest credited to policyholder account balances decreased by 10% to
$2,441 million in 1999 from $2,711 million in 1998. This decrease was
attributable to reductions of $169 million, or 14%, in Institutional Business,
$64 million, or 4%, in Individual Business and $37 million, or 42%, in
International. Group Insurance in Institutional Business decreased $63 million,
or 14%, primarily due to cancellations in the leveraged corporate-owned life
insurance business attributable to a change in the federal income tax treatment
for those products. In addition, retirement and savings products declined by
$106 million, or 14%, which reflected a shift in policyholders'
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investment preferences from guaranteed interest products to separate account
alternatives. The decrease in Individual Business was due to a 1998 annuity
reinsurance transaction, as well as a shift in policyholders' preferences to
separate account alternatives. The International decrease was due to the sale of
a substantial portion of our Canadian operations.
Policyholder dividends increased by 2% to $1,690 million in 1999 from
$1,651 million in 1998. This increase was attributable to increases of $64
million, or 4%, in Individual Business and $17 million, or 12%, in Institutional
Business, which were somewhat offset by a $42 million, or 66%, decrease in
International. The increase in Individual Business was primarily due to growth
in cash values of policies associated with our large block of traditional life
insurance business combined with a dividend scale increase on certain mature
policies in 1999. Policyholder dividends within Institutional Business vary from
period to period based on participating group insurance contract experience. The
International decrease was due to the sale of a substantial portion of our
Canadian operations.
Other expenses decreased by 16% to $6,755 million in 1999 from $8,019
million in 1998. This decrease reflected total gross other expenses of $6,709
million, a decrease of 19%, from $8,259 million in 1998, before the offset for
amortization of deferred policy acquisition costs directly attributable to net
realized investment gains and losses of $(46) million and $240 million for the
years ended December 31, 1999 and 1998, respectively. Excluding the effect of
the pay down of debt with proceeds from the sale of MetLife Capital Holdings,
Inc. in 1998, other expenses decreased by $1,372 million. This decrease was
attributable to a $1,570 million, or 60%, decrease in Corporate. The decrease in
Corporate was primarily due to a $1,895 million charge in 1998 for sales
practices claims and claims for personal injuries caused by exposure to asbestos
or asbestos-containing products, compared with a $499 million charge in 1999.
The 1999 charge was principally related to the settlement of a multidistrict
litigation proceeding involving alleged improper sale practices, accruals for
sales practices claims not covered by the settlement and other legal costs. The
1998 charge of $1,895 million was comprised of $925 million and $970 million for
sales practices claims and asbestos-related claims, respectively. We recorded
the accrual for sales practices claims based on preliminary settlement
discussions and the settlement history of other insurers.
Prior to the fourth quarter of 1998, we established a liability for
asbestos-related claims based on settlement costs for claims that we had
settled, estimates of settlement costs for claims pending against us and an
estimate of settlement costs for unasserted claims. The amount for unasserted
claims was based on management's estimate of unasserted claims that would be
probable of assertion. A liability is not established for claims which we
believe are only reasonably possible of assertion. Based on this process, our
accrual for asbestos-related claims at December 31, 1997 was $386 million. Our
potential liabilities for asbestos-related claims are not easily quantified, due
to the nature of the allegations against us, which are not related to the
business of manufacturing, producing, distributing or selling asbestos or
asbestos-containing products, adding to the uncertainty in the number of claims
brought against us.
During 1998, we decided to pursue the purchase of insurance to limit our
exposure to asbestos-related claims. In connection with our negotiations with
the casualty insurers to obtain this insurance, we obtained information that
caused us to reassess our accruals for asbestos-related claims. This information
included:
- Information from the insurers regarding the asbestos-related claims
experience of other insureds, which indicated that the number of claims
that were probable of assertion against us in the future was
significantly greater than we had assumed in our accruals. The number of
claims brought against us is generally a reflection of the number of
asbestos-related claims brought against asbestos defendants generally and
the percentage of those claims in which we are included as a defendant.
The information provided to us relating to other insureds indicated that
we had been included as defendants for a
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significant percentage of total asbestos-related claims and that we may
be included in a larger percentage of claims in the future, because of
greater awareness of asbestos litigation generally by potential
plaintiffs and plaintiffs' lawyers and because of the bankruptcy and
reorganization or the exhaustion of insurance coverage of other asbestos
defendants; and that, although volatile, there was an upward trend in the
number of total claims brought against asbestos defendants.
- Information derived from actuarial calculations we made in the fourth
quarter of 1998 in connection with these negotiations, which helped us to
frame, define and quantify this liability. These calculations were made
using, among other things, current information regarding our claims and
settlement experience (which reflected our decision to resolve an
increased number of these claims by settlement), recent and historic
claims and settlement experience of selected other companies and
information obtained from the insurers.
Based on this information, we concluded that certain claims that previously
were considered as only reasonably possible of assertion were now probable of
assertion, increasing the number of assumed claims to approximately three times
the number assumed in prior periods. As a result of this reassessment, we
increased our liability for asbestos-related claims to $1,278 million at
December 31, 1998.
During 1998, we paid $1,407 million of premiums for excess of loss
reinsurance and insurance policies and agreements, consisting of $529 million
for the excess of loss reinsurance agreements for sales practices claims and
excess mortality losses and $878 million for the excess insurance policies for
asbestos-related claims. The excess insurance policies for asbestos-related
claims provide for recovery of losses of up to $1,500 million, while the excess
of loss reinsurance policies provide for recovery of sales practices losses of
up to $550 million and for certain mortality losses with a maximum aggregate
limit of $650 million. We may recover amounts under the policies annually, with
respect to claims paid during the prior calendar year. The policies contain
self-insured retentions and, with respect to asbestos-related claims, annual and
per-claim sublimits, for which we believe adequate provision has been made in
our consolidated financial statements. For additional information regarding the
nature of these claims, see "Business -- Legal Proceedings" and Note 9 of Notes
to Consolidated Financial Statements.
In addition to the decrease in Corporate in 1999, other expenses reflected
a $104 million, or 30%, decrease in International, and increases of $128
million, or 33%, in Auto & Home and $142 million, or 6%, in Individual Business.
The International decrease was primarily due to the sale of a substantial
portion of our Canadian operations. The increase in Auto & Home was primarily
due to the St. Paul acquisition. The increase in Individual Business was
attributable to the net capitalization of deferred acquisition costs, as
discussed below. Excluding the net capitalization of deferred acquisition costs,
other expenses in Individual Business decreased by $81 million, or 3%. This
decrease is primarily attributable to cost reduction initiatives implemented in
1998.
Deferred acquisition costs 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 (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 acquisition costs increased by 13% to $1,160
million in 1999 from $1,025 million in 1998, while amortization of such costs
decreased slightly to $816 million in 1999 from $827 million in 1998.
Amortization of deferred acquisition costs of $862 million and $587 million was
allocated to other expenses in 1999 and 1998, respectively, while the remainder
of the amortization in each year was allocated to realized investment gains
(losses). The increase in amortization of deferred acquisition costs allocated
to other expenses was primarily
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attributable to our Individual Business segment, which increased to $613 million
in 1999 from $364 million in 1998. This increase resulted from our reinsurance
of mortality risk at a cost that is expected to be less than our previously
estimated mortality losses in 1998, as well as refinements in our calculation of
estimated gross margins.
Income tax expense in 1999 was $593 million, or 41%, of income before
provision for income taxes and extraordinary item compared with $740 million, or
35%, in 1998. The 1999 effective tax rate differs from the corporate tax rate of
35% primarily due to the impact of surplus tax. We are 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. The surplus tax is estimated each year and adjusted the
following year based on actual industry experience. As a stock company, we will
no longer be subject to the surplus tax after the effective date of the
demutualization.
Demutualization expenses, net of income taxes, were $225 million in 1999.
These costs related to our ongoing demutualization efforts.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
Premiums increased by 2% to $11,503 million in 1998 from $11,278 million in
1997. This increase was attributable to strong growth in Institutional Business
of $470 million, or 10%, and in Auto & Home of $49 million, or 4%. These
increases were partially offset by a decrease in International of $290 million,
or 32%. Institutional Business' premium growth was driven primarily by increases
in group life premiums. In addition, Institutional Business' group non-medical
health benefited from market share growth in dental products and services and
long-term care. Auto & Home's premium increase was primarily due to growth in
non-standard auto insurance policies. International's premium decrease was
primarily due to the dispositions of substantial portions of our U.K. operations
in October 1997 and of our Canadian operations in July 1998.
Universal life and investment-type product policy fees decreased by 4% to
$1,360 million in 1998 from $1,418 million in 1997. This decrease was
attributable to reductions of $69 million, or 50%, in International and $38
million, or 4%, in Individual Business. Substantially all of International's
policy fee decrease resulted from the divestitures of substantial portions of
our U.K. and Canadian operations. The Individual Business policy fee decrease
was primarily due to reinsurance treaties entered into during 1998, related to
$86 billion of universal life insurance in-force, which were offset in part by
continued growth of $75 million in annuities and investment products. These
decreases were also offset by a $49 million increase in Institutional Business
policy fees, due to an increase in sales of products used in executive and
corporate-owned benefit plans during 1998.
Net investment income increased by 8% to $10,228 million in 1998 from
$9,491 million in 1997, primarily due to higher other investment income of $473
million, or 129%, higher fixed maturities income of $118 million, or 2%,
improved real estate income after investment expenses and depreciation of $101
million and reduced investment expenses of $198 million. These increases in net
investment income were partially offset by reduced investment income in mortgage
loans on real estate of $112 million, or 7%, and other limited partnership
interests of $106 million, or 35%. The increase in other investment income to
$841 million in 1998 from $368 million in 1997 was principally due to a $289
million increase in revenue attributable to our securities lending program
resulting from the implementation of SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities during 1998.
This increase was offset by a commensurate increase in other expenses. The
remainder of this increase was primarily due to higher fees we received as a
result of bond prepayments, calls and tenders, which reflected, in part,
declining interest rates in 1998. The increase in fixed maturity investment
income to $6,563 million in 1998 from $6,445 million in 1997 was primarily
attributable
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to increased principal balances due, in part, to the reinvestment of proceeds
from the sale of MetLife Capital Holdings, Inc. Likewise, the reduction in
investment income from mortgage loans on real estate to $1,572 million in 1998
from $1,684 million in 1997 was due to a reduction in principal balances in
MetLife Capital Holdings, Inc. and a substantial portion of our Canadian
operations, which were sold in 1998, the proceeds from which were reinvested in
fixed maturities. The real estate investment income improvement represents the
result of real estate expenses reducing more than real estate income in 1998,
the final leg of our sales program. Since the inception of our sales program in
1995, the average yield on our holdings of real estate has increased to 10.4% in
1998. Investment income from other limited partnership interests decreased to
$196 million in 1998 from $302 million in 1997. Income from other limited
partnership interests fluctuate from period to period due to the unpredictable
nature of realized gains from these partnerships.
Other revenues increased by 34% to $1,994 million in 1998 from $1,491
million in 1997. This increase was primarily attributable to growth of $218
million, or 61%, in Institutional Business, $136 million, or 40%, in Individual
Business and $135 million, or 20%, in Asset Management. The Institutional
Business increase was due to higher administrative fees of $70 million derived
from separate accounts, $56 million from our defined contribution plan
record-keeping services and $32 million from funds held on deposit related to a
reinsurance agreement entered into during 1997. Individual Business' increase
was due to the acquisition of Nathan & Lewis ($62 million of the increase),
additional commission and fee income associated with reinsurance treaties ($39
million of the increase) and growth in expense reimbursements from reinsurers
for administrative costs incurred related to policies covered under reinsurance
agreements ($13 million of the increase). The increase in Asset Management was
attributable to higher management and advisory fees related to growth in assets
managed.
Net realized investment gains increased by 157% to $2,021 million in 1998
from $787 million in 1997. This increase reflected total gross realized
investment gains of $2,629 million, an increase of 158%, from $1,018 million in
1997, before the offsets for the additional amortization of deferred acquisition
costs of $240 million and $70 million, loss recognition for the policy
liabilities of $272 million and $126 million and additional credits to
participating contracts of $96 million and $35 million related to the assets
sold in 1998 and 1997, respectively. The increase in gross realized investment
gains was primarily attributable to a sales program initiated in the fourth
quarter of 1998, which we conducted as part of our strategy of repositioning our
investment portfolio in order to provide a higher operating rate of return on
our invested assets. In connection with this repositioning, we reduced our
investments in treasury securities and corporate equities and increased our
investments in fixed maturities with a higher current yield. We sold
approximately $2.2 billion of corporate equities and reinvested these proceeds
into other fixed maturity securities, which provide a higher current return.
Realized investment gains from fixed maturity and equity securities were $1,567
million in 1998, a 358% increase from $342 million in 1997. Net realized
investment gains also increased by $392 million from the sales of MetLife
Capital Holdings, Inc. and a substantial portion of our Canadian operations
during 1998.
Policyholder benefits and claims increased by 2% to $12,638 million in 1998
from $12,403 million in 1997. This increase reflected total gross policyholder
benefits and claims of $13,006 million, an increase of 4%, from $12,564 million
in 1997, before the offsets for loss recognition of $272 million and $126
million and additions to participating contractholder accounts of $96 million
and $35 million directly related to net realized investment gains in 1998 and
1997, respectively. This increase was attributable to increases of $482 million,
or 8%, in Institutional Business partially offset by a decrease of $256 million
in International attributable to the U.K. and Canadian divestitures. The
Institutional Business increase was commensurate with the increase in
Institutional Business premiums of $470 million, and was also attributable to
less favorable experience on participating group insurance contracts, which were
offset by reduced dividends to those policyholders of $163 million.
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<PAGE> 65
Interest credited to policyholder account balances decreased by 6% to
$2,711 million in 1998 from $2,878 million in 1997. This decrease was primarily
attributable to declines of $120 million, or 9%, in Institutional Business and
$48 million, or 35%, in International. Retirement and savings products in
Institutional Business declined by $186 million, or 20%, due to a shift in
customers' investment preferences from guaranteed interest products to separate
account alternatives and the continuation of the low interest rate environment.
The International decline was due to the divestitures of substantial portions of
our U.K. and Canadian operations.
Policyholder dividends decreased by 5% to $1,651 million in 1998 from
$1,742 million in 1997. This decrease was attributable to reductions of $163
million, or 53%, in Institutional Business and $33 million, or 34%, in
International. The Institutional Business decrease was due to less favorable
claims experience on participating group insurance contracts. The International
decrease was due to the U.K. and Canadian divestitures. These decreases were
partially offset by a $105 million, or 8%, increase in Individual Business,
primarily due to dividend increases from growth in cash values in policies
associated with our large block of traditional life insurance business, offset
by reductions in policyholder dividend scales.
Other expenses increased by 39% to $8,019 million in 1998 from $5,771
million in 1997. This increase reflected total gross other expenses of $8,259
million, an increase of 41%, from $5,841 million in 1997, before the offset for
accelerated amortization of deferred policy acquisition costs directly
attributable to net realized investment gains of $240 million and $70 million in
1998 and 1997, respectively. This increase was primarily attributable to a
charge of $1,895 million in 1998 for sales practices claims and claims for
personal injuries caused by exposure to asbestos, or asbestos-containing
products, compared with $300 million in 1997. These amounts have been charged to
the Corporate segment. In addition, the increase in other expenses in 1998
included $266 million resulting from a change in accounting for our securities
lending program. This increase related to our securities lending program, which
is reflected in the results of operations for each business segment, is
commensurate with a related increase in investment income. Expenses in
Institutional Business increased by $435 million, or 37%, due to higher
administrative expenses, the majority of which are reimbursed and are reflected
in other revenues, related to growth in our administrative service contracts
business as well as a full year's expenses attributable to our December 1997
acquisition of the defined contribution and participant services business from
Bankers Trust Corporation. Individual Business expenses increased by $183
million, or 8%, from 1997, primarily as a result of the acquisition of Nathan &
Lewis and the inclusion of a full year's activity from the October 1997
acquisition of Security First Group.
Capitalization of deferred acquisition costs increased slightly to $1,025
million in 1998 from $1,000 million in 1997 while amortization of such costs
decreased by 2% to $827 million in 1998 from $841 million in 1997. Amortization
of deferred acquisition costs of $587 million and $771 million was allocated to
other expenses in 1998 and 1997, respectively, while the remainder of the
amortization in each year was allocated to realized investment gains and losses.
The decrease in amortization of deferred acquisition costs allocated to other
expenses was primarily attributable to our individual business segment which
decreased to $364 million in 1998 from $546 million in 1997. Approximately $87
million of this decrease was attributable to higher than expected future
investment spreads on our traditional business and approximately $96 million of
this decrease was attributable to higher estimated gross margins which resulted
from the reinsurance of mortality risk at a cost that is expected to be less
than our previously estimated mortality losses.
Income tax expense in 1998 was $740 million, or 35%, of income before
provision for income taxes, discontinued operations and extraordinary item,
compared with $468 million, or 28%, of income before provision for income taxes,
discontinued operations and extraordinary item in 1997. The difference between
the 1998 and 1997 effective tax rates was primarily due to the impact of surplus
tax and, in 1997, taxes on sales of subsidiaries.
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<PAGE> 66
Demutualization expenses, net of income taxes, were $4 million in 1998.
These costs related to our ongoing demutualization efforts.
INDIVIDUAL BUSINESS
The following table presents summary consolidated financial information for
Individual Business for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Premiums............................................... $ 4,289 $ 4,323 $ 4,327
Universal life and investment-type product policy
fees................................................. 888 817 855
Net investment income.................................. 5,346 5,480 4,754
Other revenues......................................... 558 474 338
Net realized investment gains (losses)................. (14) 659 356
------- ------- -------
11,067 11,753 10,630
------- ------- -------
EXPENSES
Policyholder benefits and claims....................... 4,625 4,606 4,597
Interest credited to policyholder account balances..... 1,359 1,423 1,422
Policyholder dividends................................. 1,509 1,445 1,340
Other expenses......................................... 2,719 2,577 2,394
------- ------- -------
10,212 10,051 9,753
------- ------- -------
Income before provision for income taxes............... 855 1,702 877
Provision for income taxes............................. 300 633 278
------- ------- -------
Net income............................................. $ 555 $ 1,069 $ 599
======= ======= =======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998 --
INDIVIDUAL BUSINESS
Premiums decreased by $34 million, or 1%, to $4,289 million in 1999 from
$4,323 million in 1998. Premiums from insurance products decreased by $16
million to $4,215 million in 1999 from $4,231 million in 1998. 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 decreased by $18 million, or 20%, to $74 million in 1999 from $92
million in 1998, primarily due to lower sales of supplementary contracts with
life contingencies. The relatively high level of supplemental contract premiums
in 1998 reflected the initial offering of a payout annuity feature in that year.
Universal life and investment-type product policy fees increased by $71
million, or 9%, to $888 million in 1999 from $817 million in 1998. Policy fees
from insurance products increased by $3 million, or 1%, to $571 million in 1999
from $568 million in 1998. This increase is attributable to a $77 million
increase in separate account contract fees arising from increased sales of
variable life products. This increase was almost entirely offset by reinsurance
treaties entered into during 1998 related to $86 billion of universal life
insurance in-force, which constituted the majority of our mortality risk on
universal life business written subsequent to January 1, 1983. Policy fees from
annuity and investment products increased by $68 million, or 27%, to $317
million in 1999 from $249 million in 1998, primarily due to the continued growth
in deposits for investment products and stock market appreciation.
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<PAGE> 67
Other revenues increased by $84 million, or 18%, to $558 million in 1999
from $474 million in 1998. Other revenues for insurance products increased by
$85 million, or 19%, to $521 million in 1999 from $436 million in 1998. This
increase was primarily attributable to the inclusion of a full year's activity
of Nathan & Lewis, as well as increased commission and fee income associated
with increased sales of non-proprietary products. Other revenues for annuity and
investment products were essentially flat at $37 million in 1999 compared with
$38 million in 1998.
Policyholder benefits and claims increased by $19 million to $4,625 million
in 1999 from $4,606 million in 1998. Policyholder benefits and claims for
insurance products increased by $85 million, or 2%, to $4,450 million in 1999
from $4,365 million in 1998. This increase was primarily due to growth in our
existing block of traditional life policyholder liabilities. Policyholder
benefits and claims for annuity and investment products decreased by $66
million, or 27%, to $175 million in 1999 from $241 million in 1998 consistent
with the decreased premiums discussed above.
Interest credited to policyholder account balances decreased by $64
million, or 4%, to $1,359 million in 1999 from $1,423 million in 1998. Interest
on insurance products decreased by $18 million, or 4%, to $419 million in 1999
from $437 million in 1998. This decrease was primarily due to reduced crediting
rates on our universal life products. Interest on annuity and investment
products decreased by $46 million, or 5%, to $940 million in 1999 from $986
million in 1998. This decrease was due to a 1998 reinsurance transaction, a
shift in policyholders' preferences to separate account alternatives and reduced
crediting rates.
Policyholder dividends increased by $64 million, or 4%, to $1,509 million
in 1999 from $1,445 million in 1998. This increase was due to dividend increases
from growth in cash values of policies associated with our large block of
traditional individual life insurance business, combined with a dividend scale
increase in 1999.
Other expenses increased by $142 million, or 6%, to $2,719 million in 1999
from $2,577 million in 1998. Excluding the net capitalization of deferred
acquisition costs, other expenses decreased by $81 million, or 3%, to $2,888
million in 1999 from $2,969 million in 1998. Other expenses related to insurance
products decreased by $160 million, or 7%, to $2,239 million in 1999 from $2,399
million in 1998. This decrease was attributable to expense management
initiatives instituted in 1999 and an adjustment to the allocation of expenses
in 1999 between our insurance and annuity products to better match expenses to
the mix of our business. These decreases were partially offset by a $44 million
increase due to the inclusion of a full year's activity of Nathan & Lewis. Other
expenses related to annuity and investment products increased $79 million, or
14%, to $649 million in 1999 from $570 million in 1998, primarily due to the
adjustment of expenses noted above.
Deferred acquisition costs 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 (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 acquisition costs increased to $782 million in
1999 from $756 million in 1998 while total amortization of such costs decreased
to $567 million in 1999 from $604 million in 1998. Amortization of deferred
acquisition costs of $613 million and $364 million was allocated to other
expenses in 1999 and 1998, respectively, while the remainder of the amortization
in each year was allocated to realized investment gains (losses). Amortization
of deferred acquisition costs allocated to other expenses related to insurance
products increased to $515 million in 1999 from $267 million in 1998
attributable to the reinsurance transaction discussed above and refinements in
our calculation of estimated gross margins. Amortization of annuity products
deferred acquisition costs allocated to other expenses remained essentially
unchanged at $98 million in 1999 compared with $97 million in 1998.
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<PAGE> 68
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997 --
INDIVIDUAL BUSINESS
Premiums decreased slightly to $4,323 million in 1998 compared with $4,327
million in 1997. Premiums from insurance products decreased 1% to $4,231 million
in 1998 compared with $4,266 million in 1997. Higher premiums from insurance
riders, which permit the purchase of additional coverage, on our block of
traditional individual life insurance business was offset by declines in
premiums of traditional life insurance policies of $27 million, reflecting a
continued shift in customers' preferences from those policies to variable life
products. Premiums from annuities and investment products increased by $31
million, or 51%, to $92 million in 1998 from $61 million in 1997, primarily due
to an increase in the number of conversions from annuities to payout annuities
with life contingencies related to our traditional business.
Universal life and investment-type product policy fees decreased by 4% in
1998 to $817 million from $855 million in 1997. Policy fees from insurance
products decreased by $113 million, or 17%, to $568 million in 1998 from $681
million in 1997, primarily due to reinsurance treaties entered into during 1998
relating to $86 billion of universal life insurance in-force, constituting most
of our universal life business written subsequent to January 1, 1983. Excluding
the impact of the reinsurance treaties, policy fees from insurance products
increased by $47 million, or 7%, primarily due to an increase in insurance
coverages provided in 1998 compared with 1997. Policy fees from annuities and
investment products increased by $75 million, or 43%, to $249 million in 1998
from $174 million in 1997, due primarily to the growth in deposits for
tax-advantaged investment products as well as stock market appreciation.
Other revenues increased by 40% to $474 million in 1998 from $338 million
in 1997. Other revenues for insurance products increased by $127 million, or
41%, to $436 million in 1998 from $309 million in 1997. This increase was
primarily due to the acquisition of Nathan & Lewis, additional commission and
fee income associated with reinsurance treaties, and an increase in the expense
allowance under a reinsurance treaty involving term products resulting from an
increase in policies in-force covered by those treaties. Other revenues for
annuities and investment products increased by $9 million, or 31%, to $38
million in 1998 from $29 million in 1997, primarily due to the acquisition of
Security First Group in October 1997.
Policyholder benefits and claims increased slightly to $4,606 million in
1998 compared with $4,597 million in 1997. Policyholder benefits and claims for
insurance products decreased by $80 million, or 2%, to $4,365 million in 1998
from $4,445 million in 1997. This decrease was primarily due to an increase in
claims ceded of $131 million under the universal life reinsurance treaties
discussed above offset by the acquisition of Nathan & Lewis. Policyholder
benefits and claims for annuity and investment products increased by $89
million, or 59%, to $241 million in 1998 from $152 million in 1997, primarily
due to the increase in premiums described above.
Interest credited to policyholder account balances increased slightly to
$1,423 million in 1998 compared with $1,422 million in 1997. Interest on
insurance products increased by $8 million, or 2%, to $437 million in 1998 from
$429 million in 1997, primarily due to an increase in policyholder account
balances. Interest on annuities and investment products decreased slightly to
$986 million in 1998 compared with $993 million in 1997, primarily due to a
reduction in crediting rates attributable to the declining general interest rate
environment. This decrease was offset by the inclusion of a full year's activity
of $94 million related to Security First Group, which was acquired in October
1997.
Policyholder dividends increased by 8% to $1,445 million in 1998 from
$1,340 million in 1997, primarily due to dividend increases from growth in cash
values in policies associated with our large block of traditional individual
life insurance business, offset by reductions in dividend scales.
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<PAGE> 69
Other expenses increased by 8% to $2,577 million in 1998 from $2,394
million in 1997. Excluding the net capitalization of deferred acquisition costs,
other expenses increased by 13% to $2,969 million in 1998 from $2,624 million in
1997. Other expenses related to insurance products increased by $158 million, or
7%, to $2,399 million in 1998 from $2,241 million in 1997, primarily due to the
acquisition of Nathan & Lewis and higher non-field and sales office expenses.
Other expenses related to annuity and investment products increased by $187
million, or 49%, to $570 million in 1998 from $383 million in 1997, $94 million
of which was due to the inclusion of a full year's activity from Security First
Group. The remaining variance was due to higher general and administrative
expenses commensurate with the growth in our businesses.
Capitalization of deferred acquisition costs decreased to $756 million in
1998 from $776 million in 1997 and amortization of such costs was essentially
unchanged at $604 million in 1998 from $607 million in 1997. Amortization of
deferred acquisition costs of $364 million and $546 million was allocated to
other expenses in 1998 and 1997, respectively, while the remainder of the
amortization in each year was allocated to realized investment gains and losses.
Amortization of deferred acquisition costs allocated to other expenses related
to insurance products decreased to $267 million in 1998 from $455 million in
1997. Approximately $87 million of this decrease was attributable to higher than
expected future investment spreads on our traditional business and approximately
$96 million of this decrease was attributable to higher estimated gross margins
resulting from the reinsurance of mortality risk at a cost that is expected to
be less than our previously estimated mortality losses. Amortization of deferred
acquisition costs allocated to other expenses related to annuity products
increased in 1998 to $97 million from $91 million in 1997, reflecting growth in
the business.
INSTITUTIONAL BUSINESS
The following table presents summary consolidated financial information for
Institutional Business for the periods as indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Premiums................................................. $ 5,525 $ 5,159 $4,689
Universal life and investment-type product policy fees... 502 475 426
Net investment income.................................... 3,755 3,885 3,754
Other revenues........................................... 629 575 357
Net realized investment gains (losses)................... (31) 557 45
------- ------- ------
10,380 10,651 9,271
------- ------- ------
EXPENSES
Policyholder benefits and claims......................... 6,712 6,416 5,934
Interest credited to policyholder account balances....... 1,030 1,199 1,319
Policyholder dividends................................... 159 142 305
Other expenses........................................... 1,589 1,613 1,178
------- ------- ------
9,490 9,370 8,736
------- ------- ------
Income before provision for income taxes................. 890 1,281 535
Provision for income taxes............................... 323 435 196
------- ------- ------
Net income............................................... $ 567 $ 846 $ 339
======= ======= ======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998 --
INSTITUTIONAL BUSINESS
Premiums increased by 7% to $5,525 million in 1999 from $5,159 million in
1998. Group insurance premiums increased by $478 million, or 10%, to $5,095
million in 1999 from
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<PAGE> 70
$4,617 million in 1998. This increase was mainly attributable to strong sales
and improved policyholder retention in non-medical health, primarily our dental
and disability businesses. Retirement and savings premiums decreased by $112
million, or 21%, to $430 million in 1999 from $542 million in 1998, primarily
due to premiums received from several large existing customers in 1998.
Universal life and investment-type product policy fees increased by 6%, to
$502 million in 1999 from $475 million in 1998. This increase reflected the
continued growth in the sale of products used in executive and corporate-owned
benefit plans due to the continued favorable tax status associated with these
products.
Other revenues increased by 9% to $629 million in 1999 from $575 million in
1998. Group life decreased by $51 million, or 77%, to $15 million in 1999 from
$66 million in 1998. This decrease was primarily due to lower income in 1999
related to funds used to seed separate accounts. Non-medical health increased by
$61 million, or 27%, to $287 million in 1999 from $226 million in 1998. This
increase was primarily due to growth in our dental administrative service
business. Retirement and savings increased by $44 million, or 16%, to $327
million in 1999 from $283 million in 1998. This increase reflected higher
administrative fees derived from separate accounts and our defined contribution
record-keeping services. In addition, the 1999 results reflected interest on
funds held on deposit related to a reinsurance transaction entered into during
December 1998.
Policyholder benefits and claims increased by 5% to $6,712 million in 1999
from $6,416 million in 1998. Group insurance increased by $362 million, or 8%,
to $4,857 million in 1999 from $4,495 million in 1998. This increase was
primarily due to overall growth and is comparable to the growth in premiums
discussed above. Retirement and savings decreased by $66 million, or 3%, to
$1,855 million in 1999 from $1,921 million in 1998. The decrease was
commensurate with the premium variance discussed above, partially offset by an
increase in liabilities associated with the continued accumulation of interest
on liabilities related to our large block of non-participating annuity business.
Interest credited to policyholder account balances decreased by 14% to
$1,030 million in 1999 from $1,199 million in 1998. Group insurance decreased by
$63 million, or 14%, to $398 million in 1999 from $461 million in 1998. This
decrease was primarily due to cancellations in our leveraged corporate-owned
life insurance business attributable to a change in the federal income tax
treatment for these products. Retirement and savings decreased by $106 million,
or 14%, to $632 million in 1999 from $738 million in 1998 due to a shift in
customers' investment preferences from guaranteed interest products to separate
account alternatives and the continuation of the low interest rate environment.
Policyholder dividends increased by 12% to $159 million in 1999 from $142
million in 1998. Non-medical health increased by $26 million to $27 million in
1999. Group life and retirement and savings decreased $9 million, or 6%, to $132
million in 1999 from $141 million in 1998. Policyholder dividends vary from
period to period based on participating group insurance contract experience.
Other expenses decreased by 1% to $1,589 million in 1999 from $1,613
million in 1998. Other expenses related to group life decreased by $14 million,
or 4%, to $382 million in 1999 from $396 million in 1998. Other expenses related
to non-medical health decreased by $18 million, or 3%, to $673 million in 1999
from $691 million in 1998. These decreases were primarily attributable to
reductions in non-sales positions and operational efficiencies. Other expenses
related to retirement and savings products increased by $8 million, or 2%, to
$534 million in 1999 from $526 million in 1998. This increase was due to higher
interest expense of $47 million primarily due to commercial paper issued in
connection with amounts placed on deposit related to a 1998 reinsurance
transaction and a $15 million increase in volume-related expenses, including
premium taxes, separate account investment management expenses and commissions.
These
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<PAGE> 71
increases were partially offset by a $54 million decrease due to reductions in
non-sales positions and other administrative expenses.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997 --
INSTITUTIONAL BUSINESS
Premiums increased by 10% in 1998 to $5,159 million from $4,689 million in
1997. Group insurance premiums increased by $385 million, or 9%, in 1998 to
$4,617 million from $4,232 million in 1997. Group life premiums increased by
$153 million, or 5%, to $3,274 million in 1998 from $3,121 million in 1997.
Group non-medical health premiums increased by $232 million, or 21%, to $1,343
million in 1998 from $1,111 million in 1997, due primarily to market share
growth in our dental and long-term care businesses resulting from our expanding
network of dentists and our appointment as of January 1, 1998 by the American
Association of Retired Persons ("AARP") to offer long-term care products to its
members and the effect of a full year's results related to a disability block of
business acquired in late 1997. Retirement and savings premiums increased by $85
million, or 19%, to $542 million in 1998 from $457 million in 1997, due
primarily to premiums received from one large existing customer.
Universal life and investment-type product policy fees increased by 12% in
1998 to $475 million from $426 million in 1997. This increase reflected the
growth in the sale of products used in executive and corporate-owned benefit
plans during 1998.
Other revenues increased by 61% in 1998 to $575 million from $357 million
in 1997. Other revenues from group insurance increased by $75 million, or 35%,
to $292 million in 1998 from $217 million in 1997. This increase was primarily
attributable to increased administrative fee income from significant growth in
insurance contracts having separate account features, the largest being the
in-force AARP block of long-term care business. Other revenues from retirement
and savings products increased by $143 million, or 102%, to $283 million in 1998
from $140 million in 1997. This gain reflected increased administrative fees
derived from separate accounts of $21 million and $56 million related to our
defined contribution record-keeping services. The December 1997 acquisition of
the defined contribution record-keeping and participant services business from
Bankers Trust Corporation accounted for the majority of the growth in our
administrative service fee income during 1998. In addition, the 1998 results
reflected an increase of $32 million related to the full-year interest on funds
held on deposit related to a reinsurance transaction entered into during
December 1997.
Policyholder benefits and claims increased by 8% to $6,416 million in 1998
from $5,934 million in 1997. Group insurance increased by $469 million, or 12%,
to $4,495 million in 1998 from $4,026 million in 1997. This increase reflected
an overall growth in the business and less favorable experience on participating
group insurance contracts, and an increase of $20 million related to a full
year's results from a disability block of business acquired in late 1997, which
is partially offset by reduced dividends of $161 million. Retirement and savings
increased slightly to $1,921 million in 1998 compared with $1,908 million in
1997 primarily due to the ongoing accumulation of interest related to our large
block of non-participating annuity business.
Interest credited to policyholder account balances decreased by 9% to
$1,199 million in 1998 from $1,319 million in 1997. Interest on group insurance
products increased by $66 million, or 17%, to $461 million in 1998 from $395
million in 1997, primarily due to growth in deposits for tax-advantaged
investment products. Interest on retirement and savings products decreased by
$186 million, or 20%, to $738 million in 1998 from $924 million in 1997 due to a
shift in customers' investment preferences from guaranteed interest products to
separate account alternatives.
Policyholder dividends decreased by 53% to $142 million in 1998 from $305
million in 1997. These dividends vary from period to period based on the claims
experience of participating group insurance contracts.
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<PAGE> 72
Other expenses increased by 37% to $1,613 million in 1998 from $1,178
million in 1997. Other expenses related to group insurance increased by $204
million, or 23%, to $1,087 million in 1998 from $883 million in 1997. The
primary causes of this increase were higher premium taxes and sales commissions
related to premium growth; costs incurred in connection with various strategic
initiatives, which were intended to expand our penetration of the small and
medium case institutional markets; and costs incurred in connection with
initiatives that focused on improving our service delivery capabilities through
investments in technology. Group insurance also experienced an increase in
administrative expenses, the majority of which are reimbursed, as a result of
the AARP business. Other expenses related to retirement and savings products
increased by $231 million, or 78%, to $526 million in 1998 from $295 million in
1997. This increase was due to $45 million of ongoing expenses attributable to
the acquisition of the defined contribution record-keeping and participant
services business of Bankers Trust Corporation and a change in the presentation
of expenses relating to our securities lending program in 1998 of $65 million.
In addition, the increase of cash flows into separate accounts resulted in
higher investment management and other administrative expenses.
ASSET MANAGEMENT
The following table presents summary consolidated financial information for
Asset Management for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Net investment income....................................... $ 80 $ 75 $ 78
Other revenues.............................................. 803 817 682
---- ---- ----
883 892 760
OTHER EXPENSES.............................................. 741 740 629
---- ---- ----
Income before provision for income taxes and minority
interest.................................................. 142 152 131
Provision for income taxes.................................. 37 44 36
Minority interest........................................... 54 59 50
---- ---- ----
Net income.................................................. $ 51 $ 49 $ 45
==== ==== ====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998 --
ASSET MANAGEMENT
Other revenues, which are primarily comprised of management and advisory
fees, decreased by $14 million, or 2%, to $803 million in 1999 from $817 million
in 1998, reflecting an overall decrease in assets under management of $1
billion, or 1%, to $190 billion in 1999 from $191 billion in 1998. This decrease
in assets was primarily attributable to a reduction in assets under management
in value-style 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 were essentially unchanged in 1999 from 1998. Total
compensation and benefits of $424 million consisted of approximately 53% base
compensation and 47% variable compensation. Base compensation increased by $10
million, or 5%, to $225 million in 1999 from $215 million in 1998, primarily due
to annual salary increases and higher staffing levels. Variable compensation
decreased by $15 million, or 7%, to $199 million in 1999 from $214 million in
1998. 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
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<PAGE> 73
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 $6 million, or 2%, to $317 million in 1999 from $311 million in 1998,
primarily due to increased discretionary spending.
Minority interest, reflecting the value of third-party ownership interests
in Nvest, decreased by $5 million, or 9%, to $54 million in 1999 from $59
million in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997 --
ASSET MANAGEMENT
Other revenues, which are primarily comprised of management and advisory
fees, increased by 20% to $817 million in 1998 from $682 million in 1997.
Management and advisory fees are typically calculated based on a percentage of
assets under management, which increased by $16 billion, or 9%, to $191 billion
in 1998 from $175 billion in 1997. This increase was mainly attributable to net
cash inflows to customers' accounts of $5 billion and overall market
appreciation of $11 billion during 1998. Management and advisory fees earned are
not necessarily proportionate to average assets managed due to changes in
account mix.
Other expenses increased by 18% to $740 million in 1998 from $629 million
in 1997. This increase was primarily due to increases in compensation and
benefits of $62 million, or 17%, and general and administrative expenses of $49
million, or 19%. Compensation and benefits of $429 million consisted of 50% base
compensation and 50% variable compensation. Base compensation increased by $31
million, or 17%, to $215 million in 1998 from $184 million in 1997, primarily
due to annual salary increases and higher staffing. Variable compensation
increased by $31 million, or 17%, to $214 million in 1998 from $183 million in
1997, due to increased incentive payments based on profitability, investment
portfolio performance, new business sales and growth in revenues and profits.
General and administrative expenses increased by $49 million, or 19%, to $311
million in 1998 from $262 million in 1997, due to expanded business activities
and distribution and marketing initiatives.
Minority interest increased by $9 million, or 18%, to $59 million in 1998
from $50 million in 1997.
AUTO & HOME
The following table presents summary consolidated financial information for
Auto & Home for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Premiums................................................. $1,751 $1,403 $1,354
Net investment income.................................... 103 81 71
Other revenues........................................... 21 36 25
Net realized investment gains............................ 1 122 9
------ ------ ------
1,876 1,642 1,459
------ ------ ------
EXPENSES
Policyholder benefits and claims......................... 1,301 1,029 1,003
Other expenses........................................... 514 386 351
------ ------ ------
1,815 1,415 1,354
------ ------ ------
Income before provision for income taxes................. 61 227 105
Provision for income taxes............................... 5 66 31
------ ------ ------
Net income............................................... $ 56 $ 161 $ 74
====== ====== ======
</TABLE>
71
<PAGE> 74
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31,
1998 -- AUTO & HOME
Premiums increased by 25% to $1,751 million in 1999 from $1,403 million in
1998 primarily due to the St. Paul acquisition. Excluding the impact of the St.
Paul acquisition, premiums increased $88 million, or 6%. Auto premiums increased
by $54 million, or 5%, to $1,218 million in 1999 from $1,164 million in 1998.
This increase was due to growth in both our standard and non-standard auto
insurance books of business. "Non-standard" auto insurance is insurance for
risks bearing higher loss experience or loss potential than risks covered by
standard auto insurance policies. In addition, the standard auto policyholder
retention increased 1% to 88%. Homeowner premiums increased by $30 million, or
13%, to $255 million in 1999 from $225 million in 1998 due to higher new
business production, an average premium increase of 1% and increased
policyholder retention to 90% in 1999 from 89% in 1998. Premiums from other
personal lines increased to $18 million in 1999 from $14 million in 1998.
Other revenues decreased by 42% to $21 million in 1999 from $36 million in
1998. This decrease was primarily attributable to a decrease in payments
resulting from experience-related adjustments under a reinsurance agreement
related to the disposition of our reinsurance business in 1990.
Expenses increased by 28% to $1,815 million in 1999 from $1,415 million in
1998. This resulted in an increase in the COMBINED RATIO to 103.7% in 1999 from
100.8% in 1998. Excluding the impact of the St. Paul acquisition, expenses
increased by $116 million, or 8%, which resulted in an increase in the combined
ratio to 102.8% in 1999 from 100.8% in 1998. This increase was primarily due to
higher overall loss costs in the auto and homeowners line as discussed below. In
addition, both lines experienced modestly elevated acquisition expenses due to
increased levels of new business premiums.
Policyholder benefits and claims increased by 26% to $1,301 million in 1999
from $1,029 million in 1998. Correspondingly, the auto and homeowners loss
ratios increased to 76.1% from 74.9% and to 67.2% from 65.0% in 1999 and 1998,
respectively. Excluding the impact of the St. Paul acquisition, policyholder
benefits and claims increased by $85 million, or 8%. Auto policyholder benefits
and claims increased by $67 million, or 8%, to $939 million in 1999 from $872
million in 1998, due to a 6% increase in the number of policies in force and $23
million of unfavorable claims development due to lower than expected savings
resulting from the implementation of a new technology platform. Correspondingly,
the AUTO LOSS RATIO increased to 77.1% in 1999 from 74.9% in 1998. Homeowners
benefits and claims increased $17 million, or 12%, to $163 million in 1999 from
$146 million in 1998 due to increased volume of this book of business. The
homeowners loss ratio decreased by 0.6% to 64.4% in 1999 from 65.0% in 1998.
Other personal lines benefits and claims increased by $1 million to $12 million
in 1999 from $11 million in 1998.
Other expenses increased by 33% to $514 million in 1999 from $386 million
in 1998, which resulted in an increase in our EXPENSE RATIO to 29.3% in 1999
from 27.4% in 1998. Excluding the impact of the St. Paul acquisition, operating
expenses increased $31 million, or 8%, resulting in an increase in our expense
ratio to 27.9% in 1999 from 27.4% in 1998. This increase was primarily due to
$10 million in additional administration expenses and $23 million in new
business acquisition expenses, which were partially offset by a reduction in
employee-related expenses.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997 --
AUTO & HOME
Premiums increased by 4% in 1998 to $1,403 million from $1,354 million in
1997. Auto premiums increased by $41 million, or 4%, to $1,164 million in 1998
from $1,123 million in 1997. This increase was caused by continued growth in
premiums from our non-standard auto insurance book of business. In addition, our
overall auto policyholder retention increased to 87%
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<PAGE> 75
from 86%. These increases were offset in part by a mandated rate decrease for
standard auto insurance of $9 million, or 4%, in 1998 in Massachusetts, which
comprised 19% of our total auto premiums in both 1998 and 1997. Homeowners
premiums increased by $8 million, or 4%, to $225 million in 1998 from $217
million in 1997. This increase was attributable to contractual inflationary
adjustments of 2% and an average rate increase of 3% in 1998, which outpaced a
1% decline in the number of policies in force. This decline in the number of
policies in force, which occurred in states having greater exposure to severe
hurricanes, reflects our continued efforts to reduce catastrophe losses.
Premiums from other personal lines were stable at $14 million in both 1998 and
1997.
Other revenues increased by 44% to $36 million in 1998 from $25 million in
1997. This increase was primarily attributable to an increase of payments to us
resulting from experience-related adjustments under a reinsurance agreement
related to the disposition of our reinsurance business in 1990.
Expenses increased by 5% to $1,415 million in 1998 from $1,354 million in
1997, primarily due to higher catastrophe-related policyholder benefits and
claims of $35 million, resulting in our combined ratio increasing to 100.8% in
1998 from 99.9% in 1997. The remaining increase in expenses was more than offset
by higher net earned premiums, resulting in our combined ratio, excluding
catastrophes, decreasing to 96.8% in 1998 from 98.6% in 1997.
Policyholder benefits and claims increased by 3% to $1,029 million in 1998
from $1,003 million in 1997. Excluding catastrophes, auto policyholder benefits
and claims decreased slightly to $857 million in 1998 compared with $864 million
in 1997. Correspondingly, our auto loss ratio decreased to 74.9% in 1998
compared with 77.1% in 1997. These decreases reflect our ongoing efforts to
improve the claims adjusting process through technological efficiencies and
heightened fraud detection efforts. While the impact of severe weather on auto
has historically been low, our auto catastrophe ratio increased to 1.3% of net
earned premiums in 1998 compared with 0.2% in 1997, due primarily to Midwestern
hail storms. Excluding catastrophes, homeowners policyholder benefits and claims
decreased to $104 million in 1998 from $116 million in 1997 and our loss ratio
decreased to 46.5% in 1998 from 53.6% in 1997. These decreases reflect changes
in our underwriting practices, physical reinspections of selected in-force
policies and the use of credit report data for selecting new risks and for
reunderwriting at the time of renewal. Reinsurance costs decreased by $5
million, or 23%, to $17 million in 1998 from $22 million in 1997, reflecting the
continuing reduction in our exposure to hurricanes and the current competitive
pricing environment within the reinsurance market. Homeowners' catastrophes
increased by $26 million to $41 million in 1998 from $15 million in 1997,
reflecting Midwestern hail storms and spring storms in the southeast. The
property and casualty industry as a whole experienced a more typical amount of
losses resulting from events classified as catastrophes in 1998 and a lower than
average amount of losses in 1997. Other personal lines increased by $9 million
to $12 million in 1998 from $3 million in 1997, due to an above average number
of new claims.
Other expenses increased by 10% to $386 million in 1998 from $351 million
in 1997. Other expenses related to auto insurance increased by $27 million, or
10%, to $305 million in 1998 from $278 million in 1997, primarily due to higher
general and administrative expenses which resulted in an increase in our expense
ratio to 27.4% in 1998 from 25.9% in 1997. Other expenses related to homeowners
insurance and other personal lines increased $8 million, or 11%, to $81 million
in 1998 from $73 million in 1997, primarily due to increased administrative
expenses and new business acquisition expenses.
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<PAGE> 76
INTERNATIONAL
The following table presents summary consolidated financial information for
International for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Premiums................................................... $523 $ 618 $ 908
Universal life and investment-type product policy fees..... 48 68 137
Net investment income...................................... 206 343 504
Other revenues............................................. 12 33 54
Net realized investment gains.............................. 1 117 142
---- ------ ------
790 1,179 1,745
---- ------ ------
EXPENSES
Policyholder benefits and claims........................... 463 597 869
Interest credited to policyholder account balances......... 52 89 137
Policyholder dividends..................................... 22 64 97
Other expenses............................................. 248 352 497
---- ------ ------
785 1,102 1,600
---- ------ ------
Income before provision (benefit) for income taxes......... 5 77 145
Provision (benefit) for income taxes....................... (16) 21 19
---- ------ ------
Net income................................................. $ 21 $ 56 $ 126
==== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998 --
INTERNATIONAL
Premiums decreased by 15% to $523 million in 1999 from $618 million in
1998, primarily due to the disposition of a substantial portion of our Canadian
operations. Excluding the impact of this sale, premiums increased by $109
million, or 26%, to $523 million from $414 million. Argentina's premiums
increased $11 million primarily due to expanded business operations. Korea's and
Taiwan's premiums increased $24 and $39 million, respectively, due to improved
economic environments. Spain's premiums increased $24 million primarily due to
increased sales from our joint venture partnership.
Universal life and investment type-product policy fees decreased by 29% to
$48 million in 1999 from $68 million in 1998. Excluding the impact of the
Canadian divestiture, universal life and investment type-product policy fees
increased by $2 million, or 4%, to $48 million in 1999 from $46 million in 1998,
primarily due to expanded business operations in Argentina.
Other revenues decreased by 64% to $12 million in 1999 from $33 million in
1998. Excluding the impact of the Canadian divestiture, other revenues increased
slightly to $12 million in 1999 from $10 million in 1998.
Policyholder benefits and claims decreased by 22% to $463 million in 1999
from $597 million in 1998. Excluding the impact of the Canadian divestiture,
policyholder benefits and claims increased $106 million, or 30%, to $463 million
in 1999 from $357 million in 1998. This increase is commensurate with the
aforementioned increase in premiums.
Interest credited to policyholder account balances decreased by 42% to $52
million in 1999 from $89 million in 1998. Excluding the impact of the Canadian
divestiture, interest credited to policyholder account balances increased $1
million, or 2%, to $52 million in 1999 from $51 million in 1998 in line with
increased account balances.
Policyholder dividends decreased by 66% to $22 million in 1999 from $64
million in 1998. Excluding the impact of the Canadian divestiture, policyholder
dividends decreased $1 million, or
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<PAGE> 77
5%, to $22 million in 1999 from $21 million in 1998, primarily due to less
favorable experience on participating policies in Spain.
Other expenses decreased by 30% to $248 million in 1999 from $352 million
in 1998. Excluding the impact of the Canadian divestiture, other expenses
decreased $7 million, or 3%, to $248 million in 1999 from $255 million in 1998.
This decrease was primarily attributable to ongoing cost reduction initiatives.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997 --
INTERNATIONAL
Premiums decreased by 32% to $618 million in 1998 from $908 million in
1997, primarily due to the dispositions of a substantial portion of our U.K.
operations in October 1997 and of our Canadian operations in July 1998.
Excluding the impact of these sales, premiums decreased by $31 million, or 7%,
to $414 million in 1998 from $445 million in 1997, primarily attributable to a
$64 million, or 40%, reduction in premiums in South Korea due to a significant
economic downturn in this country. This decrease was partially offset by a $15
million, or 48%, increase in Spain related to the effect of a full year's
activity under a revised sales agreement entered into with Banco Santander
during September 1997.
Universal life and investment-type product policy fees decreased by 50% to
$68 million in 1998 from $137 million in 1997, primarily due to the U.K. and
Canadian divestitures.
Other revenues decreased by 39% to $33 million in 1998 from $54 million in
1997. Excluding the impact of the U.K. and Canadian divestitures, other revenues
increased to $10 million in 1998 from $7 million in 1997.
Policyholder benefits and claims decreased by 31% to $597 million in 1998
from $869 million in 1997. Excluding the impact of the U.K. and Canadian
divestitures, policyholder benefit and claims decreased by 5% to $357 million in
1998 from $374 million in 1997. This decrease was primarily attributable to the
decline in premiums of $64 million in South Korea and was offset in part by
minor increases in several other countries.
Interest credited to policyholder account balances decreased by 35% to $89
million in 1998 from $137 million in 1997. Excluding the impact of the U.K. and
Canadian divestitures, interest credited to policyholder account balances
decreased by 9% to $51 million in 1998 from $56 million in 1997. This decrease
was attributable to lower variable crediting rates in South Korea reflecting a
reduction in interest rates.
Policyholder dividends decreased by 34% to $64 million in 1998 from $97
million in 1997. Excluding the impact of the U.K. and Canadian divestitures,
policyholder dividends were essentially unchanged at $21 million in 1998
compared with $22 million in 1997.
Other expenses decreased by 29% to $352 million in 1998 from $497 million
in 1997. Excluding the impact of the U.K. and Canadian divestitures, other
expenses increased by 5% to $255 million in 1998 from $242 million in 1997. This
increase was primarily due to higher business development costs.
CORPORATE
Total revenues for our Corporate segment, which consisted of net investment
income and realized investment gains and losses that are not allocated to our
business segments, were $623 million in 1999, a decrease of $849 million, or
58%, from $1,472 million in 1998, primarily due to a reduction in investment
gains and investment income of $722 million due to the sale of MetLife Capital
Holdings, Inc. in 1998. Total Corporate expenses were $1,031 million in 1999, a
decrease of $1,560 million, or 60%, from $2,591 million in 1998. This decrease
is primarily due to a $1,895 million charge in 1998 for sales practices claims
and claims for personal injuries caused by
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<PAGE> 78
exposure to asbestos or asbestos-containing products as well as the elimination
of $270 million of expenses due to the sale of MetLife Capital Holdings. These
decreases were partially offset by 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.
Total revenues for our Corporate segment were $1,472 million in 1998, an
increase of $427 million, or 41%, from $1,045 million in 1997, primarily due to
the realized investment gain from the sale of MetLife Capital Holdings of $433
million. Total Corporate expenses were $2,591 million in 1998, an increase of
$1,625 million, or 168%, from $966 million in 1997, primarily due to the
aforementioned charges for sales practices claims and asbestos-related claims in
1998.
LIQUIDITY AND CAPITAL RESOURCES
METLIFE, INC.
Following the effective date of the plan, Metropolitan Life Insurance
Company will become a wholly-owned subsidiary and the principal asset of
MetLife, Inc. The primary uses of liquidity of MetLife, Inc. will include
payment of dividends on our common stock, interest payments on our debentures
issued to MetLife Capital Trust I and other debt servicing, contributions to our
subsidiaries and payment of general operating expenses. The primary source of
our liquidity will be dividends we may receive from Metropolitan Life Insurance
Company and the interest received from Metropolitan Life Insurance Company under
the capital note described below. In addition, we expect to retain up to $340
million from the proceeds of the offerings and the private placements at
MetLife, Inc., which will be available to pay dividends to our stockholders,
make contributions to our subsidiaries, make payments on the debentures issued
to MetLife Capital Trust I and meet our other obligations. Our ability, on a
continuing basis, to meet our cash needs depends primarily upon the receipt of
dividends and the interest on the capital note from Metropolitan Life Insurance
Company.
Under the New York Insurance Law, Metropolitan Life Insurance Company will
be permitted to pay a stockholder dividend to MetLife, Inc. 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
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. We cannot provide assurance that Metropolitan
Life Insurance Company will have statutory earnings to support the payment of
dividends to MetLife, Inc. in an amount sufficient to fund our cash requirements
and pay cash dividends or that the New York Superintendent will not disapprove
any dividends that Metropolitan Life Insurance Company may seek to pay. Our
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 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 may reduce STATUTORY SURPLUS,
thereby making the dividend limitation more restrictive. See "-- Metropolitan
Life Insurance Company -- Risk-based capital". See Note 13 of Notes to
Consolidated Financial Statements for a reconciliation of the difference between
statutory financial results with those determined in conformity with generally
accepted accounting principles.
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<PAGE> 79
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 Insurance Company as described under "Use of
Proceeds", Metropolitan Life Insurance Company expects to issue to MetLife, Inc.
its % mandatorily convertible capital note due 2005 having the following
principal terms:
PRINCIPAL AMOUNT.............. $1 billion
MATURITY...................... May 15, 2005
INTEREST...................... % (equal to initial interest rate on
MetLife, Inc. debentures issued to MetLife
Capital Trust I), payable quarterly, subject to
reset and deferral provisions substantially
identical to those set forth in the debentures.
PAYMENT RESTRICTIONS.......... As required by the New York Insurance Law, the
capital note will provide that Metropolitan
Life Insurance Company may not make any payment
of the interest on or the principal of the
capital note so long as specified payment
restrictions exist and have not been waived by
the New York Superintendent of Insurance.
Payment restrictions would exist if the level
of Metropolitan Life Insurance Company's
statutory total adjusted capital falls below
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. As of the date hereof,
Metropolitan Life Insurance Company's statutory
total adjusted capital significantly exceeds
these limitations. Interest will continue to
accrue while payment restrictions exist.
CONVERSION.................... At May 15, 2004 and at the stated maturity of
the capital note, the capital note shall be
mandatorily convertible, without any further
action by MetLife, Inc. or Metropolitan Life
Insurance Company, into 500 shares at each such
date of common stock of Metropolitan Life
Insurance Company. The capital note will also
become immediately convertible into 1,000
shares upon an acceleration of the capital
note. The issuance of such shares will be in
full satisfaction of Metropolitan Life
Insurance Company's obligation to pay the
principal of the note.
RANKING....................... The capital note will be unsecured and will be
subordinated to all present and future
indebtedness, policy claims and other creditor
claims (each as defined in the capital note) of
Metropolitan Life Insurance Company. The
capital note will rank pari passu with all
existing surplus notes of Metropolitan Life
Insurance Company and with all capital notes,
surplus notes or similar obligations of
Metropolitan Life Insurance Company thereafter
issued, made or incurred.
As required by the New York Insurance Law, the terms of the capital note
must be approved by the New York Superintendent of Insurance as not adverse to
the interests of Metropolitan Life Insurance Company's policyholders. The New
York Superintendent approved the issuance of the capital note on April , 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, Inc.
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<PAGE> 80
Based on the historic cash flows and the current financial results of
Metropolitan Life Insurance Company, subject to any dividend limitations which
may be imposed upon Metropolitan Life Insurance Company or its subsidiaries by
regulatory authorities, we believe that cash flows from operating activities,
together with up to $340 million of proceeds from the offerings and the private
placements to be retained by MetLife, Inc. and the interest received on the
capital note from Metropolitan Life Insurance Company, will be sufficient to
enable us to make dividend payments on our common stock as described in
"Dividend Policy", to pay all operating expenses, make payments on the
debentures issued to MetLife Capital Trust I and meet our other obligations.
METROPOLITAN LIFE INSURANCE COMPANY
LIQUIDITY SOURCES. Metropolitan Life Insurance 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. Metropolitan Life Insurance 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.
Metropolitan Life Insurance 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.
Metropolitan Life Insurance Company closely monitors and manages these risks.
See "Business -- Investments".
Additional sources of liquidity to meet unexpected cash outflows are
available from Metropolitan Life Insurance 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.
Metropolitan Life Insurance Company's available portfolio of liquid assets was
approximately $88 billion and $91 billion at December 31, 1999 and 1998,
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 Insurance Company. See "-- Financing".
LIQUIDITY USES. Metropolitan Life Insurance 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, principal and interest on its outstanding debt
obligations, including the capital note described above, as well as dividend
payments that may be declared and are payable to MetLife, Inc. 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.
Management of Metropolitan Life Insurance Company believes that its sources
of liquidity are more than adequate to meet its current cash requirements.
LITIGATION. Various litigation claims and assessments against us have
arisen in the course of our business, including in connection with our
activities as an insurer, employer, investor, investment advisor and taxpayer.
Further, state insurance regulatory authorities and other authorities regularly
make inquiries and conduct investigations concerning our 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
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<PAGE> 81
of all pending investigations and legal proceedings or to provide reasonable
ranges of potential losses, it is the opinion of our management that their
outcomes, after consideration of available insurance and reinsurance and the
provisions made in our consolidated financial statements, are not likely to have
a material adverse effect on our 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 our operating results or cash flows in particular quarterly or annual
periods.
We have recorded, in other expenses, charges of $499 million ($317 million
after-tax), $1,895 million ($1,203 million after-tax) and $300 million ($190
million after-tax) for the years ended December 31, 1999, 1998 and 1997,
respectively, for sales practice claims and claims for personal injuries caused
by exposure to asbestos or asbestos-containing products. The charge for the year
ended December 31, 1999 was principally related to the settlement of the
multidistrict litigation proceeding involving alleged improper sales practices,
accruals for sales practices claims not covered by the settlement and other
legal costs. The 1998 charge of $1,895 million was comprised of $925 million and
$970 million for sales practices claims and asbestos-related claims,
respectively. We recorded the accrual for sales practices claims based on
preliminary settlement discussions and the settlement history of other insurers.
Prior to the fourth quarter of 1998, we established a liability for
asbestos-related claims based on settlement costs for claims that we had
settled, estimates of settlement costs for claims pending against us and an
estimate of settlement costs for unasserted claims. The amount for unasserted
claims was based on management's estimate of unasserted claims that would be
probable of assertion. A liability is not established for claims which we
believe are only reasonably possible of assertion. Based on this process, our
accrual for asbestos-related claims at December 31, 1997 was $386 million. Our
potential liabilities for asbestos-related claims are not easily quantified, due
to the nature of the allegations against us, which are not related to the
business of manufacturing, producing, distributing or selling asbestos or
asbestos-containing products, adding to the uncertainty as to the number of
claims brought against us.
During 1998, we decided to pursue the purchase of insurance to limit our
exposure to asbestos-related claims. In connection with our negotiations with
the casualty insurers to obtain this insurance, we obtained information that
caused us to reassess our accruals for asbestos-related claims. This information
included:
- Information from the insurers regarding the asbestos-related claims
experience of other insureds, which indicated that the number of claims
that were probable of assertion against us in the future was
significantly greater than we had assumed in our accruals. The number of
claims brought against us is generally a reflection of the number of
asbestos-related claims brought against asbestos defendants generally and
the percentage of those claims in which we are included as a defendant.
The information provided to us relating to other insureds indicated that
we had been included as defendants for a significant percentage of total
asbestos-related claims and that we may be included in a larger
percentage of claims in the future, because of greater awareness of
asbestos litigation generally by potential plaintiffs and plaintiffs'
lawyers and because of the bankruptcy and reorganization or the
exhaustion of insurance coverage of other asbestos defendants and that,
although volatile, there was an upward trend in the number of total
claims brought against asbestos defendants.
- Information derived from actuarial calculations we made in the fourth
quarter of 1998 in connection with these negotiations, which helped us to
frame, define and quantify this liability. These calculations were made
using, among other things, current information regarding our claims and
settlement experience (which reflected our decision to resolve an
increased number of these claims by settlement), recent and historic
claims and
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<PAGE> 82
settlement experience of selected other companies and information
obtained from the insurers.
Based on this information, we concluded that certain claims that previously
were considered as only reasonably possible of assertion were now probable of
assertion, increasing the number of assumed claims to approximately three times
the number assumed in prior periods. As a result of this reassessment, we
increased our liability for asbestos-related claims to $1,278 million at
December 31, 1998.
During 1998, we paid $1,407 million of premiums for excess of loss
reinsurance and insurance agreements and policies, consisting of $529 million
for the excess of loss reinsurance agreements for sales practices claims and
excess mortality losses and $878 million for the excess insurance policies for
asbestos-related claims.
We obtained the excess of loss reinsurance agreements to provide
reinsurance with respect to sales practices claims made on or prior to December
31, 1999 and for certain mortality losses in 1999. These reinsurance agreements
have a maximum aggregate limit of $650 million, with a maximum sublimit of $550
million for losses for sales practices claims. This coverage is in excess of an
aggregate self-insured retention of $385 million with respect to sales practices
claims and $506 million, plus our statutory policy reserves released upon the
death of insureds, with respect to life mortality losses. At December 31, 1999,
the subject losses under the reinsurance agreements due to sales practices
claims and related counsel fees from the time Metropolitan Life Insurance
Company entered into the reinsurance agreements did not exceed that self-insured
retention. The maximum sublimit of $550 million for sales practices claims was
within a range of losses that management believed was reasonably possible at
December 31, 1998. Each excess of loss reinsurance agreement for sales practices
claims and mortality losses contains an experience fund, which provides for
payments to us at the commutation date if experience is favorable at such date.
We account for the aggregate excess of loss reinsurance agreements as
reinsurance; however, if deposit accounting were applied, the effect on our
consolidated financial statements in 1998, and in 1999 and 2000, would not be
significant. Under reinsurance accounting, the excess of the liability recorded
for sales practices losses recoverable under the agreements of $550 million over
the premium paid of $529 million results in a deferred gain of $21 million which
is being amortized into income over the settlement period from January 1999
through April 2000. Under deposit accounting, the premium would be recorded as
an other asset rather than as an expense, and the reinsurance loss recoverable
and the deferred gain would not have been recorded. Because the agreements also
contain an experience fund which increases with the passage of time, the
increase in the experience fund in 1999 and 2000 under deposit accounting would
be recognized as interest income in an amount approximately equal to the
deferred gain that will be amortized into income under reinsurance accounting.
The excess insurance policies for asbestos-related claims provide for
recovery of losses of up to $1,500 million, which is in excess of a $400 million
self-insured retention ($878 million of which was recorded as a recoverable at
December 31, 1999 and 1998). The asbestos-related policies are also subject to
annual and per-claim sublimits. Amounts are recoverable under the policies and
agreements annually with respect to claims paid during the prior calendar year.
Although amounts paid in any given year that are recoverable under the policies
and agreements will be reflected as a reduction in our operating cash flow for
that year, management believes that the payments will not have a material
adverse effect on our liquidity. Each asbestos-related policy contains an
experience fund and a reference fund that provides for payments to us at the
commutation date if experience under the policy to such date has been favorable,
or pro rata reductions from time to time in the loss reimbursement to us if the
cumulative return on the reference fund is less than the return specified in the
experience fund.
We believe that the excess of loss reinsurance agreements should provide
coverage for a portion of the multidistrict sales practices settlement described
above, although we have yet to file a claim under those agreements. The increase
in liabilities for death benefits and policy
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adjustments and the cash payments to be made under the settlement should be
substantially offset by amounts recoverable under those agreements, as well as
amounts provided in our consolidated financial statements, and accordingly we do
not believe that they will have a material adverse effect on our business,
results of operations, financial condition or cash flows in future periods.
We believe adequate provision has been made in our consolidated financial
statements for all reasonably probable and estimable losses for sales practices
and asbestos-related claims.
RISK-BASED CAPITAL. Section 1322 of the New York Insurance Law requires
that New York life insurers report their 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 New York Superintendent of Insurance 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 December 31, 1999,
Metropolitan Life Insurance Company's total adjusted capital was in excess of
each of those RBC levels. See "Business -- Regulation -- Insurance
regulation -- Risk-based capital".
Each of the U.S. insurance subsidiaries of Metropolitan Life Insurance
Company is subject to these same RBC requirements. At December 31, 1999, the
total adjusted capital of each of these insurance subsidiaries was in excess of
each of these 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.
Prior to implementation by Metropolitan Life Insurance Company, the Codification
requires adoption by the New York Insurance Department. Based on a study
commissioned by the NAIC, the overall impact to life insurers resulting from
adoption of the Codification is not expected to be materially adverse; however,
a detailed analysis will be necessary to determine the actual impact of the
Codification on the statutory results of operations and statutory financial
position of Metropolitan Life Insurance Company and its U.S. insurance
subsidiaries.
FINANCING. MetLife Funding, Inc. serves as a centralized finance unit for
Metropolitan Life Insurance Company. Pursuant to a support agreement,
Metropolitan Life Insurance Company has agreed to cause MetLife Funding to have
a tangible net worth of at least one dollar. At December 31, 1999 and 1998,
MetLife Funding had a tangible net worth of $10.5 million and $10.9 million,
respectively. MetLife Funding raises funds from various funding sources and uses
the proceeds to extend loans to Metropolitan Life Insurance Company and its
other subsidiaries. MetLife Funding manages its funding sources to enhance the
financial flexibility and liquidity of MetLife. At December 31, 1999 and 1998,
MetLife Funding had total outstanding liabilities of $4.2 billion and $3.6
billion, respectively, consisting primarily of commercial paper.
In connection with our acquisition of the stock of GenAmerica, we incurred
$900 million of short-term debt, consisting primarily of commercial paper. We
intend to repay up to $450 million of that debt with proceeds from the offerings
and the private placements. We also incurred approximately $3.2 billion of
short-term debt, consisting primarily of commercial paper, in connection with
our October 1, 1999 exchange offer to holders of General American Life funding
agreements. Through December 31, 1999, approximately $1.5 billion of this debt
was repaid. The remaining $1.7 billion was included in the outstanding
liabilities of MetLife Funding at December 31, 1999. See
"Business -- Acquisition of GenAmerica".
MetLife Funding and Metropolitan Life Insurance Company also maintained $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 and 1998, respectively, which served as back-up for MetLife Funding's
commercial paper program and for general corporate purposes. These credit
facilities were not utilized during 1999 or 1998.
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SUPPORT AGREEMENTS. In addition to its support agreement with MetLife
Funding, Metropolitan Life Insurance Company 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 December 31, 1999 and 1998, respectively, was
significantly in excess of the amount that would trigger such an event.
Furthermore, Metropolitan Life Insurance Company has never been called upon to
provide support to NELICO.
In connection with Metropolitan Life Insurance Company's acquisition of
GenAmerica Corporation, Metropolitan Life Insurance Company entered into a net
worth maintenance agreement with General American Life Insurance Company,
whereby Metropolitan Life Insurance Company 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
and to ensure that General American Life's liquidity is sufficient to meet its
current obligations on a timely basis. The capital and surplus of General
American Life Insurance Company at December 31, 1999 was in excess of the
required amount.
Metropolitan Life Insurance Company 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 Insurance Company 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 MetLife's liquidity resources.
CONSOLIDATED CASH FLOWS. Net cash provided by operating activities was
$3.9 billion, $0.8 billion and $2.9 billion for the years ended December 31,
1999, 1998 and 1997, respectively. In 1999, the change in cash provided by
operating activities was primarily due to strong growth in our Institutional and
Auto & Home segments. The growth in our Institutional segment was primarily
related to strong sales and improved policyholder retention in non-medical
health, primarily in our dental and disability businesses. The growth in Auto &
Home was primarily due to the acquisition of the standard personal lines
property and casualty insurance operations of The St. Paul Companies, as well as
growth in both standard and non-standard auto insurance businesses. In 1998, the
change in cash provided by operating activities was primarily attributable to
$1.4 billion paid in 1998 for excess insurance policies providing coverage for
amounts which may be paid in connection with exposure to asbestos claims and
reinsurance agreements providing coverage for, among other things, amounts which
may be paid or incurred in connection with specified sales practices claims. Net
cash provided by operating activities in 1999, 1998 and 1997 was more than
adequate to meet liquidity requirements.
Net cash (used in) provided by investing activities were $(2.4) billion,
$2.7 billion and $(1.7) billion for the years ended December 31, 1999, 1998 and
1997, respectively. Purchases of investments exceeded sales, maturities and
repayments by $0.5 billion, $7.6 billion and $1.6 billion in 1999, 1998 and
1997, respectively. In 1999, the significant decrease in net purchases of
investments resulted from a decrease in the reinvestment of sales proceeds as a
result of the funding agreement exchange offer in connection with the GenAmerica
acquisition, as well as the purchase of the individual disability income
business of Lincoln National Life Insurance Company. In 1998, the significant
increase in net purchases of investments resulted from the reinvestment of
proceeds from the sale of MetLife Capital Holdings, Inc. and a substantial
portion of our Canadian operations and cash from our securities lending program.
Prior to 1998, our securities lending program activity was not reflected in our
consolidated balance sheets or consolidated statements of cash flows. Cash flows
for investing activities also increased by $2.7 billion and $3.8 billion in 1999
and 1998, respectively, as a result of activity from our securities lending
program.
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Net cash used in financing activities was $2.0 billion, $3.1 billion and
$0.6 billion for the years ended December 31, 1999, 1998 and 1997, respectively.
Withdrawals from policyholders' account balances exceeded deposits by $2.2
billion, $2.3 billion and $2.8 billion in 1999, 1998 and 1997, respectively.
Short-term financings increased $0.6 billion in 1999 compared with a decrease of
$1.0 billion in 1998, while net reductions in long-term debt were $389 million
in 1999 compared with net additions of $212 million in 1998.
The operating, investing and financing activities described above resulted
in a decrease in cash and cash equivalents of $512 million for the year ended
December 31, 1999 compared with increases of $390 million and $586 million for
the years ended December 1998 and 1997, respectively.
EFFECTS OF INFLATION
We do not believe that inflation has had a material effect on our
consolidated results of operations, except insofar as inflation may affect
interest rates. See "Risk Factors -- Changes in interest rates may significantly
affect our profitability".
MARKET RISK DISCLOSURE
We must effectively manage, measure and monitor the market risk associated
with our invested assets and interest rate sensitive insurance contracts. We
have developed an integrated process for managing risk, which we conduct through
our Corporate Risk Management Department, several asset/liability committees and
additional specialists at the business segment level. We have established and
implemented comprehensive policies and procedures at both the corporate and
business segment level to minimize the effects of potential market volatility.
MARKET RISK EXPOSURES
We have exposure to market risk through our insurance operations and
investment activities. For purposes of this disclosure, "market risk" is defined
as the risk of loss resulting from changes in interest rates, equity prices and
foreign exchange rates.
INTEREST RATES. Our exposure to interest rate changes results from our
significant holdings of fixed maturities, as well as our interest rate sensitive
liabilities. The fixed maturities include U.S. and foreign government bonds,
securities issued by government agencies, corporate bonds and mortgage-backed
securities, all of which are mainly exposed to changes in medium- and long-term
treasury rates. Our interest rate sensitive liabilities for purposes of this
disclosure include guaranteed interest contracts and fixed annuities, which have
the same interest rate exposure (medium- and long-term treasury rates) as the
fixed maturities. We employ product design, pricing and asset/liability
management strategies to reduce the adverse effects of interest rate volatility.
Product design and pricing strategies include the use of SURRENDER CHARGES or
restrictions on withdrawals in some products. Asset/liability management
strategies include the use of derivatives, the purchase of securities structured
to protect against prepayments, prepayment restrictions and related fees on
mortgage loans and consistent monitoring of the pricing of our products in order
to better match the duration of the assets and the liabilities they support.
EQUITY PRICES. Our investments in equity securities expose us to changes
in equity prices. We manage this risk on an integrated basis with other risks
through our asset/liability management strategies. We also manage equity price
risk through industry and issuer diversification and asset allocation
techniques.
FOREIGN EXCHANGE RATES. Our exposure to fluctuations in foreign exchange
rates against the U.S. dollar results from our holdings in non-U.S. dollar
denominated fixed maturity securities and equity securities and through our
investments in foreign subsidiaries. The principal currencies which create
foreign exchange rate risk in our investment portfolios are Canadian dollars,
Euros,
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German marks, French francs, Spanish pesetas and British pounds. We mitigate the
majority of our fixed maturities' foreign exchange rate risk through the
utilization of foreign currency swaps and forward contracts. Through our
investments in foreign subsidiaries, we are primarily exposed to the Spanish
peseta, Mexican peso, Argentinean dollar and Korean won. We have denominated all
assets and liabilities of our foreign subsidiaries in their respective local
currencies, thereby minimizing our risk to foreign exchange rate fluctuations.
RISK MANAGEMENT
CORPORATE RISK MANAGEMENT. We have established several financial and
non-financial senior management committees as part of our risk management
process. These committees manage capital and risk positions, approve
asset/liability management strategies and establish appropriate corporate
business standards.
We also have a separate Corporate Risk Management Department, which is
responsible for risk throughout MetLife and reports directly to our Chief
Actuary. The Corporate Risk Management Department's primary responsibilities
consist of:
- implementing a board of directors-approved corporate risk framework,
which outlines our approach for managing risk on an enterprise-wide
basis;
- developing policies and procedures for managing, measuring and monitoring
those risks identified in the corporate risk framework;
- establishing appropriate corporate risk tolerance levels;
- deploying capital on a risk-adjusted basis; and
- reporting on a periodic basis to the Audit Committee of the board of
directors and our various financial and non-financial senior management
committees.
ASSET/LIABILITY MANAGEMENT. At MetLife, asset/liability management is the
responsibility of the General Account Portfolio Management Department ("GAPM"),
the operating business segments and various GAPM boards. The GAPM boards are
comprised of senior officers from the investment department, senior managers
from each business segment and the Chief Actuary. The GAPM boards' duties
include setting broad asset/liability management policy and strategy, reviewing
and approving target portfolios, establishing investment guidelines and limits
and providing oversight of the portfolio management process.
The portfolio managers and asset sector specialists, who have
responsibility on a day-to-day basis for risk management of their respective
investing activities, implement the goals and objectives established by the GAPM
boards. The goals of the investment process are to optimize after-tax,
risk-adjusted investment income and after-tax, risk-adjusted total return while
ensuring that the assets and liabilities are managed on a cash flow and duration
basis. The risk management objectives established by the GAPM boards stress
quality, diversification, asset/liability matching, liquidity and investment
return.
Each of our business segments has an asset/liability officer who works with
portfolio managers in the investment department to monitor investment, product
pricing, hedge strategy and liability management issues. We establish target
asset portfolios for each major insurance product, which represent the
investment strategies used to profitably fund our liabilities within acceptable
levels of risk. These strategies include objectives for effective duration,
yield curve sensitivity, convexity, liquidity, asset sector concentration and
credit quality.
To manage interest rate risk, we perform periodic projections of asset and
liability cash flows to evaluate the potential sensitivity of our securities
investments and liabilities to interest rate movements. These projections
involve evaluating the potential gain or loss on most of our in-force business
under various increasing and decreasing interest rate environments. We have
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developed models of our in-force business that reflect specific product
characteristics and include assumptions based on current and anticipated
experience regarding lapse, mortality and interest crediting rates. In addition,
these models include asset cash flow projections reflecting interest payments,
sinking fund payments, principal payments, bond calls, mortgage prepayments and
defaults. New York Insurance Department regulations require that we perform some
of these analyses annually as part of the annual proof of the sufficiency of our
regulatory reserves to meet adverse interest rate scenarios.
HEDGING ACTIVITIES. Our risk management strategies incorporate the use of
various interest rate derivatives that are used to adjust the overall duration
and cash flow profile of our invested asset portfolios to better match the
duration and cash flow profile of our liabilities to reduce interest rate risk.
Such instruments include interest rate swaps, futures and caps. We also use
foreign currency swaps and forward contracts to hedge our foreign currency
denominated fixed income investments.
RISK MEASUREMENT; SENSITIVITY ANALYSIS
We measure market risk related to our holdings of invested assets and other
financial instruments, including certain market risk sensitive insurance
contracts ("other financial instruments"), based on changes in interest rates,
equity prices and foreign currency rates, utilizing a sensitivity analysis. This
analysis estimates the potential changes in fair value, cash flows and earnings
based on a hypothetical 10% change (increase or decrease) in interest rates,
equity prices and currency exchange rates. We believe that a 10% change
(increase or decrease) in these market rates and prices is reasonably possible
in the near-term. In performing this analysis, we used market rates at December
31, 1999 to re-price our invested assets and other financial instruments. The
sensitivity analysis separately calculated each of our market risk exposures
(interest rate, equity price and currency rate) related to our non-trading
invested assets and other financial instruments. We do not maintain a trading
portfolio.
The sensitivity analysis we performed included the market risk sensitive
holdings described above under "Market Risk Disclosure". We modeled the impact
of changes in market rates and prices on the fair values of our invested assets,
earnings and cash flows as follows:
FAIR VALUES. We base our potential loss in fair values on an immediate
change (increase or decrease) in:
- the net present values of our interest rate sensitive exposures resulting
from a 10% change (increase or decrease) in interest rates;
- the U.S. dollar equivalent balances of our currency exposures due to a
10% change (increase or decrease) in currency exchange rates; and
- the market value of our equity positions due to a 10% change (increase or
decrease) in equity prices.
EARNINGS AND CASH FLOWS. We calculate the potential loss in earnings and
cash flows on the change in our earnings and cash flows over a one-year period
based on an immediate 10% change (increase or decrease) in market rates and
equity prices. The following factors were incorporated into our earnings and
cash flows sensitivity analyses:
- the reinvestment of fixed maturity securities;
- the reinvestment of payments and prepayments of principal related to
mortgage-backed securities;
- prepayment rates on mortgage-backed securities were re-estimated for each
10% change (increase or decrease) in the interest rates; and
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- expected turnover (sales) of fixed maturities and equity securities,
including the reinvestment of the resulting proceeds.
The sensitivity analysis is an estimate and should not be viewed as
predictive of our future financial performance. We cannot assure that our actual
losses in any particular year will not exceed the amounts indicated in the table
below. Limitations related to this sensitivity analysis include:
- the market risk information is limited by the assumptions and parameters
established in creating the related sensitivity analysis, including the
impact of prepayment rates on our mortgages;
- the analysis excludes other significant real estate holdings and
liabilities pursuant to insurance contracts; and
- the model assumes that the composition of our assets and liabilities
remains unchanged throughout the year.
Accordingly, we use such models as tools and not substitutes for the
experience and judgment of our corporate risk and asset/liability management
personnel.
Based on our analysis of the impact of a 10% change (increase or decrease)
in market rates and prices, we have determined that such a change could have a
material adverse effect on the fair value of our interest rate sensitive
invested assets. The equity and foreign currency portfolios do not expose us to
material market risk.
The table below illustrates the potential loss in fair value of our
interest rate sensitive financial instruments at December 31, 1999. In addition,
the potential loss with respect to fair value of currency exchange rates and our
equity price sensitive positions at December 31, 1999 is set forth in the table
below.
The potential loss in fair value for each market risk exposure of our
portfolio, all of which is non-trading, for the periods indicated was (in
millions):
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Interest rate risk............................... $5,044.3 $3,977.1
Equity price risk................................ $ 198.0 $ 247.6
Currency exchange rate risk...................... $ 262.5 $ 260.0
</TABLE>
YEAR 2000 READINESS
The Year 2000 issue is the result of many computer hardware and software
systems using only two digits, rather than four, to represent a calendar year.
Without appropriate remediation or replacement, such systems may not process
dates beyond 1999. This system problem could result in a system failure or
miscalculations causing disruptions of operations, including, but not limited
to, a temporary inability to process transactions and engage in normal business
activities.
Given the potential impact of the Year 2000 issue on us, in 1996 we
established a centralized Project Management Office within our Information
Technology Department. The Project Management Office developed a plan that
identified the processes and steps to take so that all of MetLife's own computer
applications, as well as our voice and data communication systems, would
continue to function properly in and beyond the Year 2000.
The scope of our Year 2000 plan included testing the readiness of:
applications, operating systems and hardware on mainframes, personal computers
and local area network platforms; voice and data network software and hardware;
and some non-information technology systems in buildings, facilities and
equipment, including, but not limited to, security systems and building
controls. In addition, we established procedures to contact key suppliers,
customers, joint venture partners and other business parties regarding their
Year 2000 readiness.
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The phases of our Year 2000 plan were: (1) identifying Year 2000 problems
and assigning priorities; (2) assessing the Year 2000 compliance of each of our
business segments; (3) remediating or replacing items for Year 2000 compliance;
(4) testing items for Year 2000 compliance at each of our business segments; and
(5) designing and implementing Year 2000 contingency and business continuity
plans.
We completed phases (1) through (4) by June 30, 1999. We completed phase
(5) by the end of 1999. As to our systems certification, each of our business
segments conducted testing for Year 2000 compliance. We evaluated and tested
each system using a standard certification process and used both internal and
external resources in connection with our certification process. The
certification process included, among other procedures, testing of future dates
near the end of 1999, after the beginning of 2000 and for the leap year. We also
conducted tests of our business-critical systems on an enterprise-wide basis. At
December 31, 1999, approximately 100% of our information technology applications
and systems, security systems, building controls and utilities located in
facilities owned and operated by MetLife were Year 2000 compliant.
As part of our Year 2000 plan, we initiated formal communications with all
of our significant business partners, such as suppliers and customers, to
determine the extent to which we may have been vulnerable to those third
parties' failure to remediate their own Year 2000 issues. A majority of our
significant business partners gave assurances that they were Year 2000 ready by
December 31, 1999. As of the date of this prospectus, we are not aware of any
material Year 2000-related problems experienced by our information technology
and non-information technology systems. We have not been informed by any other
companies, governmental agencies or other entities on which we rely that any
such parties experienced any material Year 2000-related problems. We cannot
guarantee, however, that we or the other companies, governmental agencies or
other entities on which we rely will not experience any Year 2000-related
problems in the future. If such problems do occur, there can be no assurance
that they will not have a material adverse effect on our business, results of
operations and financial condition.
Through December 31, 1999, we had incurred and expensed approximately $220
million related to assessment and remediation or replacement in connection with
our Year 2000 plan. We funded these costs through operating cash flows, expensed
as incurred. During 2000, we expect to have additional Year 2000-related
expenses of approximately $5 million.
Detailed business contingency plans have been developed to address Year
2000 risks that may affect our ability to conduct business. However, we cannot
guarantee that such contingency plans will mitigate all future Year 2000 issues
or prevent future Year 2000 issues from having a material adverse effect on our
business, results of operations and financial condition.
INSOLVENCY ASSESSMENTS
Most of the jurisdictions in which we are 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 us from January 1, 1997 through December 31,
1999 aggregated $62 million. We maintained a liability of $31 million at
December 31, 1999 for future assessments in respect of currently impaired,
insolvent or failed insurers.
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THE DEMUTUALIZATION
The following is a summary of the material terms of Metropolitan Life
Insurance Company's plan of reorganization. Although we believe the material
provisions of the plan of reorganization have been accurately summarized, you
should refer to the plan of reorganization itself, a copy of which is filed as
an exhibit to the registration statement of which this prospectus forms a part.
PURPOSE
The main purpose of the demutualization is to change our corporate
structure to increase our potential for long-term growth and financial strength.
We believe that our ability, as a stock company, to issue shares of stock will
enable us to raise money more efficiently and will provide us with greater
flexibility to make business acquisitions and combinations. This will allow us
to increase our market leadership, financial strength and strategic position,
providing additional security to our policyholders.
The demutualization will also make it easier for us to take advantage of
changes in laws removing restrictions on affiliations between insurers and other
types of financial services companies, such as banks. In addition, the
demutualization will provide previously unavailable economic value to eligible
policyholders in the form of allocated shares of MetLife, Inc. common stock
(which will be held in the MetLife Policyholder Trust), cash or policy credits,
in exchange for their policyholders' membership interests in Metropolitan Life
Insurance Company.
SUMMARY OF THE PLAN OF REORGANIZATION
On the date the plan of reorganization becomes effective (which will be the
date of the closings of the initial public offering, the offering of units and
the private placements), Metropolitan Life Insurance Company will convert from a
mutual life insurance company to a stock life insurance company, and become a
wholly-owned subsidiary of MetLife, Inc. Each policyholder's membership interest
will be extinguished on the plan effective date and, in consideration thereof,
each eligible policyholder will be entitled to receive, in exchange for that
interest, trust interests representing shares of common stock, cash or an
adjustment to their policy values in the form of policy credits, as provided in
the plan. We will allocate consideration among eligible policyholders based on
actuarial principles. For a description of the actuarial principles used in this
allocation, see "The Demutualization -- Payment of Consideration to Eligible
Policyholders".
The plan of reorganization requires us to make the initial public offering
and to raise proceeds from the initial public offering, together with the
offering of units and the private placements, in an amount, net of underwriting
commissions and related expenses, at least equal to the amounts required for us
to reimburse Metropolitan Life Insurance Company for the crediting of policy
credits and payment of mandatory cash payments to eligible policyholders
pursuant to the plan of reorganization and to reimburse Metropolitan Life
Insurance Company for the cash payments to be made by its Canadian branch to
certain holders of policies included in its Canadian business sold to Clarica
Life Insurance Company in 1998, as well as to pay the fees and expenses we have
incurred in connection with the demutualization.
The plan also permits us to complete one or more private placements and
other specified capital raising transactions on the effective date of the plan.
Concurrently with this offering, we expect to sell not less than 14,900,000
shares nor more than 73,000,000 shares, at a price per share equal to the
initial public offering price, in the aggregate to Banco Santander Central
Hispano, S.A. and Credit Suisse Group or their respective affiliates in private
placements. In addition, we and a trust we own are offering 20,000,000 equity
security units for an aggregate offering of $1,000 million, plus up to an
additional $150 million if the underwriters' options to purchase additional
units are exercised in full. Each unit consists of (a) a contract to purchase
shares of our common stock and (b) a capital security of MetLife Capital Trust
I, a Delaware business trust wholly-owned by us. For a description of the units,
see "Description of the Equity Security Units". Under the plan of
reorganization, the total proceeds raised in the offering of
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units cannot exceed one-third of the total proceeds raised in that offering, the
initial public offering and the private placements. The amount of proceeds from
and final terms of the units will depend on market conditions and our capital
needs at the time of issuance. We cannot proceed with any offering relating to
the units and the private placements without the approval of the New York
Superintendent of Insurance. In addition, the final terms of the initial public
offering, the offering of units and the private placements must be approved by
the New York Superintendent. Those terms were approved by the New York
Superintendent of Insurance in his order issued on April , 2000.
Pursuant to the New York Insurance Law, the board of directors of
Metropolitan Life Insurance Company adopted the plan of reorganization on
September 28, 1999, and subsequently adopted amendments to the plan. The plan of
reorganization must also be approved by at least two-thirds of the votes validly
cast by the eligible policyholders. The plan of reorganization defines eligible
policyholders as the owners on September 28, 1999, the adoption date of the
plan, of certain policies and interests issued by Metropolitan Life Insurance
Company that were in force on that date. The plan was approved by more than
two-thirds of eligible policyholders who voted in voting completed on February
7, 2000. The vote of our policyholders was 2,572,832 votes in favor, 188,914
votes opposed.
The plan of reorganization will not become effective unless, after
conducting a public hearing on the plan, the New York Superintendent approves it
based on a finding, among other things, that the plan is fair and equitable to
policyholders. The New York Superintendent held a public hearing on the plan on
January 24, 2000 and issued an order approving the plan on April , 2000. At
the public hearing, some policyholders and others raised objections to certain
aspects of the plan. Six lawsuits have been filed challenging the fairness of
the plan of reorganization and the adequacy and accuracy of Metropolitan Life
Insurance Company's disclosures to policyholders regarding the plan. The first
of these lawsuits was filed in the Supreme Court of the State of New York for
Kings County on January 14, 2000. It was brought on behalf of a putative class
consisting of all policyholders of Metropolitan Life Insurance Company who
should have membership benefits in Metropolitan Life Insurance Company and were
and are eligible to receive notice, vote and receive consideration in the
demutualization. The complaint seeks to enjoin or rescind the plan, as well as
other relief. The defendants named in the complaint are Metropolitan Life
Insurance Company, the individual members of its board of directors and MetLife,
Inc. Discovery is underway in this case. The five other lawsuits were filed
between March 10, 2000 and March 29, 2000 in the Supreme Court of the State of
New York for New York County. The same defendants are named in these five cases
as in the Kings County case, with the addition of the New York Superintendent of
Insurance. All five of the New York County cases are brought on behalf of a
putative class consisting of the eligible policyholders of Metropolitan Life
Insurance Company as of September 28, 1999, the adoption date of the plan. The
claims in these five additional cases are substantially similar to those in the
Kings County case, as is the relief sought. Metropolitan Life Insurance Company
has entered into a stipulation with the plaintiffs in the five New York County
cases in which it does not oppose consolidation of the cases, agrees that the
plaintiffs have until April 30, 2000 to file a consolidated amended complaint,
and agrees that the defendants' time to answer, move or otherwise respond to the
consolidated amended complaint will be thirty days after service of the
consolidated amended complaint. Metropolitan Life Insurance Company has agreed
to provide certain information to the plaintiffs in three of the New York County
cases. Metropolitan Life Insurance Company, MetLife, Inc. and the individual
defendants believe they have meritorious defenses to the plaintiffs' claims and
intend vigorously to contest all of the plaintiffs' claims in these six
lawsuits. See "Risk Factors -- A challenge to the New York Superintendent of
Insurance's approval may adversely affect the terms of the demutualization and
the market price of our common stock".
We began incurring expenses related directly or indirectly to the
demutualization during 1998. We estimate that expenses relating to the
demutualization, excluding costs relating to the
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offerings and the private placements, will total approximately $361 million, net
of income taxes of $83 million. Demutualization expenses consist of our cost of
printing and mailing materials to policyholders and our aggregate cost of
engaging independent accounting, actuarial, compensation, financial, investment
banking and legal advisors and other consultants to advise us in the
demutualization process and related matters, as well as other administrative
costs. The New York Superintendent has also engaged experts to provide
actuarial, investment banking, legal and auditing advice. Pursuant to the New
York Insurance Law, we must pay the fees and expenses of such consultants, which
fees and expenses are included in the above amounts. We have also agreed to
indemnify certain of our consultants and consultants to the New York
Superintendent against liabilities arising out of their engagements in
connection with the demutualization.
PAYMENT OF CONSIDERATION TO ELIGIBLE POLICYHOLDERS
On the effective date of the plan of reorganization:
- the policyholders' membership interests will be extinguished and each
eligible policyholder will be allocated a number of trust interests equal
to the number of shares of our common stock allocated to such
policyholder, except that some eligible policyholders will receive cash
or an adjustment to their policy values, known as policy credits; and
- Metropolitan Life Insurance Company will become a stock life insurance
company and a wholly-owned subsidiary of MetLife, Inc.
We will distribute cash to:
- each eligible policyholder whose mailing address is outside the U.S.;
- each eligible policyholder or class of eligible policyholders for whom we
determine in good faith, to the satisfaction of the New York
Superintendent of Insurance, that it is not reasonably feasible or
appropriate to provide consideration in the form that such policyholder
would otherwise receive;
- each owner of an industrial life insurance policy in reduced paid-up
status with respect to whom we have a reasonable belief, after a
reasonable effort to locate such policyholder, that the mailing address
as shown on our records is an address at which mail to such policyholder
is undeliverable; and
- each group eligible policyholder that is an owner of an individual
retirement annuity or a tax sheltered annuity, and elects to receive cash
instead of common stock (but this provision will apply only to that
policy).
In addition to the cash payments described above, we will make cash
payments to any eligible policyholder (other than an eligible policyholder
required to receive policy credits or cash) that has affirmatively elected on or
before February 7, 2000 to receive cash for such policyholder's allocated
shares. There may be a limit to the amount of funds available to pay cash
compensation to eligible policyholders that elect to receive cash. The plan
provides that the initial public offering, the offering of units and the private
placements must raise proceeds, net of underwriting commissions and related
expenses, in an amount at least equal to the amount paid by Metropolitan Life
Insurance Company to fund mandatory cash payments pursuant to the plan and
policy credits to policyholders and to pay fees and expenses incurred by
Metropolitan Life Insurance Company related to the demutualization, as well as
to reimburse Metropolitan Life Insurance Company for amounts to be paid by its
Canadian branch to certain former Canadian policyholders. If the initial public
offering, the offering of units and the private placements are not of a
sufficient size to fund the payment of cash to all eligible policyholders that
elect to receive
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cash, it is possible that the plan will become effective but that cash will not
be paid to all eligible policyholders electing to receive cash. If this were to
happen, cash will be paid as follows:
- each individual eligible policyholder that elects to receive cash will
receive consideration in the form of cash;
- each group eligible policyholder that elects to receive cash and is
allocated not more than 25,000 shares will receive consideration in the
form of cash; and
- each group eligible policyholder that elects to receive cash and is
allocated more than 25,000 shares will receive consideration in the form
of:
- cash, with respect to the first 25,000 shares allocated to the
eligible policyholder; and
- either shares of common stock (to be held in the trust) or a
combination of cash and shares of common stock (to be held in the
trust), with respect to the remaining shares allocated to the eligible
policyholder. Such cash will be allocated to each such eligible
policyholder on a pro rata basis based on the proportion that the
total number of shares in excess of 25,000 shares allocated to such
eligible policyholder bears to the total number of shares in excess of
25,000 shares allocated to all eligible policyholders allocated more
than 25,000 shares that have elected to receive cash.
These proration provisions will not apply to any group eligible policyholder
that is an owner of an individual retirement annuity or a tax sheltered annuity
who elects to receive cash instead of common stock (to be held in the trust),
but only with respect to that policy. The maximum number of allocated shares for
which cash will be available will depend on a number of factors, including the
number of policyholders that elect to receive cash, market conditions and the
size of the initial public offering, the offering of units and the private
placements.
Until the second year after the plan effective date, if there is an
underwritten public offering by us of common stock, we will offer to each trust
beneficiary holding at the time more than 25,000 trust interests and whose cash
election was not fully satisfied the opportunity to include a number of shares
equal to all of the trust beneficiary's trust interests in the offering. Each
such trust beneficiary may then elect whether it wants to include some or all of
its common stock (held in the trust) in the offering. We will include all shares
desired to be sold in the offering. However, if, based on the advice of a
nationally recognized investment banking firm selected by us, our board of
directors believes that including all such shares would be likely to have an
adverse effect on the price, timing or distribution of the offering, only those
shares, if any, that the board of directors determines can be included without
adversely affecting the offering will be included. If this were to occur, we
will prorate the number of shares that each such trust beneficiary may include
in the offering based on the number of trust interests that each such trust
beneficiary elected to have included in the offering. We will enter into an
underwriting agreement with the underwriters, which will contain indemnification
and other terms acceptable to us and the underwriters. We will bear the costs of
conducting the offering, including the fees and expenses of the underwriters for
the offering. We will establish reasonable procedures for the participation of
such trust beneficiaries in any such offering.
Eligible policyholders owning policies that are individual retirement
annuities, tax sheltered annuities, tax qualified individual life insurance
policies and individual annuity contracts, life or health insurance funding
accounts and guaranteed life insurance funding accounts are required to receive
consideration in the form of policy credits. However, if any such policy has
matured by death or otherwise been surrendered or terminated after September 28,
1999, but prior to the date on which the policy credits would have been
credited, cash in the amount of the policy credits will be paid in lieu of the
policy credits to the person to whom the death benefit, surrender value or other
payment at termination was made under such policy.
The remaining eligible policyholders will be entitled to receive on the
effective date of the plan their allocated shares of Metropolitan Life Insurance
Company common stock, which will
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then be exchanged on such date for an equal number of shares of our common stock
to be held by the MetLife Policyholder Trust. We will distribute consideration
to eligible policyholders receiving cash or policy credits as soon as reasonably
practicable following the effective date of the plan, but in any event not later
than 60 days after the effective date, or such later date as may be approved by
the New York Superintendent of Insurance.
Regardless of whether an eligible policyholder is receiving allocated trust
interests, cash or policy credits, the consideration an eligible policyholder
receives under the plan of reorganization will be based on the number of shares
of common stock allocated to the eligible policyholder pursuant to the terms of
the plan of reorganization. The formula for allocating shares of common stock
among eligible policyholders consists of two components. We will allocate a
fixed number of shares of common stock equal to ten shares to each eligible
policyholder, regardless of the number of policies owned by that eligible
policyholder. Additional shares will also be allocated to each eligible
policyholder holding a participating policy -- that is, a policy that is not by
its terms ineligible for dividend payments. The number of such additional shares
will vary for each such eligible policyholder based upon an actuarial formula,
specified in the plan of reorganization, that takes into account, among other
things, the past and future contributions to our statutory surplus from policies
held by the eligible policyholder, as determined by historical experience and
expected future performance.
The amount of the consideration to be paid to an eligible policyholder in
the form of cash or policy credits will generally equal the number of shares of
common stock allocated to the eligible policyholder multiplied by the price per
share at which our common stock is offered to the public in the initial public
offering. The initial public offering price, which will be established through
arm's length negotiations with representatives of the underwriters, will be
based on, among other things, prevailing market conditions, our historical
performance, estimates of our business potential and earnings prospects, an
assessment of our management and consideration of the above factors in relation
to market valuations of companies in related businesses. In addition, the final
terms of the initial public offering, including the initial public offering
price of our common stock, will be subject to the approval of the New York
Superintendent of Insurance.
We have retained PricewaterhouseCoopers LLP to advise us in connection with
actuarial matters involved in the development of the plan of reorganization and
the payment of consideration to eligible policyholders. The opinion of Kenneth
M. Beck, a principal with the firm of PricewaterhouseCoopers LLP, dated November
16, 1999, states that the plan for allocation of consideration to eligible
policyholders (as defined in the plan of reorganization) as set forth in the
plan of reorganization is fair and equitable to the policyholders of
Metropolitan Life Insurance Company as required by Section 7312 of the New York
Insurance Law. This opinion is included as Annex A of this prospectus.
ESTABLISHMENT AND OPERATION OF THE METLIFE POLICYHOLDER TRUST
Under our plan of reorganization, we will establish the MetLife
Policyholder Trust to hold the shares of our common stock allocated to eligible
policyholders not receiving cash or policy credits.
Each trust beneficiary will have the right to elect to withdraw from the
trust shares of common stock for sale, without the payment of commissions or
brokerage fees, pursuant to the purchase and sale program described below. Sales
may be made at any time after the later of (1) the termination of any
stabilization arrangements and trading restrictions in connection with the
initial public offering and (2) the closing of all underwriters' over-allotment
options which have been exercised and the expiration of all unexercised options
in connection with the initial public offering. We expect that these sales may
begin within approximately 30 days after the plan effective date. In addition,
beginning one year after the plan effective date, trust beneficiaries may elect
to withdraw all (but not less than all) of their allocated shares of our common
stock held
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through the trust to hold the shares directly, in book entry or certificated
form, or to sell the shares themselves independently, if they wish. Each trust
beneficiary holding fewer than 1,000 trust interests may also purchase
additional shares of our common stock (to be held in the trust) through the
purchase and sale program to increase the trust beneficiary's interests up to a
maximum of 1,000 interests.
The purchase and sale program will be administered by ChaseMellon
Shareholder Services, L.L.C., the program agent for the purchase and sale
program and the custodian for the trust. Generally, each beneficiary may elect
to withdraw from the trust the beneficiary's allocated shares of our common
stock for sale through the purchase and sale program, subject to the following
limitations:
- each trust beneficiary holding 199 or fewer trust interests may elect to
withdraw from the trust for sale the number of shares of our common stock
held by the trust equal to all, but not less than all, of the
beneficiary's trust interests;
- each trust beneficiary holding more than 199 trust interests may elect to
withdraw from the trust for sale a number of shares of our common stock
held by the trust equal to all or part of the beneficiary's trust
interests, subject to the limitation that partial withdrawals may be made
only in increments of 100 shares, and that following any such withdrawal
for sale of part of the trust beneficiary's trust interests the trust
beneficiary holds at least 100 trust interests; and
- for the first 300 days following the effective date of the plan, each
trust beneficiary holding more than 25,000 trust interests will be
subject to the volume limitations described below. Under the purchase and
sale program procedures, if the total shares of our common stock to be
sold on the open market on behalf of trust beneficiaries holding more
than 25,000 trust interests on any day exceed the lesser of (i) 1/20th of
1% of the number of shares of our common stock outstanding and (ii) 25%
of the average daily trading volume for the 20 trading days (or such
shorter period, if fewer than 20 trading days have elapsed since the plan
effective date) preceding the trade, the broker-dealer will only process
trades on the open market up to that limit for trust beneficiaries
holding more than 25,000 shares. The broker-dealer affiliate of the
program agent will either defer the excess shares to the next trading day
(which will be subject to the same volume limitations on that day) or
sell the shares as principal through a block trade or through a
nationally recognized brokerage firm that will sell the shares, as agent,
at market clearing prices. For a period of 90 days following the plan
effective date, only the lead managing underwriters for the initial
public offering may sell, as joint agents, the excess shares. After the
first 300 days, these limitations will no longer apply and withdrawals
for sale may be made as permitted under the trust agreement and the
purchase and sale program procedures.
Except for the limitations on sales by trust beneficiaries holding more than
25,000 trust interests, purchases and sales will generally be processed on the
first or second trading day after the day on which instructions are received,
subject to limited exceptions such as an act of God or significant market
disruption.
In addition, the trust agreement allows trust beneficiaries to instruct the
trust custodian to withdraw their allocated trust shares to participate in any
tender or exchange offer or counter offer for our common stock and to make any
cash or share election, or perfect any dissenter's rights, in connection with a
merger of MetLife, Inc.
In addition to the sale features of the purchase and sale program, the
program will permit trust beneficiaries holding fewer than 1,000 trust interests
to elect to purchase additional shares of our common stock (to be held in the
trust) on their behalf, subject to the conditions that upon completion of the
purchase the beneficiary holds no more than 1,000 interests and the total cost
for the purchased shares is at least $250 (or such lesser amount required to
purchase a number
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of shares that would cause it to hold the 1,000 maximum number of interests at
the closing price of our common stock on the trading day immediately prior to
the mailing of such funds). These purchases may be made at any time beginning on
the first trading day following the 90th day after the effective date of the
plan of reorganization.
Trust beneficiaries making such purchase or sale elections will not be
required to pay any brokerage commissions, mailing charges, registration fees or
other administrative or similar expenses. All purchase and sale elections
received by the program agent for the purchase and sale program will be
processed pursuant to policies and procedures set forth as Exhibit J to the plan
of reorganization, a copy of which has been filed as an exhibit to the
Registration Statement of which this prospectus forms a part. These procedures
may be amended in the future. Trust beneficiaries will be notified of any
changes to the purchase and sale program procedures in the future. Any changes
to the procedures before the first anniversary of the effective date of the plan
of demutualization would require the approval of the New York Superintendent of
Insurance.
The trustee has the exclusive and absolute right to vote, assent or consent
the shares of common stock held in the trust at all times during the term of the
trust. Generally, on all matters brought to our stockholders for a vote, the
trustee will vote in accordance with the recommendation given by our board of
directors to our stockholders or, if no such recommendation is given, as
directed by our board. However, if the matter concerns any of the matters
described below, the trustee will solicit instructions from the trust
beneficiaries and will vote, assent or consent all trust shares, including for
purposes of determining a quorum, in favor of, in opposition to or abstaining
from the matter in the same ratio as trust interests of the trust beneficiaries
who returned voting instructions to the trustee indicated preferences for voting
in favor of, in opposition to or abstaining from such matter. If any such
calculation of votes would require a fractional vote, the trustee will vote the
next lower number of whole shares. In these matters, instructions actually given
by trust beneficiaries would have disproportionate weight in the voting. These
matters are:
- an election or removal of directors in which a stockholder has properly
nominated one or more candidates in opposition to a nominee or nominees
of our board of directors or a vote on a stockholder's proposal to oppose
a board nominee for director, remove a director for cause or fill the
vacancy caused by the removal of a director by stockholders, provided
that the stockholder making the nomination or proposal deposits funds for
the payment of postage and other expenses for mailing proxy materials to
all of the trust beneficiaries, or such lesser number, holding at least a
majority of the trust interests, that the stockholder seeks to solicit;
- a merger or consolidation, a sale, lease or exchange of all or
substantially all of the assets, or a recapitalization or dissolution of,
MetLife, Inc., in each case requiring a vote of our stockholders under
applicable Delaware law;
- any transaction that would result in an exchange or conversion of shares
of common stock held by the trust for cash, securities or other property;
- issuances of our common stock during the first year after the effective
date of the plan at a price materially less than the then prevailing
market price of our common stock, if a vote of our stockholders is
required to approve the issuance under Delaware law, other than issuances
in an underwritten public offering or pursuant to an employee benefit
plan;
- for the first year after the effective date of the plan, any matter that
requires a supermajority vote of our outstanding stock entitled to vote
thereon under Delaware law or our certificate of incorporation or
by-laws, and any amendment to our certificate of incorporation or by-laws
that is submitted for approval to our stockholders; and
- any proposal requiring our board of directors to amend or redeem the
rights under our stockholder rights plan, other than a proposal with
respect to which we have received
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advice of nationally-recognized legal counsel to the effect that the
proposal is not a proper subject for stockholder action under Delaware
law.
In the event that voting instructions are required to be solicited from trust
beneficiaries, trust beneficiaries will be mailed proxy statements, annual
reports and other materials with respect to any matter upon which they will
direct the voting of the shares held by the trust. In addition, the custodian
will prepare and mail to each beneficiary (1) an annual statement regarding the
status of such beneficiary's trust interests and any dividends and distributions
received by the trustee with respect to such interests, as well as any interest
earned by the trust with respect to such dividends and distributions, and the
procedures for notifying the custodian of any discrepancies or errors with
respect to such statement, and (2) a notice of the beneficiary's right to make
purchase, sale and withdrawal elections. The custodian will also prepare, file
and mail to each beneficiary all information reports required under federal,
state and local law in respect of the trust beneficiaries. The trustee will
register the trust interests under the Securities Exchange Act of 1934, as
amended, and will prepare and file all periodic and other reports and other
documents pursuant to that Act, including annual reports on Form 10-K containing
financial information regarding the trust, including the amount of dividends
received on the shares of our common stock held by the trust, income from
investments made by the trust and the distribution of those amounts to trust
beneficiaries. The trust will file a similar report on Form 8-K whenever
non-annual distributions are made to trust beneficiaries. The custodian will
inform trust beneficiaries annually, in connection with the expected annual
mailing of dividend checks and account statements, of the availability of the
annual report, and trust beneficiaries who telephone the toll-free number in
order to participate in the purchase and sale program or to obtain further
information will be informed that the annual report is available on our website
or by mail upon request.
Beneficiaries will be prohibited from selling, transferring, assigning,
encumbering, or granting any option or any other interest in, or otherwise
disposing of, their trust interests, except in limited circumstances set forth
in the trust agreement. Cash dividends, if any, collected or received by the
trustee with respect to the shares of our common stock held by the trust will be
invested by the trustee and distributed, together with interest earned thereon
and net of any applicable withholding taxes, through the custodian of the trust
to the beneficiaries. Regular cash dividends, including interest net of income
taxes, received by June 30 in any calendar year will be distributed on the
following July 31, and those received by December 31 will be distributed on the
following January 31, provided that in no event will such distribution be made
more than 90 days after the receipt of dividends by the trustee. Notwithstanding
this provision, we currently expect to pay dividends directly to the trust
beneficiaries at the same time they are paid to stockholders. Dividends or other
distributions in common stock will be allocated to the beneficiaries pro rata in
accordance with their respective interests in the trust and held by the trustee
as part of the corpus of the trust. All other distributions we may make to
stockholders will be held by the trustee and distributed through the custodian
of the trust as provided in the trust agreement. We will reimburse the trustee
and the custodian for all taxes, fees, commissions and other reasonable
out-of-pocket expenses incurred by the trustee and the custodian, respectively,
except that we will not reimburse the trustee and the custodian for the expense
of mailing to beneficiaries any proxy or other materials received by the trustee
on behalf of persons other than us.
Unless it shall have been previously terminated, the trust will terminate
upon the earlier of:
- 90 days after the trustee receives notice from us that the number of
shares of our common stock held by the trust is 10% or less of the number
of issued and outstanding shares of our common stock; or
- the date on which the last share of our common stock held by the trust
has been withdrawn, distributed or exchanged.
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The trust may be terminated earlier upon the first to occur of the
following:
- the 90th day after the trustee receives written notice from us, given in
our discretion, that the number of shares of our common stock held by the
trust is 25% or less of the number of issued and outstanding shares of
our common stock;
- the trustee receives written notice that our board of directors has
determined that continuation of the trust is or is reasonably expected to
become burdensome to us or the trust beneficiaries because of changes in
law or other circumstances;
- any rights issued under a stockholder rights plan adopted by us and held
by the trust pursuant to the trust agreement become separately tradeable
from the shares of our common stock held by the trust to which they
relate; or
- the entry of a final order for termination or dissolution of the trust or
similar relief by a court of competent jurisdiction.
If the trust has not otherwise terminated, it will terminate on the date
necessary to avoid a violation of the rule against perpetuities, if such rule is
applicable.
Upon termination of the trust, the remaining shares of our common stock
held by the trust will be distributed to the trust beneficiaries pro rata, in
accordance with their respective interests in the trust, in book entry form, to
the extent permitted by applicable law, or as otherwise directed by each trust
beneficiary, together with the trust beneficiaries' pro rata share of all unpaid
distributions and dividends and interest earned thereon. The trust provides
that, concurrently with the winding up of the trust, we may, in our discretion,
offer to purchase all or a portion of the shares of our common stock from the
trust at a price equal to the average of the closing prices of our common stock
on the 20 consecutive trading days preceding such offer.
ESTABLISHMENT AND OPERATION OF THE CLOSED BLOCK
The closed block is an accounting mechanism established to ensure that the
reasonable dividend expectations of policyholders who own certain individual
insurance policies are met. As set forth in the closed block memorandum included
as a schedule to the plan of reorganization, a copy of which has been filed as
an exhibit to the Registration Statement of which this prospectus forms a part,
we will allocate assets to the closed block in an amount that produces cash
flows which, together with anticipated revenue from the closed block policies,
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 for continuation of
policyholder dividend scales in effect for 1999, if the experience underlying
such scales continues, and for appropriate adjustments in such scales if the
experience changes. The establishment and operation of the closed block will not
modify or amend the provisions of the policies included therein.
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 included in the closed block. 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 our stockholders. See
Note 1 of "Notes to Pro Forma Consolidated Financial Information" for a more
detailed description of the manner in which the financial results of the closed
block will affect the accounting presentation of our results of operations. 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 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. Dividends on policies included in the closed block, as in the past,
will be declared at the discretion of the board of directors of
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Metropolitan Life Insurance Company, may vary from time to time, reflecting
changes in investment income, mortality, persistency and other experience
factors, and are not guaranteed. We will not be required to support the payment
of dividends on closed block policies from Metropolitan Life Insurance Company's
general funds, although we could choose to provide such support.
Metropolitan Life Insurance Company will continue to pay guaranteed
benefits under all policies in accordance with their terms, including the
policies included in the closed block. If the assets allocated to the closed
block, the investment cash flows from those assets and the revenues from the
policies included in the closed block prove to be insufficient to pay the
benefits guaranteed under the policies included in the closed block,
Metropolitan Life Insurance Company will be required to make such payments from
its general funds. Since the closed block has been funded to provide for payment
of guaranteed benefits, as well as for continuation of policyholder dividend
scales in effect for 1999, if experience underlying such scales continues, it
should not be necessary to use general funds to pay guaranteed benefits, unless
the policies included in the closed block experience substantial adverse
deviations in investment income, mortality, persistency or other experience
factors. We will use our best efforts to support the policies included in the
closed block with the assets allocated to the closed block. The assets allocated
to the closed block will be subject to the same liabilities (with the same
priority in liquidation) as assets outside the closed block.
As specified in the plan of reorganization, the policies included in the
closed block will generally consist of all classes of United States dollar
denominated individual life insurance policies for which Metropolitan Life
Insurance Company has a dividend scale in effect for 1999, but generally only to
the extent such policies are in force on any date between December 31, 1998 and
the effective date of the plan. A policy may be within a class for which there
is an experience-based dividend scale in effect for 1999 even if it does not
receive a 1999 dividend, and, therefore, the policy would be included in the
closed block. Experience-based dividend scales are actuarial formulas used by
life insurers to determine amounts payable as dividends on participating
policies based on experience factors relating to, among other things, investment
results, mortality, lapse rates, expenses, premium taxes and policy loan
interest and utilization rates. The fact that a policy is included in the closed
block has no bearing on whether the holder of that policy is entitled to receive
consideration under the plan or the amount of consideration allocated to the
policyholder.
The closed block includes policies of New England Mutual Life Insurance
Company that were participating policies at the time of its merger with
Metropolitan Life Insurance Company in 1996. Under the terms of the merger,
Metropolitan Life Insurance Company agreed to establish a separate segment
within its general account consisting of assets associated with those policies
plus additional assets. In the aggregate, such assets had a value of $226.4
million at December 31, 1998.
As provided in the plan of reorganization, Metropolitan Life Insurance
Company will add to the closed block premiums and other amounts received by, and
withdraw from the closed block policy benefits and other amounts paid by,
Metropolitan Life Insurance Company on the policies included in the closed
block. Metropolitan Life Insurance Company will charge the closed block with
federal income taxes, state and local premium taxes, and other additive state or
local taxes, as well as investment management expenses relating to the closed
block as provided in the plan of reorganization. Metropolitan Life Insurance
Company will also charge the closed block for expenses of maintaining the
policies included in the closed block. Cash payments with respect to certain
reinsurance will be withdrawn from or paid to the closed block.
The board of directors of Metropolitan Life Insurance Company will set the
dividends on the closed block policies annually, in accordance with applicable
law and consistent with the objective of minimizing tontine effects and
exhausting the assets of the closed block with the final
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payment made to the last policy included in the closed block. Metropolitan Life
Insurance Company will retain an independent actuary to review the operations of
the closed block every five years as required by the plan. Additionally,
Metropolitan Life Insurance Company will review the operation of, and prepare an
internal report regarding, the investment operations of the closed block
annually.
The closed block will continue in effect until the last policy in the
closed block is no longer in force. The expected life of the closed block is
over 100 years.
CLOSED BLOCK ASSETS AND LIABILITIES
In accordance with the plan of reorganization, we will allocate a portion
of Metropolitan Life Insurance Company's invested assets, as well as cash and
short-term investments, to the closed block. If we had established the closed
block at December 31, 1999, cash and invested assets and their carrying values
would have been as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
----------------------------
CARRYING VALUE % OF TOTAL
-------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Fixed maturities available-for-sale, at fair value.......... $21,729 70%
Mortgage loans on real estate............................... 4,785 16
Policy loans................................................ 3,747 12
Other invested assets....................................... 404 1
Short-term investments...................................... 8 0
Cash and cash equivalents................................... 251 1
------- ---
Total....................................................... $30,924 100%
======= ===
</TABLE>
The composition of assets in the closed block will change over time as a
result of new investments. New investments for the closed block acquired on and
after December 31, 1999 with closed block cash flows will be allocated to the
closed block upon acquisition and will consist only of investments permitted by
the plan of reorganization. The assets allocated to the closed block will be
subject to the same liabilities (with the same priority in liquidation) as all
assets in the general account of Metropolitan Life Insurance Company.
If we had established the closed block at December 31, 1999, the policy
liabilities and accruals associated with the closed block would have aggregated
$39,627 million. This amount would have included $38,888 million of policyholder
liabilities, $712 million of dividends payable to policyholders, current income
taxes payable of $14 million and other liabilities of $13 million. See "Pro
Forma Consolidated Financial Information -- Pro Forma Consolidated Balance
Sheet".
We have retained PricewaterhouseCoopers LLP to advise us in connection with
actuarial matters involved in the establishment and operation of the closed
block. The opinion of Kenneth M. Beck, a principal with the firm of
PricewaterhouseCoopers LLP, dated November 16, 1999, states (in reliance upon
the matters and subject to the limitations described in such opinion), among
other things, that MetLife's assets set aside as of December 31, 1998 (including
subsequent adjustments as provided for in the plan), to establish the closed
block, as set forth in the plan, are adequate because they are expected to
produce cash flows which, together with anticipated revenues from the closed
block business, are reasonably expected to be sufficient to support the closed
block business including, but not limited to, provisions for payment of claims
and certain expenses and taxes, and to provide for continuation of dividend
scales payable in 1999, if the experience underlying such scales continues. This
opinion is included as Annex A of this prospectus.
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TRANSFERRED CANADIAN POLICIES
In July 1998, Metropolitan Life Insurance Company sold a substantial
portion of its Canadian operations to Clarica Life Insurance Company. As part of
that sale, a large block of policies in effect with Metropolitan Life Insurance
Company in Canada were transferred to Clarica Life, and the holders of the
transferred Canadian policies became policyholders of Clarica Life. Those
transferred policyholders are no longer policyholders of Metropolitan Life
Insurance Company and, therefore, are not entitled to compensation under the
plan of reorganization. However, as a result of a commitment made in connection
with obtaining Canadian regulatory approval of that sale, if Metropolitan Life
Insurance Company demutualizes, its Canadian branch will make cash payments to
those who are, or are deemed to be, holders of these transferred Canadian
policies. The payments, which will be recorded in other expenses in the same
period as the effective date of the plan, will be determined in a manner that is
consistent with the treatment of, and fair and equitable to, eligible
policyholders of Metropolitan Life Insurance Company. The proceeds of the
initial public offering, as well as the net proceeds from the offering of the
units, must be sufficient to reimburse Metropolitan Life Insurance Company for
those payments, as well as to fund mandatory cash payments pursuant to the plan
and policy credits to policyholders and to pay fees and expenses incurred by
Metropolitan Life Insurance Company related to the demutualization. See Notes 2
and 7 of Notes to Pro Forma Consolidated Financial Information.
FEDERAL INCOME TAX CONSEQUENCES OF THE DEMUTUALIZATION
We have received a private letter ruling from the Internal Revenue Service
to the effect that:
- The MetLife Policyholder Trust will be treated as a "grantor trust" for
federal income tax purposes, and each beneficiary of the trust will be
treated for federal income tax purposes as if the beneficiary were the
direct owner of a proportionate interest in the shares of our common
stock (or other property) held in the trust;
- Beneficiaries of the trust will not recognize gain or loss for federal
income tax purposes as a result of the deposit of shares of our common
stock in the trust or their withdrawal of shares from the trust; and
- The deposit of shares of our common stock in the trust under the terms of
the plan of reorganization will not adversely affect the federal income
tax treatment to eligible policyholders of consideration received under
the plan, or of MetLife, resulting from the conversion of Metropolitan
Life Insurance Company from a mutual life insurance company into a stock
life insurance company owned by MetLife, Inc.
The Internal Revenue Service rulings are based on the accuracy of certain
representations made by us.
Under the terms of the plan of reorganization, the demutualization will not
become effective unless we receive an opinion of our special tax counsel,
Debevoise & Plimpton (or other nationally-recognized tax counsel), to the effect
that:
- Policies issued by Metropolitan Life Insurance Company before the
effective date of the plan will not be treated as newly-issued policies
for any material federal income tax purpose as a result of the
demutualization of Metropolitan Life Insurance Company under the plan;
- Eligible policyholders receiving solely interests in the trust will not
recognize gain or loss for federal income tax purposes as a result of the
demutualization of Metropolitan Life Insurance Company under the plan;
- The consummation of the plan of reorganization, including the crediting
of policy credits to a policy under the terms of the plan, will not
adversely affect any tax-favored status
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<PAGE> 102
accorded to the policy under the Internal Revenue Code, and will not be
treated as a contribution or distribution that results in penalties to
the holder; and
- The summary of the principal U.S. federal income tax consequences to
eligible policyholders of their receipt of consideration under the plan
of reorganization that is contained under the heading "Federal Income Tax
Consequences" in the information booklet provided to policyholders is
correct and complete in all material respects.
In addition to the required opinion described above regarding the federal
income tax treatment to policyholders, it is also a condition to the
effectiveness of the plan that we receive an opinion from our special tax
counsel to the effect that:
- MetLife, Inc. will not recognize any gain or loss for federal income tax
purposes as a result of (1) its issuance of its common stock to the
trust; (2) its receipt of shares of Metropolitan Life Insurance Company
common stock; (3) its cancellation, for no consideration, of its common
stock previously issued to and held by the Metropolitan Life Insurance
Company immediately prior to the effective date of the plan; or (4) its
sale of shares of its common stock in the initial public offering for
cash; and
- The conversion of Metropolitan Life Insurance Company from a mutual life
insurance company to a stock life insurance company will qualify as a
"reorganization" under the Internal Revenue Code.
We have received an additional opinion from Debevoise & Plimpton, our
special tax counsel, which is not required under the terms of the plan, to the
effect that, under the Internal Revenue Code, the regulations issued thereunder,
and current Internal Revenue Service and judicial interpretations of the
Internal Revenue Code and regulations:
- The affiliated federal income tax group of which Metropolitan Life
Insurance Company is the common parent immediately before the
demutualization will remain in existence after the effectiveness of the
plan, with MetLife, Inc. as the common parent; and
- Following its conversion from a mutual life insurance company to a stock
life insurance company, Metropolitan Life Insurance Company will continue
to be an eligible member for inclusion in that affiliated federal income
tax group.
Based on the Internal Revenue Service rulings we have received and the
opinions of our special tax counsel described above, we believe that MetLife
will not realize significant income, gain or loss for federal income tax
purposes as a result of the consummation of the demutualization under the terms
of the plan of reorganization.
The opinions of special tax counsel described above are based on the
accuracy of representations and undertakings made by us. We have not sought a
private letter ruling from the Internal Revenue Service regarding the matters
addressed by the opinions of special tax counsel described above.
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BUSINESS
We are a leading provider of insurance and financial services to a broad
spectrum of individual and institutional customers. We currently provide
individual insurance, annuities and investment products to approximately nine
million households, or one of every eleven households in the U.S. We also
provide group insurance and retirement and savings products and services to
approximately 64,000 corporations and other institutions, including 86 of the
FORTUNE 100 largest companies. Our institutional clients have approximately 33
million employees and members.
We are a leader in each of our major U.S. businesses. We believe that our
unparalleled franchises and brand names uniquely position us to be the
preeminent provider of insurance and financial services in the U.S. businesses
in which we compete.
We are one of the largest and best capitalized insurance and financial
services companies in the U.S. Our revenues for 1999 were $25.4 billion and our
net income was $617 million. We had total consolidated assets of $225.2 billion
and equity of $13.7 billion at December 31, 1999.
We are organized into five major business segments: Individual Business,
Institutional Business, Asset Management, Auto & Home and International.
INDIVIDUAL BUSINESS. Individual Business offers a wide variety of
protection and asset accumulation products for individuals, including life
insurance and annuities. Individual Business also distributes products
provided by our other business segments, including mutual funds and auto
and homeowners insurance. Reflecting overall trends in the insurance
industry, sales of our traditional life insurance products have declined in
recent years, while first-year premiums and deposits from variable life
insurance products have grown at a compound annual rate of 33.1% for the
five years ended 1999 and represented 67.4% of our total life insurance
sales for Individual Business in 1999. Our principal distribution channels
are the MetLife career agency and the New England Financial general agency
distribution systems and, after our recent acquisition of GenAmerica
Corporation, GenAmerica's independent general agency system. We also have
dedicated sales forces that market to non-profit organizations and banks
and their customers. In total, we had approximately 11,000 active sales
representatives in 1999. In addition to these distribution channels, we are
increasing the distribution of our products through independent insurance
agents and registered representatives. We believe our ability to
effectively manage these multiple distribution channels represents a
significant competitive advantage. Individual Business had $11.1 billion of
revenues, or 43.5% of our total revenues, and $565 million of operating
income in 1999.
INSTITUTIONAL BUSINESS. Institutional Business offers a broad range
of group insurance and retirement and savings products and services. Our
group insurance products and services include group life insurance and
non-medical health insurance such as short- and long-term disability,
long-term care and dental insurance, as well as other related products and
services. Our group insurance premiums, fees and other income, which
totaled $5.9 billion in 1999, have grown at a compound annual rate of 10.0%
for the three years ended 1999. Our retirement and savings products and
services include administrative services sold to sponsors of 401(k) and
other defined contribution plans, guaranteed interest products and separate
account products. We distribute our Institutional Business products through
a sales force of approximately 300 MetLife employees that is organized by
both customer size and product. In total, we have approximately 64,000
institutional customers, including 86 of the FORTUNE 100 largest companies.
Institutional Business had $10.4 billion of revenues, or 40.8% of our total
revenues, and $585 million of operating income in 1999.
ASSET MANAGEMENT. Through our wholly-owned subsidiary, State Street
Research & Management Company, and our controlling interest in Nvest
Companies, L.P. and its affiliates, Asset Management provides a broad
variety of asset management products and services primarily to third-party
institutions and individuals. Our Asset Management segment
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managed $189.8 billion of our total assets under management at December 31,
1999, including $54.9 billion of assets in mutual funds and in separate
accounts supporting individual variable life and annuity products. For the
five years ended 1999, this segment's assets under management grew at a
compound annual rate of 14.2%. We distribute our asset management products
through several distribution channels, including State Street Research's
and Nvest's dedicated sales forces and also through our Individual Business
and Institutional Business distribution channels. Asset Management had $0.9
billion of revenues, or 3.5% of our total revenues, and $51 million of
operating income in 1999.
AUTO & HOME. Auto & Home offers auto insurance, homeowners insurance
and other personal property and casualty insurance products. We sell these
products directly to employees through employer-sponsored programs, as well
as through a variety of retail distribution channels. These channels
include agents in the MetLife career agency system, approximately 6,000
independent agents and brokers, which includes those of The St. Paul
Companies acquired in 1999, and approximately 385 Auto & Home specialists.
We are the leading provider of personal auto and homeowners insurance
through employer-sponsored programs in the U.S. Net premiums earned from
products sold through employer-sponsored programs have grown at a 14.3%
compound annual rate for the five years ended 1999. On September 30, 1999,
our Auto & Home segment acquired the standard personal insurance operations
of The St. Paul Companies, which had in-force premiums of approximately
$1.1 billion, substantially increasing the size of our personal lines
business, making us the eleventh largest personal property and casualty
insurer in the U.S. based on 1998 net premiums written. See
"Business -- Auto & Home". Auto & Home had $1.9 billion of revenues, or
7.4% of our total revenues, and $54 million of operating income in 1999.
INTERNATIONAL. We have international insurance operations in ten
countries, with a focus on the Asia/Pacific region, Latin America and
selected European countries. Our International segment offers life
insurance, accident and health insurance, annuities and retirement and
savings products and services to both individuals and groups and auto and
homeowners coverage to individuals. Assets of our International segment, as
adjusted for the recent divestitures of a substantial portion of our U.K.
and Canadian operations, have grown at a compound annual rate of 21.4% for
the five years ended 1999. International had $0.8 billion of revenues, or
3.1% of our total revenues, and $18 million of operating income in 1999.
STRATEGY
Our mission is to build financial freedom for everyone. Consistent with
this mission, our goal is to be the preeminent provider of insurance and
financial services in each of the U.S. businesses in which we compete. In order
to achieve that goal, we will pursue the following strategies across all of our
business segments:
BUILD ON WIDELY RECOGNIZED BRAND NAMES
Our widely recognized brand names are among our most valuable assets. We
believe that our leading market share positions in the insurance and financial
services industries, our long history of innovation, integrity and reliability,
and our reputation for high quality products and services to individuals and
institutions have resulted in the MetLife name becoming one of the most
well-known brand names in the U.S. We have also been successful in utilizing
additional brand names, such as New England Financial, Security First Group and
State Street Research, for specific market segments. We believe our recent
acquisition of GenAmerica and RGA further strengthens our brand portfolio. In
addition, we believe that our brand names give us a key competitive advantage,
allowing us to continue to build and maintain strong relationships with our
customers and distributors. We intend to continue to aggressively capitalize on
our brand recognition across multiple products, distribution channels and
customer groups.
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CAPITALIZE ON LARGE CUSTOMER BASE
As a leading provider of insurance and financial services for over 130
years, we have built an unparalleled base of customers, including nine million
households, or one of every eleven households in the U.S., and approximately
64,000 institutional customers with approximately 33 million employees and
members. We believe that our large, existing customer base represents a
significant growth opportunity. We intend to pursue the following growth
initiatives:
- enhancing our relationships with our existing individual customers by:
- offering a broad array of products that meets the needs of our
customers throughout their entire life cycle of financial needs;
- improving the training of our agents and other financial services
representatives to strengthen their ability to serve the needs of our
customers;
- developing direct marketing programs in partnership with our agency
sales force to identify additional sales opportunities among our
existing customers; and
- providing banking and related services, as early as the first quarter
of 2001, to serve the banking needs of our individual customers;
- offering financial advice and education, retirement planning and
beneficiary assistance services directly to employees of our
institutional customers; and
- increasing sales to our institutional customers by expanding the offering
of voluntary (employee-paid) products, including auto and homeowners and
long-term care insurance and pre-paid legal services plans.
EXPAND MULTIPLE DISTRIBUTION CHANNELS
We believe that our development and successful management of multiple
distribution channels represent a significant competitive advantage. Our
multiple distribution channels include our proprietary career and general agency
distribution systems and our nationwide Institutional Business sales force, as
well as a wide variety of other distribution channels in each of our business
segments. We intend to grow our core distribution channels and to continue to
build complementary distribution channels for sales of our products.
We believe our career agency and general agency systems provide us with
important advantages, allowing us to more effectively control our distribution
and build and maintain long-term relationships with our customers. Our objective
is to increase the size and productivity of our agency distribution systems by:
- expanding our investment in the recruiting, training and retention of
agents, including changing our compensation practices to improve
incentives for more productive agents and increasing our recruiting of
agencies as well as individual agents; and
- enhancing the technology that supports agents, including improving their
access to product and client information and offering more sophisticated
client management systems to enable them to service larger numbers of
clients and prospects more effectively.
Our four-year agent retention rate has improved from 10.2% in 1995 to 24.2%
in 1999. The industry average in 1998 was 14.2%. During the period from 1995 to
1999, the productivity of our career and general agency distribution systems, as
measured by NET SALES CREDITS per agent, an industry measure for agent
productivity, has grown at a compound annual rate of 12.0%.
In addition to our core distribution channels, we have also developed and
seek to expand additional complementary distribution channels that provide
opportunities for further growth. Examples of our initiatives include:
- our recent acquisition of GenAmerica, which sells its life insurance and
annuity products through multiple distribution channels;
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- our recent acquisitions of Security First Group and the Nathan & Lewis
companies, which increased our presence in the fast-growing bank and
broker-dealer distribution channels;
- expanding our marketing efforts to the independent agency community by
introducing new products and programs;
- establishing the Small Business Center, which has offices located
throughout the U.S., to better access the rapidly growing small-sized
institutional markets;
- entering into joint ventures and other arrangements with third parties to
expand the marketing and distribution opportunities of our Institutional
Business products and services;
- establishing additional distribution channels for Asset Management,
including the development of a dedicated sales force for State Street
Research and increased coordination of distribution among Nvest's
investment managers; and
- introducing a direct response marketing program to generate additional
Auto & Home sales.
Complementary distribution channels within Individual Business accounted
for 2.4% of first-year life insurance premiums and deposits and 32.2% of annuity
premiums and deposits in 1999. In addition, premiums and other income from
products sold through Institutional Business' Small Business Center have grown
at a compound annual rate of 28.1% for the three years ended 1999 and totaled
$328 million in 1999.
CONTINUE TO INTRODUCE INNOVATIVE AND COMPETITIVE PRODUCTS
The products and services offered by the financial services industry
continue to evolve as the financial needs of consumers change. We intend to be
at the forefront of the insurance and financial services industries in offering
innovative and competitive products to our customers. Recent initiatives
include:
- new or revised products covering a substantial portion of our individual
product offerings, including the introduction of a new variable universal
life product, a long-term care insurance product and an equity additions
feature to our traditional participating whole life insurance product,
which allows policyholder dividends to be invested in an equity index
account; and
- new voluntary institutional products, including long-term care and auto
and homeowners insurance, as well as pre-paid legal services plans, for
employees of our Institutional Business customers.
INCREASE FOCUS ON ASSET ACCUMULATION PRODUCTS
We intend to expand our assets under management in both our insurance
operations and our Asset Management segment by increasing our focus on sales of
asset accumulation products, including variable life and annuity products,
mutual funds and 401(k) plan products, which we believe provide a stable source
of fee income as well as a higher operating return on equity compared with
traditional insurance products. During the five years ended 1999, the separate
account liabilities related to our individual variable annuity products grew at
a 38.2% compound annual rate, and totaled $20.7 billion at December 31, 1999.
Assets under management for mutual funds and separate accounts supporting
individual variable life and annuity products grew at a compound annual rate of
16.7% for the five years ended 1999, and totaled $54.9 billion at December 31,
1999. In addition, primarily through two recent acquisitions, our Institutional
Business segment has become a leading provider of administrative services in the
defined contribution 401(k) plan market. We intend to use this position to
attract more 401(k) plan assets for our Asset Management segment.
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REDUCE OPERATING EXPENSES
We are committed to improving profitability by reducing operating expenses.
As part of an overall program to reduce operating expenses and enhance the
efficiency of our operations, we have implemented the following programs:
- during 1998, we reduced the number of non-sales positions by 2,267, an
11% reduction, and during 1999, we reduced the number of non-sales
positions by 1,856, or 7%;
- in 1999, as part of an internal reorganization, we began to integrate the
operations of New England Financial, which since its merger with MetLife
had been operated as a separate division, with the individual insurance
operations of MetLife, and further consolidate administrative services
throughout our organization; we believe this will reduce operating
expenses by eliminating redundancies; and
- we have made substantial investments in technological improvements in
recent years, totaling approximately $925 million for the three years
ended 1999, which we believe will enhance the efficiency of our
operations, as well as improve our customer service and financial
reporting.
STRENGTHEN PERFORMANCE-ORIENTED CULTURE
Our management team intends to strengthen the performance-oriented culture
throughout our organization. We have implemented a number of initiatives to
significantly enhance the performance of our employees, including:
- establishing a new compensation program to better align compensation with
individual and MetLife performance;
- enhancing the expertise of our management and workforce by selectively
hiring experienced new employees at all levels of our organization, with
28% of new officer appointments for the three years ended 1999 coming
from outside MetLife;
- expanding our training effort, including new management training programs
for all of our officers and expanded training for our employees; and
- implementing a new performance measurement and review program for our
employees to increase individual accountability and better align
individual and corporate goals.
CONTINUE TO OPTIMIZE OPERATING RETURNS FROM INVESTMENT PORTFOLIO
The return on our invested assets has contributed significantly to our
earnings growth. Over the past three years, we have repositioned our investment
portfolio in order to provide a higher operating rate of return on our invested
assets. In connection with that repositioning, we reduced our investments in
treasury securities and corporate equities and have increased our investments in
fixed maturities with higher current yields. At the same time, we have continued
to maintain a prudent asset mix, with investment grade fixed maturities
constituting 91.0% of our total fixed maturities at December 31, 1999. We
believe that the expertise of our investment department will enable us to
continue to optimize the operating returns on our invested assets in the future.
ENHANCE CAPITAL EFFICIENCY OF OUR OPERATIONS
We seek to maximize our operating return on equity by enhancing the capital
efficiency of our operations. We have recently implemented a new internal
capital allocation system that we believe will allow us to more effectively
invest our capital. Consistent with a more disciplined approach to capital
allocation, we have divested operations that did not meet targeted rates of
return or growth, including our medical insurance operations, substantial
portions of our U.K. and Canadian operations and our commercial leasing
business. We also intend to increase sales of asset accumulation products, such
as variable life and annuity products, that require less capital
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than traditional insurance products. In addition, as a publicly traded stock
company, we will have a greater ability to make acquisitions and raise external
capital in a more efficient manner, which we believe will increase our adjusted
operating return on equity and enhance stockholder value.
FOCUS INTERNATIONAL OPERATIONS ON GROWING MARKETS
We have established insurance operations in selected international markets
that are experiencing significant growth in demand for insurance products and
where we believe we can gain significant market share. We intend to expand our
international operations by continuing to make capital investments in countries
in which we have existing operations, as well as in selected new markets, either
through start-up operations or by acquisition. We now have operations in ten
emerging insurance markets, including Indonesia and Uruguay, which we entered in
1998, and Brazil, which we entered in 1999. In addition, at the end of 1999, we
obtained a license to sell life insurance in Poland. As part of our strategy to
focus on growth markets, as well as to divest operations that would not meet our
financial objectives, we disposed of substantial portions of our operations in
the U.K. in 1997 and in Canada in 1998.
INDIVIDUAL BUSINESS
Our Individual Business segment offers a wide variety of protection and
asset accumulation products aimed at serving the financial needs of our
customers throughout their entire life cycle. Products offered by Individual
Business include insurance products such as traditional, universal and variable
life insurance, individual disability insurance and long-term care insurance and
annuities and investment products such as variable and fixed annuities and
mutual funds. Our principal distribution channels are the MetLife career agency
and the New England Financial general agency distribution systems and, after our
recent acquisition of GenAmerica Corporation, GenAmerica's independent general
agency system. We also have dedicated sales forces that market to non-profit
organizations and banks and their customers. In total, we had approximately
11,000 active sales representatives in 1999. In addition to these distribution
channels, we are increasing the distribution of our products through independent
insurance agents and registered representatives.
Our broadly recognized brand names and strong distribution channels have
allowed us to maintain our position as the largest provider of individual life
insurance and annuities in the U.S., with $11.5 billion of total individual life
and annuity premiums and deposits in 1999. Through September 30, 1999 we were
also the largest issuer of individual variable life insurance in the U.S. with
$278.7 million in first-year premiums and deposits, and the seventh largest
variable annuity writer with approximately $24.1 billion in variable annuity
assets managed.
The U.S. individual life insurance industry had approximately $12.7
trillion of insurance in force and $1.3 trillion of total annuity assets at or
for the year ended December 31, 1998. The U.S. insurance and investment market
has undergone tremendous change in recent years, as Americans have begun to rely
less on traditional life insurance, defined benefit retirement plans, social
security and other government programs and the "baby-boom" generation has begun
to enter their prime savings years. At the same time, technology advances have
greatly increased the availability and timeliness of information so consumers
are better informed about financial products and the state of their financial
affairs. As a result of these trends, sales of mutual funds, variable annuities
and other savings products have increased. We believe that the growth of
annuities and investment products will continue and that, as the baby-boom
generation begins to retire, asset payout products will also increase in
importance. We believe that, as these trends continue, the types of products we
offer, including variable life insurance, fixed and variable annuities and
long-term care insurance, will become the products of choice for the protection
and transfer of wealth.
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INDIVIDUAL BUSINESS STRATEGY
BUILD ON WIDELY RECOGNIZED BRAND NAMES. We believe we have one of the most
well-known brand names in the U.S., built through our leading market share
positions in the insurance and financial services industries, our reputation for
high quality products and services and our long practice of advertising the
MetLife name and Peanuts(TM) characters. We have also successfully used
additional brand names in our Individual Business segment, such as New England
Financial, Security First Group and Texas Life, to focus on specific market
segments. We believe our recent acquisition of GenAmerica further strengthens
our brand portfolio. In addition, we believe that our brand names give us a key
competitive advantage, allowing us to continue to build and maintain strong
relationships with our customers and distributors. We intend to continue to
aggressively capitalize on our brand recognition across multiple products,
distribution channels and customer groups.
CAPITALIZE ON LARGE CUSTOMER BASE. We believe consumers increasingly seek
comprehensive financial advice and information regarding their financial affairs
and superior products that serve them throughout the different stages of their
lives. We believe that building long-term relationships with our large existing
customer base represents a significant growth opportunity. Approximately nine
million households, or one of every eleven households in the U.S., own a MetLife
individual product. Our goal is to obtain a larger share of the individual
insurance, annuities and investment products purchased by these households by
providing them with the best products and services that are available to meet
their needs. We intend to pursue the following key initiatives:
- offering a broad array of products that meet the financial needs of our
customers throughout their entire life cycle, including protection
products, such as life and disability insurance; asset accumulation
products, such as annuities and mutual funds; asset distribution
products, such as payout annuities; and wealth transfer products, such as
life insurance and long-term care insurance;
- improving the training of our agents and other financial services
representatives to strengthen their ability to offer sophisticated
financial advice to our customers; and
- developing direct marketing programs in partnership with our agency sales
force to identify additional sales opportunities among our existing
customers.
We also seek to utilize our historically strong position among our institutional
customers to provide programs offering financial advice and education,
retirement planning and beneficiary assistance services to their employees.
GROW CORE DISTRIBUTION CHANNELS. Although we utilize a number of different
distribution channels to market our individual products, we believe that our
core career agency and general agency distribution systems are among our most
valuable assets, allowing us to more effectively control our distribution and
build and maintain long-term relationships with our customers. We intend to
increase the size and productivity of our agency distribution systems by:
- expanding our investment in the recruiting, training and retention of
agents, including changing our compensation practices to improve
incentives for more productive agents and increasing our recruiting of
agencies as well as individual agents; and
- enhancing the technology that serves agents, including improving their
access to product and client information and offering more sophisticated
client management systems to enable them to service larger groups of
clients and prospects more effectively.
The productivity of our career and general agency distribution systems, as
measured by net sales credits per agent, an industry measure for agent
productivity, has grown at a compound annual rate of 12.0% for the five years
ended 1999. During that period, our four-year agent retention rate has improved
from 10.2% in 1995 to 24.2% in 1999. The industry average in 1998 was 14.2%.
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INCREASE DISTRIBUTION THROUGH OTHER CHANNELS. We expect to continue
aggressively seeking opportunities to expand our distribution capabilities in
attractive markets. In 1997, we acquired Security First Group, which expanded
our distribution through the rapidly growing bank market for annuities and
investment products and to the nonprofit, educational and health care markets.
In 1998, we purchased Nathan & Lewis, which increased our presence in the
fast-growing broker-dealer distribution channel. Our recent acquisition of
GenAmerica added its multiple distribution channels, including its independent
general agency system. We also expect to increase our use of independent life
agents and registered representatives in the future. Sales through additional
channels represented 2.4% of annualized first-year life insurance premiums and
deposits and 32.2% of individual annuity premiums and deposits in 1999.
CONTINUE TO INTRODUCE INNOVATIVE AND COMPETITIVE PRODUCTS. The products
offered by the financial services industry continue to evolve as the financial
needs of consumers change and as technology improves. We intend to be at the
forefront of the insurance and financial services industries in offering
innovative and competitive products to our customers. Recent initiatives
include:
- continuing to enhance the competitiveness of our products, such as the
1998 introduction of new or revised products covering a substantial
portion of our product offerings;
- creating products to reflect the needs of specific distribution channels
and by marketing products under several brand names, including MetLife,
New England Financial, Security First, Texas Life and General American
Life; and
- distributing products created by others, such as mutual funds and 401(k)
plans, which may be offered under one of our own brand names or carry the
name of the company that created them.
MARKETING AND DISTRIBUTION
We target the large, middle-income market, as well as affluent individuals,
owners of small businesses and executives of small to medium-sized companies. We
have also been successful in selling our products in various multicultural
markets. We distribute our individual products nationwide through multiple
channels, with the primary distribution systems being the MetLife career agency
system and the New England Financial general agency system. While continuing to
invest in our traditional distribution channels, we have also expanded into
additional channels in order to supplement our growth or penetrate specific
target markets. During the year ended December 31, 1999, the MetLife career
agency and the New England Financial general agency systems and our additional
distribution channels accounted for 49.8%, 47.8% and 2.4%, respectively, of
first-year premiums and deposits for individual life insurance and 54.9%, 12.9%
and 32.2%, respectively, of individual annuity deposits.
METLIFE CAREER AGENCY SYSTEM. The MetLife career agency system had 6,866
agents in 318 agencies at December 31, 1999. Our career agency sales force
focuses on the large, middle-income market, including multicultural markets. The
average face amount of a life insurance policy sold through the career agency
system in 1999 was approximately $160,000.
Agents in our career agency system are full-time MetLife employees whom we
compensate primarily with commissions based on sales. As our employees, they
also receive certain benefits. Agents in our career agency system may not offer
products of other insurers without our approval. At December 31, 1999,
approximately 93% of the agents in our career agency system were licensed to
sell one or more of the following products: variable life insurance, variable
annuities or mutual funds.
We support our efforts in multicultural markets through targeted
advertising, specially trained agents and sales literature written in
non-English languages. We estimate sales in multicultural markets represent
one-fourth of MetLife's career agency individual life sales.
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From 1994 to 1998, the number of agents in the MetLife career agency system
declined, from 9,521 to 6,853. Most of this decline was due to a reduction in
the number of less experienced agents, with the number of agents having at least
five years of experience at MetLife declining from approximately 4,100 to
approximately 3,400 during this period. We believe that this decline was
principally the result of the adverse impact of sales practices litigation
brought against us beginning in the early 1990s, the establishment of more
stringent company-wide criteria for recruiting and retaining agents and a
consolidation of sales offices and changes in compensation practices for our
sales force during this period. We have undertaken several initiatives to grow
our career agency force in the future, including expanding our investment in the
recruiting, training and retention of agents, changing our compensation
practices to improve incentives for more productive agents and increasing our
recruiting of agencies as well as individual agents. At December 31, 1999, the
number of agents in the MetLife career agency system was 6,866. In addition, our
career agency system is increasingly productive, with net sales credits per
agent, an industry measure for agent productivity, growing at a compound annual
rate of 10.6% for the five years ended 1999.
NEW ENGLAND FINANCIAL GENERAL AGENCY SYSTEM. In 1996, we merged with the
parent company of New England Life Insurance Company, which afforded us better
access to its target market of affluent individuals, owners of small businesses
and executives of small- to medium-sized companies. We operate the New England
Life Insurance Company business through our New England Financial division. The
average face amount of a life insurance policy sold through the New England
Financial general agency system in 1999 was approximately $310,000. At December
31, 1999, New England Financial's sales force comprised 76 general agencies
providing support to 2,825 agents and a network of independent brokers
throughout the U.S. The compensation of both agents, who are independent
contractors, and general agents, who have exclusive contracts with New England
Financial, is based on sales, although we also provide general agents with an
allowance for benefits and other expenses.
New England Financial has a highly trained general agency sales force and,
according to The American College, in 1998 ranked third in the insurance
industry in the percentage of agents who are Chartered Life Underwriters and
Chartered Financial Consultants. Approximately 92% of New England Financial's
general agents are licensed to sell variable products and mutual funds. New
England Financial's general agency sales force increased total agent count by
123 agents in 1999; we believe it is one of the few life insurance organizations
to register a significant increase in agents in 1999. To capitalize on its
distribution strengths and achieve even higher levels of performance and agent
retention, New England Financial is creating a compensation system in which the
interests of the company and its top performing agents and field managers are
more closely aligned. Productivity of the New England Financial general agency
force, as measured by net sales credits, has grown at a compound annual rate of
13.8% for the five years ended 1999.
ADDITIONAL DISTRIBUTION CHANNELS. We also distribute our individual
insurance and investment products through several additional distribution
channels, including Nathan & Lewis, MetLife Brokerage, New England Financial's
Independent Producer Network, the Security First Group, MetLife Resources and
Texas Life.
Nathan & Lewis. Nathan & Lewis Securities, Inc., a MetLife subsidiary
acquired in 1998, is a broker-dealer that markets mutual funds and other
securities, as well as variable life insurance and variable annuity
products, through approximately 1,000 independent registered
representatives. With the acquisition, we obtained the use of Nathan &
Lewis's account information and client management systems, which we intend
to integrate into our other broker-dealer operations.
Independent Distribution Network. In 1999, Individual Business
combined MetLife Brokerage, a division of MetLife, and New England
Financial's Independent Producer Network to create the Independent
Distribution Network (IDN). IDN will market integrated,
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specially-designed insurance products to upper income customers in the
wealth preservation market through approximately 1,000 independent retail
and wholesale insurance brokerage agencies, independent producers and
agents in the career and general agency systems.
Security First Group. Security First Group, a MetLife subsidiary
acquired in 1997, distributes proprietary and third-party fixed and
variable annuity products and mutual funds to customers of approximately 65
national, regional and community banks.
MetLife Resources. MetLife Resources, a division of MetLife, markets
retirement, annuity and other financial products on a national basis
through approximately 415 agents and independent brokers. MetLife Resources
targets the nonprofit, educational and health care markets.
Texas Life. Texas Life, a MetLife subsidiary, markets whole life and
universal life insurance products under the Texas Life name through
approximately 1,585 active independent insurance brokers. These brokers are
independent contractors that sell insurance for Texas Life on a
nonexclusive basis. Recently, a number of MetLife career agents have also
begun to market Texas Life products. Texas Life sells permanent life
insurance policies with low cash values that are marketed through the use
of brochures, as well as payroll deduction life insurance products.
PRODUCTS
We offer a wide variety of individual insurance, annuities and investment
products aimed at serving our customers' financial needs throughout their entire
life cycle. Our individual insurance products consist of variable life,
universal life, whole life, term life and other insurance products. Our
individual annuities and investment products consist of variable and fixed
annuities and mutual funds.
The following table sets forth selected financial information regarding our
individual insurance, annuities and investment products at the dates or for the
periods indicated:
INDIVIDUAL INSURANCE, ANNUITIES AND INVESTMENT PRODUCTS
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
INSURANCE PRODUCTS:
Variable life:
First-year premiums/Deposits.............................. $ 389.1 $ 371.0 $ 242.2
Premiums/Deposits......................................... $ 997.7 $ 857.1 $ 657.3
Number of policies........................................ 480,107 415,933 360,790
Future policy benefits/Policy account balance............. $ 381.4 $ 289.7 $ 226.8
Separate account liability................................ $ 4,160.0 $ 3,148.4 $ 2,063.1
Life insurance in force................................... $ 81,146.8 $ 65,902.1 $ 52,647.2
Universal life:
First-year premiums/Deposits.............................. $ 14.8 $ 20.7 $ 28.7
Premiums/Deposits......................................... $ 556.1 $ 578.0 $ 613.6
Number of policies........................................ 907,214 1,058,081 1,097,026
Future policy benefits/Policy account balance............. $ 5,870.0 $ 5,793.2 $ 5,688.0
Life insurance in force................................... $ 78,729.0 $ 82,330.3 $ 86,016.9
Whole life:
First-year premiums/Deposits.............................. $ 135.8 $ 162.2 $ 198.7
Premiums/Deposits......................................... $ 3,834.2 $ 3,843.7 $ 3,859.4
Number of policies........................................ 7,788,905 8,160,567 8,532,166
Future policy benefits/Policy account balance............. $ 36,887.6 $ 35,725.8 $ 34,589.8
Life insurance in force................................... $193,522.8 $193,819.5 $196,785.8
</TABLE>
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<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Term life:
First-year premiums/Deposits.............................. $ 37.2 $ 42.6 $ 29.7
Premiums/Deposits......................................... $ 312.3 $ 307.6 $ 284.8
Number of policies........................................ 659,742 675,362 689,767
Future policy benefits/Policy account balance............. $ 483.6 $ 454.0 $ 435.6
Life insurance in force................................... $126,511.6 $123,561.8 $117,443.2
Other Individual insurance products:(1)
First-year premiums/Deposits.............................. $ 432.9 $ 295.7 $ 269.0
Premiums/Deposits......................................... $ 1,221.3 $ 1,082.2 $ 1,011.5
Number of policies........................................ 3,004,914 3,173,831 3,411,881
Future policy benefits/Policy account balance............. $ 5,213.4 $ 5,186.2 $ 5,549.9
Separate account liability................................ $ 3,950.1 $ 4,020.8 $ 3,457.3
ANNUITIES AND INVESTMENT PRODUCTS:
Annuities:
Premiums/Deposits......................................... $ 4,547.0 $ 3,992.6 $ 3,167.1
Number of contracts....................................... 1,483,874 1,453,943 1,411,103
Future policy benefits/policy account balance............. $ 21,022.3 $ 21,100.2 $ 21,313.2
Separate account liability................................ $ 20,718.2 $ 15,844.0 $ 11,686.4
Mutual funds:
Deposits.................................................. $ 3,848.2 $ 3,303.1 $ 2,540.4
</TABLE>
- ---------------
(1) Consists of individual disability insurance products; individual long-term
care insurance products; small face amount life insurance policies sold by
our agents until 1964, known as industrial policies; and employee benefit
products and group pension products sold through New England Financial.
Reflecting trends in the insurance industry, sales of mutual funds,
variable annuities, variable life insurance policies and other savings products
have increased in recent years, while sales of our traditional insurance
products have declined. During the five years ended 1999, the separate account
liabilities related to our individual variable annuity products grew at a 38.2%
compound annual rate, and totaled $20.7 billion at December 31, 1999. First-year
premiums and deposits for variable life insurance products have grown at a 33.1%
compound annual rate and were $389.1 million in 1999. During this same period,
mutual fund sales have grown at a 29.7% compound annual rate and in 1999
accounted for $3.8 billion of deposits. Sales of whole and term life insurance
products, however, declined during this period, to $173.0 million of first-year
premiums and deposits in 1999 from $341.6 million in 1995, which represented an
annual rate of decline of 15.6%.
INSURANCE PRODUCTS
Our individual insurance products include variable life products, universal
life products, traditional life products, including whole life and term
insurance, and other insurance products, including individual disability
insurance and long-term care insurance products, which are designed to meet a
multitude of consumer needs.
We continually review and update our products. We have introduced new
products and features designed to increase the competitiveness of our portfolio
and the flexibility of our products to meet the broad range of asset
accumulation, protection and distribution needs of our customers. Some of these
updates have included the introduction of a new variable universal life product,
a long-term care insurance product and an equity additions feature to our
traditional participating whole life insurance product, which allows
policyholder dividends to be invested in a stock index investment account.
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Distribution options under life policies and under both fixed and variable
annuities include level payments guaranteed for the lifetime of the owner or
beneficiary, for a specified term or combinations of these two options.
Distribution options may be accessed through an immediate annuity or following
the accumulation phase of a deferred annuity.
VARIABLE LIFE. Variable life products provide insurance coverage through a
contract which gives the policyholder flexibility in investment choices and,
depending on the product, in premium payments and coverage amounts, with certain
guarantees. For example, we retain the right within limits to adjust the fees we
assess for providing administrative services and death benefit coverage. Most
importantly, with variable life products, premiums and cash value can be
directed by the policyholder into a variety of separate investment accounts or
directed to our general account. In the separate investment accounts, the
policyholder bears the entire risk of the investment results. We collect
specified fees for the management of these various investment accounts and any
net return is credited directly to the policyholder's account. In some
instances, third-party money management firms manage investment accounts that
support variable insurance products. With some products, by maintaining a
certain premium level, policyholders may have the benefit of various death
benefit guarantees that may protect the death benefit from adverse investment
experience.
UNIVERSAL LIFE. Universal life products provide insurance coverage on the
same basis as variable life, except that they allow premiums, and the resulting
accumulated balances, to be allocated only to our general account. Universal
life products may allow the insured to increase or decrease the amount of death
benefit coverage over the term of the contract and may allow the owner to adjust
the frequency and amount of premium payments. We credit premiums, net of
specified expenses, to an account maintained for the policyholder, as well as
interest, at rates we determine, subject to specified minimums. Specific charges
are made against the account for the cost of insurance protection and for
expenses.
WHOLE LIFE INSURANCE. Whole life insurance products provide a guaranteed
benefit upon the death of the insured in return for the periodic payment of a
fixed premium over a predetermined period. Premium payments may be required for
the whole of the contract period, to a specified age or for a specified period,
and may be level or change in accordance with a predetermined schedule. Whole
life insurance includes policies that provide a participation feature in the
form of dividends. Policyholders may receive dividends in cash or apply them to
increase death benefits, increase cash values available upon surrender or reduce
the premiums required to maintain the contract in force. In certain
jurisdictions, dividends may be directed into an equity investment account.
Because the use of dividends is specified by the policyholder, this group of
products provides significant flexibility to individuals to tailor the product
to suit their specific needs and circumstances, while at the same time providing
guaranteed benefits.
We intend to continue offering participating policies after the
demutualization. We will be subject to statutory restrictions that limit to 10%
the amount of statutory profits on participating policies written after the
demutualization (measured before dividends to policyholders) that can inure to
the benefit of stockholders. We believe that the impact of these restrictions on
our earnings will not be significant.
TERM INSURANCE. Term insurance provides a guaranteed benefit upon the
death of the insured within a specified time period in return for the periodic
payment of premiums. Specified coverage periods range from one year to 20 years,
but in no event are longer than the period over which premiums are paid. Death
benefits may be level over the period or decreasing. Decreasing coverage is used
principally to provide for loan repayment in the event of death. Premiums may be
guaranteed at a level amount for the coverage period or may be non-level and
non-guaranteed. Term insurance products are sometimes referred to as pure
protection products, in that there are normally little or no savings or
investment elements. Term contracts expire without value at the end of the
coverage period if the insured party is still alive.
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OTHER INDIVIDUAL INSURANCE PRODUCTS. Individual disability
insurance. Individual disability products provide a benefit in the event of the
disability of the insured. In most instances, this benefit is in the form of a
monthly income paid to age 65. In addition to income replacement, the product
may be used to provide for the payment of business overhead expenses for
disabled business owners or mortgage payment protection. We also distribute
individual disability policies through a joint venture between New England
Financial and Provident Companies, Inc. Although policies are issued in New
England Financial's name, all underwriting, administration and servicing is
handled by Provident, and 80% of the risk on all these new disability policies
is reinsured by Provident.
Individual long-term care insurance. Our long-term care insurance provides
reimbursement for certain costs associated with nursing home care and other
services that may be provided to older individuals unable to perform the
activities of daily living.
Other products. In addition to these products, we operate a closed block
of small face amount life insurance policies that our agents sold until 1964,
known as industrial policies. New England Financial also sells a small amount of
employee benefit products and group pension products, which are included in the
financial results of our Individual Business segment.
ANNUITIES AND INVESTMENT PRODUCTS
We offer a variety of individual annuities and investment products,
including variable and fixed annuities and mutual funds.
VARIABLE ANNUITIES. We offer variable annuities for both asset
accumulation and asset distribution needs. Variable annuities allow the
contractholder to make deposits into various investment accounts, as determined
by the contractholder. The investment accounts are separate accounts of MetLife
or New England Financial, and risks associated with investments in the separate
accounts are borne entirely by the contractholders. Contractholders may also
choose to allocate all or a portion of their account to our general account, in
which case we credit interest at rates we determine, subject to certain
minimums. They may also elect certain death benefit guarantees.
Separate account investments may be managed by us or by various
unaffiliated third-party portfolio managers. Third-party managers include such
well-known names as Janus Capital Corp., T. Rowe Price Associates, Inc., Scudder
Kemper Investments, Inc., Neuberger Berman Management Inc. and Fidelity
Investments. The availability of these managers depends on the particular
product series and distribution channel used by the contractholder. At December
31, 1999, $15.0 billion of variable annuity assets were allocated to separate
accounts managed by us, $5.7 billion to separate accounts managed by third
parties and $8.0 billion to our general account.
FIXED ANNUITIES. Fixed annuities are used for both asset accumulation and
asset distribution needs. Fixed annuities do not allow the same investment
flexibility provided by variable annuities but provide guarantees related to
preservation of principal and credited interest. Deposits made into these
contracts are allocated to the general account and are credited with interest at
rates we determine, subject to certain minimums. Credited interest rates may be
guaranteed not to change for certain limited periods of time, normally one year.
MUTUAL FUNDS AND SECURITIES. We offer both proprietary and non-proprietary
mutual funds. Proprietary funds include those of State Street Research and the
Nvest Funds Group. We also offer investment accounts for mutual funds and
general securities that allow customers to buy, sell and retain holdings in one
centralized location, as well as brokerage accounts that offer the accessibility
and liquidity of a money market mutual fund. Of the mutual funds we sold in
1999, $1,667 million of the deposited assets were managed by our Asset
Management segment and $2,181 million by third parties.
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INSTITUTIONAL BUSINESS
Our Institutional Business segment offers a broad range of group insurance
and retirement and savings products and services to corporations and other
institutions.
Our group insurance products and services include group life insurance,
non-medical health insurance, such as short- and long-term disability, long-term
care and dental insurance and related administrative services, as well as other
benefits such as employer-sponsored auto and homeowners insurance provided
through our Auto & Home segment and prepaid legal services plans. We sell these
products either as an employer-paid benefit or as a voluntary benefit in which
the premiums are paid by the employee. Revenues from our group insurance
products and services were $7 billion in 1999, representing 67.3% of total
Institutional Business revenues of $10.4 billion. Group insurance operating
income was $334 million in 1999.
Our retirement and savings products and services include administrative
services sold to sponsors of 401(k) and other defined contribution plans,
guaranteed interest products and other retirement and savings products and
services, including separate account contracts for the investment of defined
benefit and defined contribution plan assets. Revenues from our retirement and
savings products were $3.4 billion in 1999, representing 32.7% of total
Institutional Business revenues. Retirement and savings operating income was
$251 million in 1999.
We are a leader in the U.S. group insurance market. In 1999, we were:
- the largest group life insurer, with $5.3 billion of total statutory
direct premiums written;
- the second largest group long-term disability carrier and the largest
provider of group short-term disability and group long-term care based on
premiums and equivalents. In addition, we were the second largest
commercial dental carrier based on premiums and equivalents with the
largest commercial preferred provider organization in the U.S., having
approximately 44,000 participating dentists at December 31, 1999;
- a leading provider of administrative services to 401(k) and other defined
contribution plans, with 1.6 million participants; and
- one of the largest insurer managers of retirement and savings products,
as measured by assets under management, with approximately $64.2 billion
in retirement and savings assets under management at December 31, 1999.
We have built this position through long-standing relationships with many
of the largest corporate employers in the U.S. In 1999, 86 of the FORTUNE 100
largest companies purchased our products; these companies have been our
customers for an average of approximately 20 years. We believe that these large
customers provide an important and stable base from which to grow our
institutional business.
The employee benefit market served by Institutional Business has begun to
change dramatically in recent years. As the U.S. employment market has become
more competitive, employers are seeking to enhance their ability to hire and
retain employees by providing attractive benefit plans. The market also reflects
increasing concern of employees about the future of government-funded retirement
and safety-net programs, an increasingly mobile workforce and the desire of
employers to share the market risk of retirement benefits with employees. We
believe these trends are facilitating the introduction of new "voluntary"
products, such as long-term care and auto and homeowners insurance, as well as
leading more employers to adopt defined contribution pension arrangements such
as 401(k) plans.
Voluntary products, which give valued benefits to employees at little or no
cost to the employer, are attractive to employees since they are generally
priced at group rates and are usually paid through payroll deduction, making
them convenient to purchase and maintain. Voluntary products are particularly
popular as workforces become more diverse and prefer to
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tailor benefits to their individual circumstances. Voluntary products have
become an increasingly important part of our group insurance product offerings.
A substantial portion of our group insurance products are offered on a voluntary
basis. Premiums for our voluntary products, which include employer-sponsored
auto and homeowners insurance, were $2.1 billion in 1999.
INSTITUTIONAL BUSINESS STRATEGY
INCREASE EMPHASIS ON VOLUNTARY PRODUCTS. We seek to increase sales to our
institutional customers by expanding the offering of voluntary, or employee-paid
products, including auto and homeowners and long-term care insurance and prepaid
legal services plans. We believe that voluntary products represent a substantial
growth area. Although many employers still do not offer these products, we
believe that they will be an increasingly important part of the benefits offered
to attract and retain employees as the cost and convenience advantages receive
more recognition in the marketplace. Since they are generally paid through
payroll deduction, we believe they provide us with a stable customer base and
source of revenues.
FOCUS ON DEFINED CONTRIBUTION MARKET. With the acquisitions of Benefit
Services Corporation, which specializes in the small and mid-size markets, and
the defined contribution record keeping and participant services business
formerly owned by Bankers Trust Corporation, which focuses on the large
corporate market, we have become a leading provider of administrative services
in the 401(k) plan market. At December 31, 1999, we provided administrative
services for $85.9 billion of defined contribution plan assets. We intend to use
our position as a leading administrator of defined contribution plans to capture
more assets under management for our Asset Management segment.
INCREASE OUR PRESENCE IN SMALL AND MID-SIZE EMPLOYER MARKET. We believe
there is an opportunity to build on our strong brand name and experience to
increase our sales to small and mid-size employers. To address this opportunity,
we formed the Small Business Center in 1994 to focus on small employers and the
brokers and intermediaries who service them and expanded our marketing to
mid-sized employers through this channel in 1999. From 1997 to 1999, our
premiums and other income from products currently sold through the Small
Business Center have grown from $200 million to $328 million, a compound annual
rate of 28.1%.
MARKETING AND DISTRIBUTION
Institutional Business markets our products through separate sales forces,
comprised of MetLife employees, for both our group insurance and retirement and
savings lines.
We distribute our group insurance products and services through a regional
sales force that is segmented by the size of the target customer. Marketing
representatives sell either directly to corporate and other institutional
customers or through an intermediary, such as a broker or a consultant.
Voluntary products are sold through the same sales channels, as well as by
specialists for these products. As of December 31, 1999, the group insurance
sales channels had approximately 300 marketing representatives.
Our group insurance products are distributed through the following
channels:
- The National Accounts unit focuses exclusively on our largest 125
customers, generally those having more than 25,000 employees. This unit
assigns account executives and other administrative and technical
personnel to a discrete customer or group of customers in order to
provide them with individualized products and services;
- Our regional sales force operates from 27 offices and generally
concentrates on sales to employers with fewer than 25,000 employees,
through selected national and regional brokers, as well as through
consultants; and
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- The Small Business Center focuses on improving our position in the
smaller end of the market. Currently, seventeen individual offices
staffed with sales and administrative employees are located throughout
the U.S. These centers provide comprehensive support services on a local
basis to brokers and other intermediaries by providing an array of
products and services designed for smaller businesses.
We distribute our retirement and savings products primarily through
separate sales forces for each of our major product groups. We market pension
and other investment-related products to sponsors of retirement and savings
plans covering employees of large private sector companies with plan assets in
excess of $600 million, mid-size and smaller private sector companies, plans
covering public employees, collective bargaining units, nonprofit organizations
and other institutions and individuals. Pension and other investment-related
products are marketed and sold through approximately 50 marketing
representatives. Defined contribution services are marketed through several
distribution channels depending on the target market. For mid- and large-size
employers, a dedicated sales force focuses on new relationships and
cross-selling opportunities with other Institutional Business distribution
channels. With respect to the small plan segment, generally those with less than
500 lives, defined contribution services are distributed through the agency
system, the Small Business Center and our group regional sales force.
We have entered into several joint ventures and other arrangements with
third parties to expand the marketing and distribution opportunities of our
Institutional Business products and services.
- In February 1998, in cooperation with the AXA Group of France, we
launched the MAXIS Employee Benefits Network to better serve our
multinational clients. The MAXIS Network consists of insurers in more
than 50 countries, including MetLife and AXA and their international
affiliates, offering multinational customers the ability to pool the
experience of local insurance plans and to obtain their insurance needs
through a single program.
- In April 1998, we formed an alliance with Travelers Property Casualty
Corp. to offer Synchrony(SM), a product which combines administration of
short- and long-term disability benefits with workers' compensation
benefits from Travelers.
- In 1998, we entered into an agreement with American Express Company to
offer our 401(k) plan investment management and administrative services
to their small employer customers.
We also seek to sell our Institutional Business products and services
through sponsoring organizations and affinity groups. In 1998, AARP, the
nation's leading organization for people 50 years and older, selected us to
offer long-term care insurance to its members. In 1999, we had $75.3 million in
long-term care premiums from this group. In addition, we were selected in 1998
as the preferred provider of long-term care products by the National Long Term
Care Coalition, a national organization of large companies.
GROUP INSURANCE PRODUCTS AND SERVICES
Our group insurance products and services include group life insurance and
non-medical health insurance such as short- and long-term disability, long-term
care and dental insurance. Other products include employer-sponsored auto and
homeowners insurance provided through our Auto & Home segment and prepaid legal
plans. The following table sets forth premiums and
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fees and other selected data for each of our group insurance products and
services for the periods indicated:
GROUP INSURANCE PRODUCTS(1)
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS, EXCEPT AS
INDICATED)
<S> <C> <C> <C>
Group Life:
Premiums, fees and other income........................... $ 3,985 $ 3,815 $ 3,592
Policyholder liabilities.................................. $12,176 $11,656 $10,598
Life insurance in-force (in billions)..................... $ 1,196 $ 1,096 $ 1,135
Group Non-Medical Health:
Premiums, fees and other income........................... $ 1,913 $ 1,570 $ 1,281
Policyholder liabilities.................................. $ 3,854 $ 3,178 $ 3,169
</TABLE>
- ---------------
(1) Premiums from our employer-sponsored auto and homeowners insurance are
reported in our Auto & Home segment.
GROUP LIFE. Group life insurance products and services include group term,
group universal life, group variable universal life, dependent life and survivor
benefits. These products and services can be standard products or tailored to
meet specific customer needs. This category also includes high face amount life
insurance products covering senior executives for compensation-related or
benefit-funding purposes.
GROUP NON-MEDICAL HEALTH. Group non-medical health insurance consists of
short- and long-term disability, long-term care, dental and accidental death and
dismemberment. We also sell excess risk and administrative services only
arrangements to some employers. We sold our medical insurance operations in
1995.
OTHER PRODUCTS AND SERVICES. We are the market leader in auto and
homeowners insurance programs that are sponsored by employers and offered on a
voluntary basis. Through our Auto & Home segment, we offer auto and homeowners
insurance to employees in the workplace, which is usually paid for through
payroll deduction. See "-- Auto & Home". Other products and services include
prepaid legal plans, which are offered through approximately 250 corporate
sponsors. Prepaid legal plans are generally voluntary products that provide
employees with access to covered legal services at competitive prices.
RETIREMENT AND SAVINGS PRODUCTS AND SERVICES
Our retirement and savings products and services include administrative
services sold to 401(k) and other defined contribution plans, guaranteed
interest products and other retirement and savings products and services. The
following table sets forth selected data for each of our retirement and savings
products and services for the periods indicated:
RETIREMENT AND SAVINGS PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1999 1998 1997
----- ---- ----
(DOLLARS IN BILLIONS)
<S> <C> <C> <C>
Defined Contribution Plans Services:
Number of participants (in millions)...................... 1.6 1.7 1.6
Assets administered....................................... $85.9 $79.4 $67.1
Liabilities for guaranteed interest products................ $20.4 $21.8 $20.6
Liabilities for other retirement and savings products....... $41.2 $43.1 $42.6
</TABLE>
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<PAGE> 120
DEFINED CONTRIBUTION PLAN SERVICES. Since 1996, we have made a number of
key acquisitions in the defined contribution marketplace, making us a leading
provider of administrative services to 401(k) and other defined contribution
plans. We provide full service defined contribution programs to companies of all
sizes in the expanding 401(k) plan market, as well as to the nonprofit,
educational and health care markets. Our programs involve a full range of
record-keeping (including employee communications) services, either on a
stand-alone basis or combined with asset management services.
GUARANTEED INTEREST PRODUCTS. We offer guaranteed interest contracts,
known as GICs, our Met Managed GIC and similar products. In traditional GICs and
funding agreements, corporations and other institutions invest their funds in
products in which the principal and interest are guaranteed by the issuing
insurance company for a specified period of time. We also sell annuity guarantee
products, generally in connection with the termination of pension plans, funds
available from defined contribution plans or the funding of structured
settlements. Sales of guaranteed interest products declined in 1999 and 1998,
primarily as a result of a shift in customers' investment preferences from
guaranteed interest products to separate account alternatives as interest rates
declined in those years. Substantially all of our GICs contain provisions
limiting early terminations, including penalties for early terminations and
minimum notice requirements. Included in our guaranteed interest products at
December 31, 1999 are $2.5 billion of funding agreements, $0.6 billion of which
we assumed from General American Life Insurance Company. Of the $2.5 billion of
funding agreements, $29 million, $708 million, $452 million and $1,117 million
may be terminated after 1-day, 7-day, 30-day and 90-day notice periods,
respectively. The remaining $176 million of the $2.5 billion of funding
agreements may not be put by the holder prior to their maturity. Excluded from
this total is $5.1 billion of funding agreements assumed from General American
Life Insurance Company, which were terminated on October 1, 1999 in connection
with our exchange offer. See "Business -- Acquisition of GenAmerica".
The Met Managed GIC is an investment product that complements traditional
GICs through the added feature of customer participation in the investment
results of the funds underlying the Met Managed GIC product. We are the industry
leader in assets under management for this type of product with assets of $11.9
billion in 1999. The Met Managed GICs allow the contractholders to receive, at
termination, the market value of their accounts or to transfer their accounts at
book value to a traditional GIC product, in which case the interest rate
credited will be adjusted to reflect any difference between the market value of
the transferred account and its book value.
OTHER RETIREMENT AND SAVINGS PRODUCTS AND SERVICES. Other retirement and
savings products and services include separate account contracts for the
investment and management of defined benefit and defined contribution plans on
behalf of corporations and other institutions. Customer funds are deposited in
separate accounts managed by us or by an independent manager, and invested in a
variety of assets including fixed income instruments, common stock and real
estate. In 1999, 88.3% of our institutional separate account assets were managed
by a MetLife affiliate and 11.7% were managed by non-affiliates. We report asset
management fees for assets managed by us in our Asset Management segment, while
administrative fees are reported in our Institutional Business segment.
ASSET MANAGEMENT
Through our wholly-owned subsidiary State Street Research and our
controlling interest in Nvest Companies, L.P. and its affiliates, Asset
Management provides a broad variety of asset management products and services
primarily to third-party institutions and individuals. Asset Management had
total assets under management of $189.8 billion at December 31, 1999, growing at
a compound annual rate of 14.2% for the five years ended 1999. Included in this
total was $54.9 billion in mutual funds and separate accounts supporting
individual variable life and annuity products, which have grown at a compound
annual rate of 16.7% for the five years ended 1999. At December 31, 1999, Asset
Management's assets under management consisted of
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equities, representing 44% of Asset Management's total assets under management,
fixed income investments (45%), money market investments (6%) and real estate
(5%).
We distribute our asset management products and services through numerous
distribution channels, including State Street Research's and Nvest's dedicated
sales forces, and also through our Individual Business and Institutional
Business distribution channels.
The investment management industry, which includes both retail mutual funds
and institutional asset management, has experienced strong growth over the last
ten years. Mutual fund assets have grown at a compound annual rate of 23.8% for
the ten years ended December 31, 1998. During the same period, institutional
assets, including corporate, government and endowments and foundations, have
grown at a compound annual rate of 10.3%. The number of prime savers (persons
aged 40 to 60 years) has grown 37% between 1988 and 1998. While overall industry
growth has been strong, there has been a shift in preference from defined
benefit plans to defined contribution plans and mutual funds due to favorable
legislation regarding individual savings, a more transient workforce for whom
defined benefit plans are not the best solution and uncertainty surrounding the
long-term viability of Social Security. We believe we are well-positioned to
benefit from this shift due to our broad offering of both institutional and
retail products and our multi-channel distribution network.
ASSET MANAGEMENT STRATEGY
The primary objective of our asset management strategy is to grow assets
under management. To attain this goal, we have implemented the following
strategies:
OFFER EXPANDED LINE OF PRODUCTS AND SERVICES. We seek to grow Asset
Management by offering customers a diverse line of products and services that
focus on the distinct capabilities of each of our subsidiaries. Each of Nvest's
investment management firms implements an independent investment specialty and
philosophy. We believe this approach fosters an entrepreneurial environment that
encourages the development of new, innovative investment management products and
services, while maintaining access to the significant resources of the larger
organization. State Street Research seeks to grow its business by targeting
markets outside its core large institutional retirement plan market, including
the fast growing mid-size plan market and mutual funds.
EXECUTE STRATEGIC ACQUISITIONS. Each of our Asset Management subsidiaries
seeks acquisition opportunities that provide diversification of asset classes
and methods of distribution. We believe Nvest's public holding company structure
provides it with an opportunity to make acquisitions that enhance the overall
business while retaining the acquired company's independent identity. Key
employees are generally expected to continue as active participants in the
acquired business and the acquired firm's executive personnel are responsible
for reviewing their firm's results, plans and budgets. State Street Research
also seeks acquisitions that will enhance the products and services it offers.
For instance, in 1997 a team of professionals specializing in managing money for
professional athletes joined State Street Research, and it has since expanded
its distribution to high net worth individuals through financial services
supermarkets, brokers and financial planners.
ENHANCED DISTRIBUTION SYSTEMS. We seek to increase sales of our products
and services through enhanced distribution systems, including improved
coordination of the independent distribution systems of Nvest, and through
increased utilization of our Individual Business and Institutional Business
distribution channels. We believe that further opportunities exist to increase
sales in many of the markets served by these channels, including sales of mutual
funds to individuals and asset management services to 401(k) plans served by
Institutional Business.
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NVEST
Nvest Companies, L.P. offers a broad array of investment management
products and services across a wide range of asset categories to institutions,
mutual funds and private accounts. Nvest operates as a holding company for
twelve investment management firms and six principal distribution and consulting
firms, all but one of which are wholly owned by Nvest. The twelve investment
management firms operate as independent entities, with each company having
responsibility for its own investment strategy and decisions, business plans,
product development and management fee schedules. Through its distribution and
consulting firms, Nvest makes available certain distribution, consulting and
administrative services that Nvest's subsidiary investment management firms draw
on as needed. These services include marketing, product development and
administrative support such as financial, management information and employee
benefits services.
We are the general partner and, at December 31, 1999, owned approximately
48% of the total economic interest of Nvest and its affiliates. Through Nvest,
L.P., a New York Stock Exchange-listed limited partnership, approximately 14% of
the economic interest in Nvest is publicly traded, with the remaining 38% owned
by others. We acquired our interest in Nvest in August 1996 as part of our
merger with New England Mutual Life Insurance Company. During the five years
ended 1999, Nvest's assets under management have grown at a compound annual rate
of 14.6% to $133 billion. At December 31, 1999, Nvest's assets under management
consisted of equities, representing 44% of Nvest's total assets under
management, fixed income investments (43%), money market investments (8%) and
real estate (5%).
The following table summarizes Nvest's assets under management by investor
type at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN BILLIONS)
<S> <C> <C> <C>
Institutional............................................... $ 86 $ 87 $ 80
Mutual Funds................................................ 36 36 33
Private Accounts............................................ 11 12 12
---- ---- ----
$133 $135 $125
==== ==== ====
</TABLE>
INVESTMENT MANAGEMENT FIRMS
Each of the following twelve investment management firms pursues an
independent investment strategy and philosophy:
- Loomis, Sayles & Company, L.P. actively manages portfolios of publicly
traded fixed-income securities, equity securities and other financial
instruments for a client base consisting of institutional clients,
endowments, foundations and third-party corporate investment portfolios,
manages assets for high net worth individuals and advises the Loomis
Sayles Funds.
- Harris Associates L.P. is primarily a value-equity style investment
advisory firm with institutional, private account and multi-manager
product offerings; it also serves as the investment advisor for The
Oakmark Family of Funds.
- AEW Capital Management, L.P. is a real estate advisory firm which
utilizes its real estate, research and capital markets expertise to focus
on high-yield equity and debt strategies, real estate securities and
directly held interests in real estate portfolios.
- Back Bay Advisors, L.P., which manages mutual funds in two mutual fund
groups sponsored by Nvest affiliates, as well as institutional funds for
the pension and foundation marketplace, specializes in fixed-income
management.
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- Jurika & Voyles, L.P. provides investment advisory services to
institutions, individuals and mutual funds utilizing a fundamental,
research-driven investment approach which seeks to invest at
opportunistic prices in the stock of companies exhibiting growth in cash
flow.
- Kobrick Funds, LLC provides investment management services for equity
mutual funds.
- Reich & Tang Funds, a division of Reich & Tang Asset Management L.P.,
manages money market mutual funds that are marketed primarily through
brokerage houses and regional commercial banks and acts as administrator
for mutual funds advised by third parties and for the equity funds
managed by Reich & Tang Capital Management.
- Reich & Tang Capital Management, a division of Reich & Tang Asset
Management L.P., manages mutual funds, private investment partnerships
and equity funds for institutions and individuals.
- Snyder Capital Management, L.P. provides investment advisory services
primarily to institutions and high net worth individuals and families,
and specializes in investing in small- to mid-capitalization equities.
- Vaughan, Nelson, Scarborough & McCullough, L.P. manages equity, fixed
income and balanced portfolios for foundations, endowments, institutions
and high net worth individuals.
- Westpeak Investment Advisors, L.P. provides customized equity management
for institutional investors, such as pension plans, foundations and
endowments, and mutual funds, utilizing an active, quantitative research
capability.
- Capital Growth Management Limited Partnership provides investment
management services for mutual funds and for a limited number of large
institutions and individual clients.
Nvest's investment management firms market their services to institutions,
individually managed private accounts for high net worth individuals and mutual
funds. The institutional market for investment management services includes
corporate, government and union pension plans, endowments and foundations and
corporations purchasing investment management services for their own account.
Nvest's management firms also advise or sub-advise approximately 100 mutual
funds, the great majority of which are grouped into eight fund "families" and
are marketed through a variety of channels.
DISTRIBUTION AND CONSULTING FIRMS
Nvest and its six principal distribution and consulting firms listed below
provide distribution, marketing and administrative services to Nvest's
investment management firms:
- Nvest Funds Distributor, L.P. serves as the distributor and is
responsible for all sales-related activities of the Nvest Funds Group, a
proprietary group of mutual funds. It distributes mutual funds through
retail sales networks of regional and national brokerage firms and other
distribution channels, including our Individual and Institutional
channels.
- Nvest Associates, Inc. provides institutional marketing and consulting
services to Nvest's investment management firms.
- Nvest Advisor Services assists in the marketing and distribution of
mutual funds advised by several of Nvest's investment management firms
through financial planners and advisors.
- Nvest Managed Account Services assists in the marketing and distribution
of investment products to mutual fund wrap programs.
- Nvest Retirement Services assists in the marketing and distribution of
mutual funds advised by several of Nvest's investment management firms to
retirement plan sponsors, large 401(k) plan providers and consultants.
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<PAGE> 124
- Nvest Services Company, Inc. provides fund administration, legal and
compliance and human resources services to the Nvest Funds Group. It also
provides its services, on a voluntary basis, to Nvest's other affiliates
and fund families.
STATE STREET RESEARCH
State Street Research conducts its operations through two wholly-owned
subsidiaries, State Street Research & Management Company, a full-service
investment management firm, and SSR Realty Advisors, Inc., a full-service real
estate investment advisor. State Street Research offers investment management
services in all major investment disciplines through multiple channels of
distribution in both the retail and institutional marketplaces. State Street
Research had assets under management of $56.8 billion, having grown at a
compound annual rate of 13.2% for the five years ended 1999. At December 31,
1999, State Street Research's assets under management consisted of equities,
representing 44% of State Street Research's total assets under management, fixed
income investments (50%), money market investments (1%) and real estate (5%).
State Street Research is currently an investment manager for ten of the
twelve largest U.S. corporate pension plans. The majority of State Street
Research's institutional business is concentrated in qualified retirement funds,
including both defined benefit and defined contribution plans. State Street
Research also provides investment management services to foundations and
endowments. In addition, State Street Research serves as advisor or subadvisor
for 37 mutual funds, as well as five mutual fund portfolios underlying MetLife's
variable life and annuity products, collectively with $18.9 billion of assets
under management at December 31, 1999.
The following table summarizes State Street Research's assets under
management by investor type for the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN BILLIONS)
<S> <C> <C> <C>
Institutional............................................... $37.6 $38.8 $35.4
Mutual Funds................................................ 18.9 17.0 14.7
Private Accounts............................................ 0.3 0.2 --
----- ----- -----
$56.8 $56.0 $50.1
===== ===== =====
</TABLE>
MARKETING AND DISTRIBUTION
State Street Research distributes its investment products to institutions
through its own institutional sales force, MetLife's institutional sales force
and pension consultants. Our Institutional Business sales force is the largest
contributor to State Street Research institutional sales, representing 68% of
the 1999 total. State Street Research's mutual fund products are distributed
primarily through large retail brokerage firms (40.5% of mutual fund sales) and
by the MetLife career agency sales force (59.5% of mutual fund sales). In
addition to the primary distribution channels, State Street Research has
developed distribution capabilities through regional brokerage firms, mutual
fund supermarkets, registered investment advisors and financial planners. State
Street Research also offers its products to the defined contribution market
through Institutional Business' defined contribution group, as well as directly
through its own distribution channel.
AUTO & HOME
Auto & Home, operating primarily through Metropolitan Property and Casualty
Insurance Company, a wholly-owned subsidiary of MetLife, offers personal lines
property and casualty insurance directly to employees through employer-sponsored
programs, as well as through a
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variety of retail distribution channels, including the MetLife career agency
system, independent agents and Auto & Home specialists. Auto & Home primarily
sells auto insurance, which represented 79.0% of Auto & Home's total net
premiums earned in 1999, and homeowners insurance, which represented 19.8% of
Auto & Home's total net premiums earned in 1999. Auto insurance includes both
standard and non-standard (insurance for risks having higher loss experience or
loss potential than risks covered by standard insurance) policies.
On September 30, 1999, our Auto & Home segment acquired the standard
personal lines property and casualty insurance operations of The St. Paul
Companies, which had in-force premiums of approximately $1.1 billion and
approximately 3,000 independent agents and brokers. This acquisition
substantially increased the size of this segment's business, making us the
eleventh largest personal property and casualty insurer in the U.S. based on
1998 net premiums written, and will also give us a strong presence in a number
of additional states.
AUTO & HOME STRATEGY
EXPAND EMPLOYER-SPONSORED PROGRAMS. We believe the employer-sponsored
distribution channel represents a significant growth opportunity to expand sales
of our Auto & Home products to our Institutional Business clients. The rapid
growth and acceptance of employer-sponsored marketing of auto and homeowners
insurance is a relatively recent development, and most employers do not
currently offer it as a benefit. Currently only a small percentage of our
Institutional Business clients offer Auto & Home products. We also anticipate
significant growth of existing employer-sponsored programs through greater
penetration of the employee base.
CONTINUE BUILDING DIRECT MARKETING CAPABILITY. In the third quarter of
1998, Auto & Home launched a direct response marketing distribution channel. We
expect the direct marketing distribution channel to generate sales through
target mailings, telemarketing, broad advertising, affinity groups, agent
referrals, bank relationships and the Internet. We believe that our experience
with using direct marketing distribution techniques in the employer-sponsored
distribution channel, combined with the strength of the MetLife brand name,
should enable us to compete successfully in the direct marketing distribution
channel.
ENHANCE RETAIL DISTRIBUTION. We currently market our products through
retail channels in 46 states. Since 1997, we have emphasized, through additional
advertising, pricing, and underwriting efforts, certain states in which we
believe we have the most potential for profitable growth.
CONTINUE TO REDUCE CATASTROPHE EXPOSURE. Since Hurricane Andrew in 1992,
our management has worked actively to reduce Auto & Home's exposure to losses
from catastrophes. Actions include a reduction in homeowners policies in force
in states having greater exposure to severe hurricanes, in conformity with
regulatory requirements. At the same time, Auto & Home has significantly
enhanced reinsurance coverage in all regions to limit losses from catastrophes.
PRODUCTS
Auto & Home's insurance products include:
- auto, including both standard and non-standard private passenger;
- homeowners, including renters, condominium and dwelling fire; and
- other personal lines, including umbrella (protection against losses in
excess of amounts covered by other liability insurance policies),
recreational vehicles and boat owners.
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The following table sets forth net premiums earned and other operating results
for Auto & Home for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
AUTO:(1)
Net premiums earned....................................... $1,383 $1,164 $1,123
Loss ratio without catastrophes........................... 75.6% 73.6% 76.9%
Loss ratio due to catastrophes............................ 0.5% 1.3% 0.2%
------ ------ ------
Loss ratio................................................ 76.1% 74.9% 77.1%
Expense ratio............................................. 27.9% 26.3% 24.8%
------ ------ ------
Combined ratio............................................ 104.0% 101.2% 101.9%
Combined ratio without catastrophes....................... 103.5% 99.9% 101.7%
HOMEOWNERS:(1)
Net premiums earned....................................... $ 347 $ 225 $ 217
Loss ratio without catastrophes........................... 60.9% 46.5% 53.6%
Loss ratio due to catastrophes............................ 6.3% 18.5% 7.1%
------ ------ ------
Loss ratio................................................ 67.2% 65.0% 60.7%
Expense ratio............................................. 34.3% 32.3% 30.3%
------ ------ ------
Combined ratio............................................ 101.5% 97.3% 91.0%
Combined ratio without catastrophes....................... 95.2% 78.8% 83.9%
ALL LINES:(1)
Net premiums earned....................................... $1,751 $1,403 $1,354
Loss ratio without catastrophes........................... 72.7% 69.4% 72.7%
Loss ratio due to catastrophes............................ 1.7% 4.0% 1.3%
------ ------ ------
Loss ratio................................................ 74.4% 73.4% 74.0%
Expense ratio............................................. 29.3% 27.4% 25.9%
------ ------ ------
Combined ratio............................................ 103.7% 100.8% 99.9%
Combined ratio without catastrophes....................... 102.0% 96.8% 98.6%
</TABLE>
- ---------------
(1) Loss adjustment expenses are reflected in our loss ratio. We believe this
presentation is consistent with the presentation of other property and
casualty insurers.
AUTO COVERAGES. Auto insurance policies include coverages for private
passenger automobiles, utility automobiles and vans, motorcycles, motor homes,
antique or classic automobiles and trailers. Auto & Home offers common coverages
such as liability, uninsured motorist, no fault or personal injury protection
and collision and comprehensive coverages. Auto & Home also offers non-standard
auto insurance, which accounted for $128 million in net premiums earned in 1999.
HOMEOWNERS COVERAGES. Homeowners insurance provides protection for
homeowners, renters, condominium owners and residential landlords against losses
arising out of damage to dwellings and contents from a wide variety of perils,
as well as coverage for liability arising from ownership or occupancy.
Traditional insurance policies for dwellings represent most of Auto &
Home's homeowners policies providing protection for loss on a "replacement cost"
basis. These policies provide additional coverage for reasonable expenses for
normal living expenses incurred by policyholders who have been displaced from
their homes.
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MARKETING AND DISTRIBUTION
Personal lines auto and homeowners insurance products are directly marketed
to employees through employer-sponsored programs. Auto & Home products are also
marketed and sold by the MetLife career agency sales force, independent agents
and Auto & Home specialists. For the year ended December 31, 1999,
employer-sponsored programs, independent agents, the MetLife career agency
force, Auto & Home specialists and other distribution channels accounted for
32.0%, 30.5%, 25.0%, 7.9% and 4.6%, respectively, of total net premiums earned
by the Auto & Home segment.
EMPLOYER-SPONSORED PROGRAMS. Net premiums earned through Auto & Home's
employer-sponsored distribution channel have grown from $329.2 million in 1995
to $561.6 million in 1999, a compound annual rate of 14.3%. Auto & Home is the
leading provider of employer-sponsored auto and homeowners products. At December
31, 1999, over 1,000 employers offered our Auto & Home products to their
employees.
Institutional Business marketing representatives market the
employer-sponsored Auto & Home products to employers through a variety of means,
including broker referrals and cross-selling to our group customers. Once
endorsed by the employer, we commence marketing efforts to employees. Employees
who are interested in the group auto and homeowners products can call a
toll-free number for a quote, and can purchase coverage and authorize payroll
deduction over the telephone. Auto & Home has also developed proprietary
software that permits an employee to obtain a quote for group auto insurance
through Auto & Home's Internet website.
In the early 1990s, Auto & Home created a multi-tiered pricing structure
that permits Auto & Home to underwrite virtually any individual auto risk,
allowing us to offer a policy to virtually all of a company's employees. Auto &
Home's multi-tiered pricing structure for auto insurance permits us to write
classes of business for which other industry participants do not compete, or
compete solely by writing through multiple companies, which is less convenient
for employees and more expensive to administer.
RETAIL DISTRIBUTION CHANNELS. We market and sell Auto & Home products
through the MetLife career agency sales force, independent agents and Auto &
Home specialists. In recent years, we have increased our use of independent
agents and Auto & Home specialists to sell these products.
Independent agents. At December 31, 1999, Auto & Home maintained contracts
with approximately 6,000 agents and brokers, which includes those of The St.
Paul Companies. Independent agents have been the primary source of new business
production for Auto & Home's non-standard auto insurance program.
Auto & Home specialists. Approximately 385 Auto & Home specialists sell
products for Auto & Home in 19 states. Auto & Home's strategy is to utilize Auto
& Home specialists, who are our employees, in geographic markets that are
underserved by our career agents. Auto & Home intends to increase the number of
Auto & Home specialists in many of the selected states on which we focus.
MetLife career agency system. Approximately 2,400 agents in the MetLife
career agency system sell Auto & Home insurance products. Sales of Auto & Home
products by agents have been declining since the early 1990s, due principally to
the reduction in the number of agents in our career agency sales force. See
"-- Individual Business -- Marketing and Distribution".
OTHER DISTRIBUTION CHANNELS. We believe that Auto & Home's experience with
direct response marketing in connection with the employer-sponsored marketing
distribution channel, plus the strength of the MetLife brand name, give Auto &
Home advantages that can successfully be used to establish a direct response
marketing operation. During late 1997 and early 1998, Auto & Home developed
pricing, underwriting, financial control and sales capabilities and information
technology for our auto products needed to enter the direct response marketing
distribution channel. In the third quarter of 1998, Auto & Home commenced direct
response
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marketing activities for our auto products in California. During 1999, the
direct response channel was extended to Maryland, Michigan and Missouri, and
presently represents 5% of new auto insurance sales. The direct response
marketing channel will permit sales to be generated through sources such as
target mailings, broad advertising, affinity groups, career agent referrals,
bank relationships and the Internet.
In 1999, Auto & Home's lines of business were concentrated in the following
states, as measured by net premiums earned: Massachusetts ($265 million or 15.0%
of total net premiums earned), New York ($250 million or 14.2%), Connecticut
($100 million or 5.7%), Florida ($99 million or 5.6%) and Illinois ($84 million
or 4.8%).
CLAIMS
Auto & Home's claims department includes approximately 2,100 employees
located in Auto & Home's Warwick, Rhode Island home office, fifteen field claim
offices, four law department house counsel offices and drive-in inspection and
other sites throughout the United States. These employees include claim
adjusters, appraisers, attorneys, managers, medical specialists, investigators,
customer service representatives, claim financial analysts and support staff.
Claim adjusters, representing the majority of employees, investigate, evaluate
and settle over 700,000 claims annually, principally by telephone.
Auto & Home seeks to control claims severity by using experienced
adjusters, medical management resources and preferred provider organizations.
Auto & Home also employs an expert software system incorporating a database of
expert medical opinions to evaluate the severity of bodily injury and uninsured
motorist bodily injury claims. That system is licensed under an agreement that
expires in 2002.
Auto & Home is currently installing a new proprietary claims handling
system that uses technology with data mining capabilities to help claims
personnel provide service and control claims severity while limiting personnel
costs. The system is being used in all Auto & Home claims offices, and is
expected to be installed, by year-end 2000, in the claims offices acquired as a
result of the acquisition of The St. Paul standard personal lines.
INTERNATIONAL
International provides life insurance, accident and health insurance,
annuities and savings and retirement products to both individuals and groups,
and auto and homeowners coverage to individuals. We focus on the Asia/Pacific
region, Latin America and selected European countries. We currently have
insurance operations in South Korea, Taiwan, Hong Kong, Indonesia, Mexico,
Argentina, Brazil, Uruguay, Spain and Portugal. In addition, at the end of 1999
we obtained a license to sell life insurance in Poland. We operate in
international markets through subsidiary and branch operations, as well as
through joint ventures. In 1999, International had over six million customers.
INTERNATIONAL STRATEGY
We seek to develop a presence in international markets that are
experiencing significant demand for insurance products and where we believe we
can gain significant market share. We evaluate potential markets in terms of the
market opportunity, such as our ability to generate long-term profits, the
regulatory and competitive environment and related market risk. We believe that
such markets provide us with the opportunity to realize higher growth rates and
higher profit margins than we might achieve domestically. Accordingly, we seek
higher rates of return on these operations. However, because these operations
are not yet mature, we focus not only on current earnings, but on building
embedded value. Our primary focus is on developing economies in Asia, Latin
America and Europe. We intend to expand our international operations by
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<PAGE> 129
continuing to make investments in countries in which we currently have
operations, as well as in selected new markets, either through start-up
operations or by acquisition.
As part of this strategy to focus on growth markets, as well as to divest
operations that would not meet our financial objectives, we disposed of
substantial portions of our operations in the U.K. in 1997 and in Canada in
1998. Both operations were located in mature, highly competitive and rapidly
consolidating markets in which market share gains were very difficult.
The following table sets forth selected data for International for the
periods indicated:
INTERNATIONAL(1)
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Premiums.................................................... $ 518 $ 414 $ 444
Deposits.................................................... $ 303 $ 530 $ 162
Assets...................................................... $3,289 $2,324 $1,707
Number of agents............................................ 6,591 3,680 5,197
Number of countries......................................... 10 8 8
</TABLE>
- ---------------
(1) Information in table excludes data for the U.K. and Canada. We disposed of
substantial portions of our operations in the U.K. in 1997 and in Canada in
1998.
ASIA/PACIFIC REGION
SOUTH KOREA. MetLife Saengmyoung Ltd., which became a wholly-owned
subsidiary in 1998, has more than 200,000 customers and sells individual life
insurance, savings and retirement and non-medical health products. The company
also sells group life and savings and retirement products. Premiums and deposits
for 1999 were $188 million.
TAIWAN. We launched our Taiwanese operations through a branch of
Metropolitan Insurance and Annuity Company in May 1989. The branch has
approximately 3.3 million customers and sells individual life, accident,
non-medical health and personal travel insurance products, as well as group
life, accident, and non-medical health insurance products. Individual products
are primarily sold through career agents and through direct marketing, while
group coverages are sold through agents and brokers. Premiums and deposits for
1999 were $124 million.
HONG KONG. Metropolitan Life Insurance Company of Hong Kong Limited, which
was established in 1995, sells individual life insurance products through sales
agents. In 1998, we signed an agreement to distribute our products through an
established brokerage network. We also distribute our products in Hong Kong
through other brokers and general agents. In addition, we recently entered into
a marketing agreement with the local operations of The Chase Manhattan Bank to
offer insurance products to the credit card and retail banking customers of
Chase in Hong Kong.
INDONESIA. P.T. MetLife Sejahtera was established in November 1997 and
began selling its products in March 1998. The joint venture sells individual
life insurance products through a full-time agency sales force.
LATIN AMERICA
MEXICO. We expanded into Latin America in 1992 with the launching of
Seguros Genesis, S.A., a wholly-owned subsidiary, in Mexico. Seguros Genesis
sells individual and group
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<PAGE> 130
insurance, as well as savings and retirement products, through sales agents and
brokers, and is now the fifth largest life insurer in Mexico. Premiums and
deposits for 1999 were $207 million.
ARGENTINA. We established our Argentine operations through Metropolitan
Life Seguros de Vida S.A. and Metropolitan Life Seguros de Retiro S.A. in 1994.
Through these affiliates, we sell group life insurance products through
established brokers and directly to employers, and individual life insurance and
disability products through an agency sales force, as well as through other
distribution channels, such as direct marketing and independent agent
franchises. In 1997, we began to market group insurance and individual deferred
and immediate annuities and currently have over 515,000 customers. Premiums and
deposits for 1999 were $64 million.
BRAZIL. Metropolitan Life Seguros e Previdencia Privada, S.A., based in
Sao Paulo, was formed in 1997 and started business in early 1999, focusing on
group life and accident products.
URUGUAY. In July 1998, we established Metropolitan Life Seguros de Vida
S.A., and started business in early 1999, offering individual life insurance
products through an agency sales force.
EUROPE
SPAIN. We operate in Spain through a 50-50 joint venture with Banco
Santander Central Hispano, S.A., Spain's largest financial group. Our Spanish
affiliates sell personal life insurance, savings and retirement and non-life
insurance products through both their own agency sales force and the branch
network of Banco Santander. The affiliates operate under the "Genesis" brand. In
November 1995, Genesis launched a direct auto business (Genesis Auto) and there
are now over 127,000 Genesis Auto policyholders. Premiums and deposits for 1999
were $193 million.
PORTUGAL. In late 1992, we entered the market in Portugal through branches
of our Spanish joint venture subsidiaries. Genesis in Portugal distributes
personal life insurance, savings and retirement and non-life insurance products
through its agency sales force and the branch network of Banco Santander
Portugal. Premiums and deposits for 1999 were $41 million.
In addition, we obtained a license to sell life insurance in Poland in
1999.
ACQUISITION OF GENAMERICA
BACKGROUND
On January 6, 2000, we acquired GenAmerica Corporation for $1.2 billion in
cash. GenAmerica is a leading provider of life insurance, life reinsurance and
other financial services to affluent individuals, businesses, insurers and
financial institutions. GenAmerica's products and services include individual
life insurance and annuities, life reinsurance, institutional asset management,
group life and health insurance and administration, pension benefits
administration and software products and technology services for the life
insurance industry. GenAmerica's subsidiary, General American Life Insurance
Company, distributes its life insurance products through approximately 625
agents in its independent general agency system and approximately 1,575 active
independent insurance agents and brokers.
GenAmerica is a holding company which owns General American Life Insurance
Company. GenAmerica's subsidiaries also include Reinsurance Group of America,
Inc. ("RGA"), one of the largest life reinsurers in the United States based on
in-force premiums, and Conning Corporation ("Conning"), a manager of investments
for General American Life and other insurer and pension clients. Upon completion
of the acquisition of GenAmerica, we owned approximately 58% and 61% of the
outstanding common stock of RGA and Conning, respectively. On March 9, 2000, we
announced that we had agreed to acquire all of the outstanding shares of Conning
common stock not already owned by us for $12.50 per share in cash, or
approximately $65 million. The transaction is subject to customary terms and
conditions, including regulatory approvals. Both
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RGA and Conning are publicly traded. See "Business -- Legal Proceedings" for a
description of legal proceedings relating to the Conning offer.
We agreed to acquire GenAmerica after it developed liquidity problems and
General American Life was placed under administrative supervision by the
Missouri Department of Insurance. At July 31, 1999, General American Life's
outstanding funding agreements aggregated $6.8 billion, of which $3.4 billion
and $1.8 billion were reinsured by ARM Financial Group, Inc. and RGA,
respectively. These reinsurance transactions were recorded using the deposit
method of accounting. These funding agreements guarantee the holder a return on
principal at a stated interest rate for a specified period of time. They also
allow the holder to "put" the agreement to General American Life for a payout of
the principal and interest within designated time periods of 7, 30 or 90 days.
In July 1999, Moody's Investors Services, Inc. downgraded the claims paying
ability rating of ARM due to the relative illiquidity of certain of its invested
assets, which resulted in General American Life recapturing the obligations and
assets related to the funding agreements reinsured by ARM. As a result of the
recapture, Moody's downgraded General American Life's claims paying ability
rating from A2 with a stable outlook to A3. Upon announcement of the downgrade,
a large number of funding agreement holders exercised puts of agreements having
outstanding principal amounts aggregating approximately $5.0 billion. General
American Life was unable to liquidate sufficient assets in an orderly fashion
without incurring significant losses. General American Life notified the
Missouri Department of Insurance of a liquidity crisis on August 9, 1999 and the
Department placed General American Life under administrative supervision.
Shortly thereafter, General American Mutual Holding Company, the parent of
GenAmerica, entered into discussions with us and several other companies for the
sale of GenAmerica. Those discussions culminated in our execution of a stock
purchase agreement with General American Mutual Holding Company on August 26,
1999 and our purchase of GenAmerica on January 6, 2000.
REASONS FOR THE ACQUISITION
GenAmerica offers us a strategic opportunity to expand our Individual
Business distribution system. GenAmerica's independent general agency system,
which principally targets affluent individuals, complements the current MetLife
and New England distribution systems. GenAmerica also provides us with
relationships with regional networks of broker-dealers and a strong geographic
presence in the midwest. Additionally, GenAmerica has been a leader in supplying
technology to the life insurance industry, having developed a number of
sophisticated software products and technology services that are used by a
number of life insurers. Finally, the acquisition of RGA and Conning allows us
to expand our opportunities in the life reinsurance and investment management
businesses.
TERMS OF ACQUISITION
Pursuant to the stock purchase agreement, we have a first priority
perfected security interest in the purchase price proceeds to cover losses that
we incur for which GenAmerica's parent, General American Mutual Holding Company,
has indemnified us. Such indemnified losses include breaches of representations
and warranties, certain legal proceedings brought within three years after the
date of closing, alleged breaches of General American Life's funding agreements
and guaranteed interest contracts and the acceleration of payments under certain
compensation arrangements and benefit plans. Amounts will be released to General
American Mutual Holding Company over time, but, subject to holdbacks for
disputed pending or threatened claims existing at that time, no later than the
third anniversary of the closing date. Costs incurred in connection with any
matter covered by the seller's indemnification will be recorded as expenses in
our consolidated statement of income in the period they are incurred. Recoveries
of such costs will be evaluated and estimated independently of the costs
incurred and will be recorded in
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<PAGE> 132
Metropolitan Life Insurance Company's consolidated statement of income for the
period recovery is probable.
In connection with the acquisition, we offered each holder of a General
American Life funding agreement the option to exchange its funding agreement for
a MetLife funding agreement with substantially identical terms and conditions or
receive cash equal to the principal amount of the funding agreement and accrued
interest. Holders of approximately $5.1 billion of the total $5.7 billion of
General American Life's remaining funding agreement liabilities elected to
receive cash. We completed the funding agreement exchange offer on September 29,
1999. In consideration of this exchange offer, General American Life transferred
to Metropolitan Life Insurance Company assets selected by Metropolitan Life
Insurance Company and General American Life having a market value equal to the
market value of the funding agreement liabilities. In addition, Metropolitan
Life Insurance Company has coinsured new and certain existing business of
General American Life and some of its affiliates.
FINANCING
We financed the acquisition of GenAmerica stock from available funds and
the proceeds from the issuance of $900 million of short-term debt. We expect to
use a portion of the proceeds from the offerings and the private placements to
repay up to $450 million of this debt.
In addition, we incurred approximately $3.2 billion of short-term debt,
consisting primarily of commercial paper, in connection with our exchange offer
to holders of General American Life funding agreements. During the fourth
quarter of 1999, we repaid $1.5 billion of this debt. On September 29, 1999,
MetLife Funding, Inc. and Metropolitan Life Insurance Company obtained an
additional committed credit facility for $5 billion, which serves as back-up for
this commercial paper.
BUSINESS OF GENAMERICA
GenAmerica is organized into four major business segments: Life Insurance
and Annuity; Life Reinsurance; Institutional Asset Management; and Insurance
Services and Related Businesses. GenAmerica also maintains a Corporate and
Consolidation/Elimination segment through which it reports items that are not
directly allocable to any of its business segments, primarily home office
general and administrative expenses and interest expense on long-term debt. This
segment includes the elimination of all inter-segment amounts. The accounting
policies of these segments, including inter-segment transactions, are
consistent, in all material respects, with those described in MetLife's
consolidated financial statements. GenAmerica's businesses will be incorporated
into our business segments as applicable, except for RGA, which we will
separately designate as our Reinsurance segment.
The following table sets forth selected data for GenAmerica and for each of
GenAmerica's segments for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
STATEMENT OF INCOME AND BALANCE SHEET DATA:
Total revenues........................................ $ 3,919.5 $ 3,863.6 $ 3,192.9
Operating income(1)................................... $ 28.1 $ 120.9 $ 98.9
Net income (loss)..................................... $ (174.3) $ 113.5 $ 96.2
Assets................................................ $23,594.3 $28,949.2 $23,947.2
Policyholder liabilities.............................. $14,117.2 $20,559.0 $16,995.7
Separate account liabilities.......................... $ 6,892.0 $ 5,194.9 $ 4,052.0
</TABLE>
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<PAGE> 133
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
SEGMENT DATA:(2)
LIFE INSURANCE AND ANNUITY:
Total revenues........................................ $ 1,442.3 $ 1,497.6 $ 1,350.7
Operating income(1)................................... $ 35.9 $ 52.5 $ 41.3
Net income............................................ $ 14.9 $ 51.9 $ 45.1
Assets................................................ $15,154.5 $14,256.9 $13,333.9
LIFE REINSURANCE:
Total revenues........................................ $ 1,721.4 $ 1,503.1 $ 1,071.8
Operating income(1)................................... $ 49.1 $ 49.3 $ 43.7
Net income............................................ $ 17.5 $ 34.1 $ 32.5
Assets................................................ $ 5,107.5 $ 6,329.6 $ 4,680.5
INSTITUTIONAL ASSET MANAGEMENT:
Total revenues........................................ $ 47.3 $ 191.1 $ 137.1
Operating income(1)................................... $ 9.2 $ 15.9 $ 12.5
Net income (loss)..................................... $ (188.6) $ 15.7 $ 13.2
Assets................................................ $ 104.7 $ 7,108.1 $ 4,293.0
INSURANCE SERVICES AND RELATED BUSINESSES:
Total revenues........................................ $ 738.2 $ 691.6 $ 645.7
Operating income (loss)(1)............................ $ (13.8) $ 10.8 $ 10.7
Net income............................................ $ 17.0 $ 12.7 $ 12.4
Assets................................................ $ 3,314.0 $ 2,994.8 $ 2,663.0
CORPORATE AND CONSOLIDATION/ELIMINATION:
Total revenues........................................ $ (29.7) $ (19.8) $ (12.4)
Operating loss........................................ $ (52.3) $ (7.6) $ (9.3)
Net loss.............................................. $ (35.1) $ (0.9) $ (7.0)
Assets................................................ $ (86.4) $(1,740.2) $(1,023.2)
</TABLE>
- ---------------
(1) Operating income (loss) is calculated as net income (loss) less (i) realized
investment gains and losses, (ii) GenAmerica's share of RGA's gains or
losses on operations that are classified as discontinued in RGA's
consolidated financial statements, but included in GenAmerica's operating
income (loss), (iii) surplus tax, and (iv) fees to exit the funding
agreement business. Realized investment gains and losses have been adjusted
for (a) deferred policy acquisition amortization to the extent that such
amortization results from realized investment gains and losses and (b)
additions to future policy benefits resulting from the need to establish
additional liabilities due to the recognition of investment gains. This
presentation may not be comparable to presentations made by other insurers.
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<PAGE> 134
The following provides a reconciliation of net income (loss) to operating
income for GenAmerica consolidated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1999 1998 1997
------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net income (loss)........................................... $(174.3) $113.5 $ 96.2
Adjustments to reconcile net income (loss) to operating
income
Gross realized investment (gains) losses.................. 164.0 (12.4) (28.4)
Income tax on gross realized investment gains and
losses.................................................. (54.4) 3.9 10.0
------- ------ ------
Realized investment (gains) losses, net of income tax... 109.6 (8.5) (18.4)
------- ------ ------
Amounts allocated to investment gains and losses.......... (8.4) (0.5) 6.8
Income tax on amounts allocated to investment gains and
losses.................................................. 3.0 0.2 (2.4)
------- ------ ------
Amount allocated to investment gains and losses, net of
income tax............................................ (5.4) (0.3) 4.4
------- ------ ------
Loss from discontinued operations, net of income tax...... 6.3 16.2 11.4
------- ------ ------
Surplus tax............................................... -- -- 5.3
------- ------ ------
Fees to exit funding agreement business, net of income tax
of $49.5................................................ 91.9 -- --
------- ------ ------
Operating income............................................ $ 28.1 $120.9 $ 98.9
======= ====== ======
</TABLE>
The following provides a reconciliation of net income to operating income
for the Life Insurance and Annuity segment of GenAmerica:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net income.................................................. $14.9 $51.9 $45.1
Adjustments to reconcile net income to operating income:
Gross realized investments (gains) losses................. 36.2 1.1 (15.1)
Income tax on gross realized investment gains and
losses.................................................. (9.7) (0.3) 5.3
----- ----- -----
Realized investment (gains) losses, net of income tax... 26.5 0.8 (9.8)
----- ----- -----
Amounts allocated to investment gains and losses.......... (8.5) (0.4) 6.8
Income tax on amounts allocated to investment gains and
losses.................................................. 3.0 0.2 (2.4)
----- ----- -----
Amount allocated to investment gains and losses, net of
income tax............................................. (5.5) (0.2) 4.4
----- ----- -----
Surplus tax............................................... -- -- 1.6
----- ----- -----
Operating income............................................ $35.9 $52.5 $41.3
===== ===== =====
</TABLE>
The following provides a reconciliation of net income to operating income
for the Life Reinsurance segment of GenAmerica:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1999 1998 1997
------ ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net income.................................................. $ 17.5 $34.1 $32.5
Adjustments to reconcile net income to operating income:
Gross realized investment (gains) losses.................. 38.9 (1.7) (0.3)
Income tax on gross realized investment gains and
losses.................................................. (13.6) 0.7 0.1
------ ----- -----
Realized investment (gains) losses, net of income tax... 25.3 (1.0) (0.2)
------ ----- -----
Loss from discontinued operations, net of income tax...... 6.3 16.2 11.4
------ ----- -----
Operating income............................................ $ 49.1 $49.3 $43.7
====== ===== =====
</TABLE>
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<PAGE> 135
The following provides a reconciliation of net income (loss) to operating
income for the Institutional Asset Management segment of GenAmerica:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1999 1998 1997
------- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net income (loss)........................................... $(188.6) $15.7 $13.2
Adjustments to reconcile net income (loss) to operating
income:
Gross realized investment (gains) losses.................. 163.0 0.3 (1.3)
Income tax on gross realized investment gains and
losses.................................................. (57.1) (0.1) 0.4
------- ----- -----
Realized investment (gains) losses, net of income tax... 105.9 0.2 (0.9)
------- ----- -----
Surplus tax............................................. -- -- 0.2
------- ----- -----
Fees to exit funding agreement business, net of income tax
of $49.5................................................ 91.9 -- --
------- ----- -----
Operating income............................................ $ 9.2 $15.9 $12.5
======= ===== =====
</TABLE>
The following provides a reconciliation of net income to operating income
(loss) for the Insurance Services and Related Businesses segment of GenAmerica:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1999 1998 1997
------ ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net income.................................................. $ 17.0 $12.7 $12.4
Adjustments to reconcile net income to operating income
(loss):
Gross realized investment gains........................... (47.5) (2.1) (3.8)
Income tax on gross realized investment gains............. 16.6 0.3 1.3
------ ----- -----
Realized investment gains, net of income tax............ (30.9) (1.8) (2.5)
------ ----- -----
Amounts allocated to investment gains..................... 0.1 (0.1) --
Income tax on amounts allocated to investment gains....... -- -- --
------ ----- -----
Amount allocated to investment gains, net of income
tax.................................................... 0.1 (0.1) --
------ ----- -----
Surplus tax............................................... -- -- 0.8
------ ----- -----
Operating income (loss)..................................... $(13.8) $10.8 $10.7
====== ===== =====
</TABLE>
The following provides a reconciliation of net loss to operating loss for
the Corporate and Consolidation/Elimination segment of GenAmerica:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net loss.................................................... $(35.1) $ (0.9) $ (7.0)
Adjustments to reconcile net loss to operating loss
Gross realized investment gains........................... (26.6) (10.0) (7.9)
Income tax on gross realized investment gains............. 9.4 3.3 2.9
------ ------ ------
Realized investment gains, net of income tax............ (17.2) (6.7) (5.0)
------ ------ ------
Surplus tax............................................... -- -- 2.7
------ ------ ------
Operating loss.............................................. $(52.3) $ (7.6) $ (9.3)
====== ====== ======
</TABLE>
We believe the supplemental operating information presented above allows
for a more complete analysis of results of operations. Realized investment gains
and losses have been excluded due to their volatility between periods and
because such data are often excluded when evaluating the overall financial
performance of insurers. Operating income (loss) should not be considered as a
substitute for any GAAP measure of performance. Our method of calculating
operating income (loss) may be different from the method used by other companies
and therefore comparability may be limited.
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<PAGE> 136
(2) Segment data does not include consolidation and elimination entries related
to intersegment amounts.
After General American Life was placed under administrative supervision by
the Missouri Department of Insurance, sales of new insurance policies and
annuity contracts by GenAmerica declined significantly and surrender levels for
existing policyholders and annuity owners increased. Although we intend to
quickly integrate GenAmerica into our existing operations, we cannot guarantee
that we will be able to do so or that sales by GenAmerica of new insurance
policies and annuity contracts and surrender rates for existing policies and
contracts will return to pre-supervision levels. GenAmerica incurred a net loss
in 1999, principally due to losses from the sale of invested assets to meet
funding agreement and other policy obligations and the write-down of assets to
their current market value; there can be no assurance that future profitability
will not be adversely affected.
LIFE INSURANCE AND ANNUITY. GenAmerica's Life Insurance and Annuity
segment, which represented approximately 37% of GenAmerica's total revenues in
1999, offers a wide variety of life insurance and annuity products to individual
customers. GenAmerica's individual life insurance products consist of universal
and variable universal life, whole life and term life. GenAmerica's annuity
products consist of variable annuities and fixed annuities. GenAmerica sells
these products primarily to professionals, business owners and other affluent
individuals, resulting in an average face value of approximately $340,000, one
of the highest average face values per policy in the insurance industry.
GenAmerica uses multiple distribution channels to sell its life insurance
and annuity products, including approximately 275 independent general agencies,
representing a total of approximately 625 agents in its independent general
agency system and approximately 1,575 active independent insurance agents and
brokers. GenAmerica markets its various products through additional channels,
including consultants, insurance brokers, worksite, affinity group and direct
marketing to businesses and affluent individuals.
The Life Insurance and Annuity segment's revenues, excluding realized
investment gains and losses, grew from $1.3 billion in 1997 to $1.5 billion in
1999, a compound annual rate of 7.4%. In 1999, operating income declined by
31.6% to $35.9 million and net income declined by 71.3% to $14.9 million as a
result of the effect of GenAmerica's liquidity problems on its sales, expenses
and investment performance.
LIFE REINSURANCE. GenAmerica's Life Reinsurance segment, which represented
approximately 44% of GenAmerica's total revenues in 1999, sells reinsurance
products to life insurers in the U.S. and internationally. GenAmerica conducts
this business through its publicly traded subsidiary RGA. RGA is one of the
largest life reinsurers in North America based on in-force business. It markets
life reinsurance primarily to the largest U.S. life insurers and, in 1999, held
treaties with most of the top 100 U.S. life insurers. U.S. insurers accounted
for 72.2% of RGA's net premiums in 1999. Outside of the U.S., RGA operates
principally in Canada, Latin America and the Asia Pacific region. These
international operations are rapidly expanding and accounted for 27.8% of RGA's
net premiums in 1999.
RGA's business principally consists of traditional, mortality-based
reinsurance, written on both facultative and automatic treaty bases. RGA also
writes non-traditional reinsurance, including asset intensive products and
financial reinsurance. RGA distributes these products and services in the U.S.
through a regionalized direct sales force and internationally primarily through
a direct sales force located in the respective international locations. RGA also
makes limited use of reinsurance intermediaries and brokers to help supplement
sales to its targeted market.
The Life Reinsurance segment's revenues, excluding realized investment
gains and losses, grew at a compound annual rate of 27.9% from $1.1 billion in
1997 to $1.8 billion in 1999. Operating income in 1999 was $49.1 million, which
was essentially unchanged from the 1998 reported amount. Net income declined
48.7% to $17.5 million in 1999 due to exiting the funding agreement business.
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<PAGE> 137
INSTITUTIONAL ASSET MANAGEMENT. GenAmerica's Institutional Asset
Management segment, which represented approximately 1.2% of GenAmerica's total
revenues in 1999, offers asset management and related products and services
primarily to the insurance industry. GenAmerica conducts its asset management
business through Conning. Conning's assets under management grew from $26.0
billion in 1997 to $33.2 billion in 1999, a compound annual rate of 13.0%. At
December 31, 1999, of Conning's $33.2 billion of assets under management,
approximately $11.6 billion, or 34.9%, were GenAmerica assets.
The products and services provided by Conning consist of: (1) institutional
asset management and related services; (2) private equity funds; (3) mortgage
loan origination and real estate management; and (4) insurance industry
research. Also reported in GenAmerica's Institutional Asset Management segment
are the results relating to GenAmerica's funding agreement business. GenAmerica
exited the funding agreement business on September 29, 1999. See "-- Terms of
Acquisition".
The Institutional Asset Management segment's revenues, excluding realized
gains and losses, grew from $135.8 million in 1997 to $210.3 million in 1999, a
compound annual rate of 24.4%. In 1999, its operating income declined 42.1% to
$9.2 million. This segment incurred a net loss of $188.6 million due to exiting
the funding agreement business and due to the large investment losses sustained
in raising liquidity and transferring assets to MetLife.
In March 2000, GenAmerica and its subsidiaries began withdrawing from
Conning approximately $7.7 billion of their assets that Conning had managed and
transferring the management of those assets to Metropolitan Life Insurance
Company.
INSURANCE SERVICES AND RELATED BUSINESSES. GenAmerica's Insurance Services
and Related Businesses segment, which represented approximately 19% of total
revenues in 1999, provides administrative services and insurance products for
employers and their employees, as well as software products and technology
services to companies in the life insurance industry.
In its administrative services business, GenAmerica provides administrative
support services to employer sponsored health plans and investment products and
investment, administrative and consulting services to 401(k) and pension plans.
Through its wholly-owned subsidiary NaviSys, GenAmerica also provides
software products and technology services that include life and annuity
administration systems, insurance underwriting systems, sales illustration
software, and electronic commerce and Internet-related products and services.
The Insurance Services and Related Businesses segment's revenues, excluding
realized investment gains and losses, grew from $641.9 million in 1997 to $690.8
million in 1999, a compound annual rate of 3.7%. This segment incurred an
operating loss of $13.8 million as a result of the aforementioned liquidity
problem and subsequent sale of the group health business. Net income increased
33.9% to $17.0 million primarily due to a realized investment gain related to
the sale of a non-strategic subsidiary.
On January 1, 2000, GenAmerica exited the group medical business through a
co-insurance agreement with Great-West Life & Annuity Insurance Company
(Great-West). This co-insurance agreement also includes any life and health
business that is directly associated with the medical business. GenAmerica is
required to reimburse Great-West for up to $10 million in net operating losses
incurred during 2000. These amounts have been reflected in the 1999 consolidated
financial statements of GenAmerica. GenAmerica must also compensate Great-West
for certain amounts receivable related to this business should they be deemed
uncollectible.
GENAMERICA INVESTMENTS
GenAmerica had total consolidated assets at December 31, 1999 of $23.6
billion. Of its total consolidated assets, $16.7 billion were held in the
general accounts of its insurance subsidiaries while the remaining $6.9 billion
were held in the separate accounts of its insurance subsidiaries.
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<PAGE> 138
Of the $16.7 billion of assets held in the general accounts, $13.1 billion
consisted of cash and invested assets.
The following table summarizes the consolidated cash and invested assets
held in the general accounts of GenAmerica's insurance subsidiaries at the dates
indicated.
GENAMERICA INVESTED ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------
1999 1998
---------------------- ----------------------
CARRYING CARRYING
VALUE % OF TOTAL VALUE % OF TOTAL
-------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed maturities(1)............................... $ 6,959.6 53.0% $11,230.9 65.4%
Equity securities(1).............................. 42.5 0.3 38.8 0.2
Commercial mortgage loans......................... 1,678.9 12.8 2,337.5 13.6
Policy loans...................................... 2,243.9 17.1 2,151.0 12.5
Real estate....................................... 131.2 1.0 129.9 0.8
Other invested assets............................. 898.8 6.8 457.6 2.7
Short-term investments............................ 295.3 2.2 200.4 1.2
Cash and cash equivalents......................... 888.3 6.8 619.5 3.6
--------- ----- --------- -----
Total invested assets............................. $13,138.5 100.0% $17,165.6 100.0%
========= ===== ========= =====
</TABLE>
- ---------------
(1) All fixed maturities and equity securities are classified as
available-for-sale and carried at estimated fair value.
The yield on general account invested assets (including net realized gains and
losses on investments) was 6.6%, 7.3% and 7.5% for the years ended December 31,
1999, 1998 and 1997, respectively.
FIXED MATURITIES. Fixed maturities consist of publicly traded and
privately placed debt securities, primarily of United States corporations,
mortgage-backed securities, asset-backed securities and obligations of the
Canadian government and provinces. The portion of funds invested in Canadian
dollar obligations supports corresponding Canadian liabilities. Fixed maturities
represented approximately 53.0% and 65.4% of GenAmerica's total invested assets
at December 31, 1999 and 1998, respectively.
The following table summarizes GenAmerica's total fixed maturities by NAIC
designation or, if not rated by the NAIC, by the comparable rating of Moody's or
S&P or, if not rated by Moody's or S&P, by GenAmerica's internal rating system.
GENAMERICA TOTAL FIXED MATURITIES BY CREDIT QUALITY
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
NAIC RATING AGENCY AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED
DESIGNATION EQUIVALENT DESIGNATION COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE
- ----------- ---------------------- --------- ----- ---------- --------- ----- ----------
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C> <C> <C>
1 Aaa/Aa/A........... $4,267.3 55.9% $3,980.0 $ 6,842.0 62.8% $ 7,157.5
2 Baa................ 2,802.5 36.7 2,534.5 3,555.4 32.6 3,619.1
3 Bb................. 421.4 5.6 351.7 400.9 3.7 378.1
4 B.................. 102.3 1.3 66.8 64.1 0.6 47.2
5 Caa and lower...... 22.9 0.3 14.4 31.1 0.3 25.3
6 In or near default... 15.4 0.2 12.2 4.1 0.0 3.7
-------- ----- -------- --------- ----- ---------
Total fixed maturities............ $7,631.8 100.0% $6,959.6 $10,897.6 100.0% $11,230.9
======== ===== ======== ========= ===== =========
</TABLE>
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<PAGE> 139
Mortgage-backed securities and asset-backed securities represented
approximately 16.3% and 20.2% of GenAmerica's total invested assets at December
31, 1999 and 1998, respectively. GenAmerica invests in pass-through and
collateralized mortgage obligations collateralized by the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation, Governmental
National Mortgage Association and Canadian Housing Authority collateral. The
following table sets forth the types of mortgage-backed securities, as well as
other asset-backed securities, held by GenAmerica as of the dates indicated.
GENAMERICA MORTGAGE AND ASSET-BACKED SECURITIES
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1999 1998
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
CMOs........................................................ $ 741.7 $1,584.2
Commercial mortgage-backed securities....................... 145.0 211.9
Principal only/interest only................................ 27.2 1.8
Other mortgage-backed securities............................ 26.9 42.8
Asset-backed securities..................................... 1,198.1 1,632.8
-------- --------
Total mortgage-backed securities and asset-backed
securities................................................ $2,138.9 $3,473.5
======== ========
</TABLE>
COMMERCIAL MORTGAGE LOANS. GenAmerica's commercial mortgage loan portfolio
comprised 12.8% and 13.6% of its total invested assets at December 31, 1999 and
1998, respectively. During the years ended December 31, 1999, 1998 and 1997, the
average yield on its commercial mortgage loans was 8.8%, 8.4%, and 9.1% per
year, respectively.
The carrying value of commercial mortgage loans at December 31, 1999 was
$1.7 billion. This amount is net of valuation allowances aggregating $29.1
million. The net valuation allowances represent GenAmerica's best estimate of
the cumulative impairments on these loans at that date. However, there can be no
assurance that increases in valuation allowances will not be necessary. Any such
increases may have a material adverse effect on GenAmerica's financial position
and results of operations.
At December 31, 1999, the carrying value of potential problem, problem and
restructured commercial mortgage loans was $48.8 million, $8.6 million and $12.6
million, respectively, net of valuation allowances of $29.1 million in the
aggregate.
Gross interest income on restructured commercial mortgage loan balances
that would have been recorded in accordance with the loans' original terms was
approximately $0.1 million, $1.6 million and $3.7 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
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<PAGE> 140
The following table presents the carrying amounts of potential problem,
problem and restructured commercial mortgages relative to the carrying value of
all commercial mortgages as of the dates indicated:
GENAMERICA POTENTIAL PROBLEM, PROBLEM AND RESTRUCTURED COMMERCIAL MORTGAGES AT
CARRYING VALUE
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1999 1998
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Total commercial mortgages.................................. $1,678.9 $2,337.5
======== ========
Potential problem commercial mortgages...................... $ 48.8 $ 85.2
Problem commercial mortgages................................ 8.6 20.1
Restructured commercial mortgages........................... 12.6 29.5
-------- --------
Total potential problem, problem and restructured commercial
mortgages................................................. $ 70.0 $ 134.8
======== ========
Total potential problem, problem and restructured commercial
mortgages as a percent of total commercial mortgages...... 4.2% 5.8%
======== ========
</TABLE>
FUTURE POLICY BENEFITS
For all of our product lines, we establish, and carry as liabilities,
actuarially determined amounts that are calculated to meet our policy
obligations at such time as an annuitant takes income, a policy matures or
surrenders or an insured dies or becomes disabled. We compute the amounts for
future policy benefits in our consolidated financial statements in conformity
with generally accepted accounting principles.
We distinguish between short duration and long duration contracts. Short
duration contracts arise from our group life and group dental business. The
liability for future policy benefits for short duration contracts consists of
gross unearned premiums as of the valuation date and the discounted amount of
the future payments on pending claims as of the valuation date. Our long
duration contracts consist of traditional life, term, non-participating whole
life, individual disability income, group long-term disability and long-term
care contracts. We determine future policy benefits for long duration contracts
using assumptions based on current experience, plus a margin for adverse
deviation for these policies. Where they exist, we amortize deferred policy
acquisition costs in relation to the associated premium.
We also distinguish between investment contracts, limited pay contracts and
universal life type contracts. The future policy benefits for these products
primarily consist of policyholders' account balances. We also establish
liabilities for future policy benefits (associated with base policies and
riders, unearned mortality charges and future disability benefits), for other
policyholder funds (associated with unearned revenues and claims payable) and
for unearned revenue (the unamortized portion of front-end loads charged).
Investment contracts primarily consist of individual annuity and certain group
pension contracts that have limited or no mortality risk. We amortize the
deferred policy acquisition costs on these contracts in relation to estimated
gross profits. Limited pay contracts primarily consist of single premium
immediate individual and group pension annuities. For limited pay contracts, we
defer the excess of the gross premium over the net premium and recognize such
excess into income in relation to anticipated future benefit payments. Universal
life type contracts consist of universal and variable life contracts. We
amortize deferred policy acquisition costs for limited pay and universal type
contracts using the product's estimated gross profits. For universal life type
contracts with front-end loads, we defer the charge and amortize the unearned
revenue using the product's estimated gross profits.
The liability for future policy benefits for our participating traditional
life insurance is the net level reserve using the policy's guaranteed mortality
rates and the dividend fund interest rate or
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<PAGE> 141
nonforfeiture interest rate, as applicable. We amortize deferred policy
acquisition costs in relation to the product's estimated gross margins.
We establish liabilities to account for the estimated ultimate costs of
losses and LOSS ADJUSTMENT EXPENSES ("LAE") for claims that have been reported
but not yet settled, and claims incurred but not reported for the Auto & Home
segment. We base unpaid losses and loss adjustment expenses on:
- case estimates for losses reported on direct business, adjusted in the
aggregate for ultimate loss expectations;
- estimates of incurred but not reported losses based upon past experience;
- estimates of losses on insurance assumed primarily from involuntary
market mechanisms; and
- estimates of future expenses to be incurred in settlement of claims.
We deduct estimated amounts of salvage and subrogation from unpaid losses and
loss adjustment expenses. Implicit in all these estimates are underlying
inflation assumptions because we determine all estimates using expected actual
amounts to be paid. We derive estimates for development of reported claims and
for incurred but not reported claims principally from actuarial analyses of
historical patterns of claims and development for each line of business.
Similarly, we derive estimates of unpaid loss adjustment expenses principally
from actuarial analyses of historical development patterns of the relationship
of loss adjustment expenses to losses for each line of business. We anticipate
ultimate recoveries from salvage and subrogation principally on the basis of
historical recovery patterns.
Pursuant to state insurance laws, our insurance subsidiaries also establish
STATUTORY RESERVES, carried as liabilities, to meet their obligations on their
policies. We establish these statutory reserves in amounts sufficient to meet
our policy and contract obligations, when taken together with expected future
premiums and interest at assumed rates. Statutory reserves generally differ from
liabilities for future policy benefits determined using generally accepted
accounting principles.
The New York Insurance Law and regulations require us to submit to the New
York Superintendent of Insurance, with each annual report, an opinion and
memorandum of a "qualified actuary" that the statutory reserves and related
actuarial amounts recorded in support of specified policies and contracts, and
the assets supporting such statutory reserves and related actuarial amounts,
make adequate provision for our statutory liabilities with respect to these
obligations.
Due to the nature of the underlying risks and the high degree of
uncertainty associated with the determination of our liabilities, we cannot
precisely determine the amounts that we will ultimately pay with respect to
these liabilities, and the ultimate amounts may vary from the estimated amounts,
particularly when payments may not occur until well into the future. However, we
believe our liabilities for future benefits adequately cover the ultimate
benefits. We periodically review our estimates for liabilities for future
benefits and compare them with our actual experience. We revise our estimates
when we determine that future expected experience differs from assumptions used
in the development of our liabilities. If the liabilities originally recorded
prove inadequate, we must increase our liabilities, which may have a material
adverse effect on our business, results of operations and financial condition.
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<PAGE> 142
UNDERWRITING AND PRICING
INDIVIDUAL AND INSTITUTIONAL BUSINESSES
Our individual and group insurance underwriting involves an evaluation of
applications for life, disability, dental, retirement and savings and long-term
care insurance products and services by a professional staff of underwriters and
actuaries, who determine the type and the amount of risk that we are willing to
accept. We employ detailed underwriting policies, guidelines and procedures
designed to assist the underwriter to properly assess and quantify risks before
issuing a policy to qualified applicants or groups.
Individual underwriting considers not only an applicant's medical history,
but other factors such as financial profiles, foreign travel, avocations and
alcohol, drug and tobacco use. Our group underwriters generally evaluate the
risk characteristics of each prospective insured group, although with certain
products employees may be underwritten on an individual basis. Generally, we are
not obligated to accept any risk or group of risks from, or to issue a policy or
group of policies to, any employer or intermediary. Requests for coverage are
reviewed on their merits and generally a policy is not issued unless the
particular risk or group has been examined and approved for underwriting.
Underwriting is generally done on a centralized basis by our employees, although
some policies are underwritten by intermediaries under strict guidelines we have
established.
In order to maintain high standards of underwriting quality and
consistency, we engage in a multilevel series of ongoing internal underwriting
audits, and are subject to external audits by our reinsurers, at both our remote
underwriting offices and our corporate underwriting office.
We have established senior level oversight of this process that facilitates
quality sales, serving the needs of our customers, while supporting our
financial strength and business objectives. Our goal is to achieve the
underwriting, mortality and MORBIDITY assumptions in our product pricing. This
is accomplished by determining and establishing underwriting policies,
guidelines, philosophies and strategies that are competitive and suitable for
the customer, the representative and us.
Individual and group product pricing reflects our insurance underwriting
standards. Product pricing on insurance products is based on the expected payout
of benefits calculated through the use of assumptions for mortality, morbidity,
expenses, persistency and investment returns, as well as certain macroeconomic
factors such as inflation. Investment-oriented products are priced based on
various factors, including investment return, expenses and persistency,
depending on the specific product features. Product specifications are designed
to prevent greater than expected mortality, and we periodically monitor
mortality and morbidity assumptions.
Unique to group insurance pricing is experience rating, the process by
which the rate charged to a group policyholder reflects credit for positive past
claim experience or a charge for poor experience. We employ both prospective and
retrospective experience rating. Prospective experience rating involves the
evaluation of past experience for the purpose of determining future premium
rates. Retrospective experience rating involves the evaluation of past
experience for the purpose of determining the actual cost of providing insurance
for the customer for the time period in question.
We continually review our underwriting and pricing guidelines so that our
policies remain progressive, competitive and supportive of our marketing
strategies and profitability goals. Decisions are based on established actuarial
pricing and risk selection principles to ensure that our underwriting and
pricing guidelines are appropriate.
140
<PAGE> 143
AUTO & HOME
Auto & Home's underwriting function has six principal aspects:
- evaluating potential worksite marketing employer accounts and independent
agencies;
- establishing guidelines for the binding of risks by agents with binding
authority;
- reviewing coverage bound by agents;
- on a case by case basis, underwriting potential insureds presented by
agents outside the scope of their binding authority;
- pursuing information necessary in certain cases to enable Auto & Home to
issue a policy within our guidelines; and
- ensuring that renewal policies continue to be written at rates
commensurate with risk.
Subject to very few exceptions, agents in each of our distribution channels
have binding authority for risks which fall within Auto & Home's published
underwriting guidelines. Risks falling outside the underwriting guidelines may
be submitted for approval to the underwriting department; alternatively, agents
in such a situation may call the underwriting department to obtain authorization
to bind the risk themselves. In most states, Auto & Home generally has the right
within a specified period (usually 60 days) to cancel any policy.
Auto & Home establishes prices for our major lines of insurance based on
our proprietary data base, rather than relying on rating bureaus. Auto & Home
determines prices in part from a number of variables specific to each risk. The
pricing of personal lines insurance products takes into account, among other
things, the expected frequency and severity of losses, the costs of providing
coverage (including the costs of acquiring policyholders and administering
policy benefits and other administrative and overhead costs), competitive
factors and profit considerations.
The major pricing variables for personal lines automobile insurance include
characteristics of the automobile itself, such as age, make and model,
characteristics of insureds, such as driving record and experience, and the
insured's personal financial management. Auto & Home's ability to set and change
rates is subject to regulatory oversight.
As a condition of our license to do business in each state, Auto & Home,
like all other automobile insurers, is required to write or share the cost of
private passenger automobile insurance for higher risk individuals who would
otherwise be unable to obtain such insurance. This "involuntary" market, also
called the "shared market," is governed by the applicable laws and regulations
of each state, and policies written in this market are generally written at
higher than standard rates.
In homeowners' insurance, price is driven by, among other factors, the
frequency of the occurrence of covered perils, the cost to repair or replace
damaged or lost property and the cost of litigation associated with liability
claims. Major underwriting considerations include the condition and maintenance
of the property, adequacy of fire protection and characteristics of insureds,
such as personal financial management. Most homeowners insurance policies have a
provision for automatic annual adjustments in coverage and premium due to
inflation in building and labor costs. Homeowners pricing also includes the
consideration of the incidence and severity of natural catastrophes, such as
hurricanes and earthquakes, over a long-term period.
REINSURANCE
We cede premiums to other insurers under various agreements that cover
individual risks, group risks or defined blocks of business, on a coinsurance,
yearly renewable term, excess or catastrophe excess basis. These reinsurance
agreements spread the risk and minimize the effect
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<PAGE> 144
on us of losses. The amount of each risk retained by us depends on our
evaluation of the specific risk, subject, in certain circumstances, to maximum
limits based on characteristics of coverages. Under the terms of the reinsurance
agreements, the reinsurer agrees to reimburse us for the ceded amount in the
event the claim is paid. However, we remain liable to our policyholders with
respect to ceded insurance if any reinsurer fails to meet the obligations
assumed by it. Since we bear the risk of nonpayment by one or more of our
reinsurers, we cede reinsurance to well-capitalized, highly rated reinsurers.
INDIVIDUAL BUSINESS
In recent periods, in response to the reduced cost of reinsurance coverage,
we have increased the amount of individual mortality risk coverage purchased
from third-party reinsurers. Since 1996, we have entered into reinsurance
agreements that cede substantially all of the mortality risk on term insurance
policies issued during 1996 and subsequent years, and on survivorship whole life
insurance policies issued in 1997 and subsequent years. In 1998, we reinsured
substantially all of the mortality risk on our universal life policies issued
since 1983. We are continuing to reinsure substantially all of the mortality
risk on the universal life policies. As a result of these transactions, we now
reinsure up to 90% of the mortality risk for all new individual insurance
policies that we write.
In addition to these reinsurance policies, we reinsure risk on specific
coverages.
While our retention limit on any one life is $25 million ($30 million for
joint life cases), we may cede amounts below those limits on a case-by-case
basis depending on the characteristics of a particular risk. In addition, we
routinely reinsure certain classes of risks in order to limit our exposure to
particular travel, avocation and lifestyle hazards. We have several individual
life reinsurance agreements with a diversified group of third-party reinsurers.
These automatic pools have permitted us to enhance product performance, while
decreasing business risk.
INSTITUTIONAL BUSINESS
We generally do not utilize reinsurance for our group insurance products,
but we do reinsure when capital requirements and the economic terms of the
reinsurance make it appropriate to do so.
AUTO & HOME
Auto & Home purchases reinsurance to control our exposure to large losses
(primarily catastrophe losses), to stabilize earnings and to protect surplus.
Auto & Home cedes to reinsurers a portion of risks and pays premiums based upon
the risk and exposure of the policies subject to reinsurance.
To control our exposure to large property and casualty losses, Auto & Home
utilizes three varieties of reinsurance agreements in which protection is
provided for a specified type or category of risks. First, we utilize property
catastrophe excess of loss agreements. Second, we utilize casualty excess of
loss agreements. Third, we utilize property per risk excess of loss agreements.
PROPERTY CATASTROPHE EXCESS OF LOSS. Protection against hurricane losses
in Florida is obtained through (1) the state-run Catastrophe Fund, which
provides coverage of 90% of $153 million in excess of $36 million, (2) privately
placed reinsurance of $52.5 million in excess of $200 million, and (3) a
multi-year treaty for Florida second-event coverage in which the maximum
recoverable is $46.5 million in excess of $50 million. This multi-year treaty is
subject to a 24-month activation period and upon activation the contract period
is 36 months. This coverage becomes activated when the aggregate incurred losses
for the insurance industry exceed $8 billion or the Florida Hurricane
Catastrophe Fund is depleted. For other regions, on January 1,
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<PAGE> 145
2000, Auto & Home entered into a multi-year treaty in which the maximum
recoverable amounts are $37.5 million for any one loss occurrence in excess of
$75 million, $75 million for any one annual period and no more than $112.5
million during the four-year contract term. On January 1, 2000, Auto & Home also
entered into an annual treaty in which the maximum recoverable amount is $122.5
million for each and every loss occurrence in excess of $125 million. The
aggregate effect of these coverages is to limit Auto & Home's probable maximum
after-tax loss from a one in 250-year hurricane in Florida or a one in 100-year
hurricane in the Northeast to less than 10% of Auto & Home's statutory surplus.
PROPERTY PER RISK EXCESS OF LOSS. Auto & Home's property per risk excess
of loss coverage has three layers of protection: each current layer is effective
through June 30, 2000. The first layer of coverage provides up to $1 million of
recoveries for each loss in excess of $1 million. The second layer provides up
to $3 million of coverage for each loss in excess of $2 million. The third layer
provides up to $10 million of coverage for each loss in excess of $5 million.
For a given occurrence, the entire program provides maximum coverage of $24
million.
CASUALTY EXCESS OF LOSS. Auto & Home's casualty excess of loss coverage
has three layers of protection: each current layer is effective through June 30,
2000. The first layer covers up to $3 million of losses for each occurrence in
excess of $2 million. The second layer covers up to $5 million of losses for
each occurrence in excess of $5 million. The third layer covers up to $10
million of losses for each occurrence in excess of $10 million.
INVESTMENTS
We had total cash and invested assets at December 31, 1999 of $138.6
billion. In addition, we had $64.9 billion held in our separate accounts, for
which we generally do not bear investment risk.
Our primary investment objective is to maximize after-tax operating income
consistent with acceptable risk parameters. We are 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.
We manage credit risk through in-house fundamental analysis of the
underlying obligors, issuers, transaction structures and real estate properties.
We also manage credit risk and valuation risk through industry and issuer
diversification and asset allocation. For real estate and agricultural assets,
we manage credit risk and valuation risk through geographic, property type, and
product type diversification and asset allocation. We manage interest rate risk
as part of our 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 our
products, such as the resetting of credited interest and dividend rates for
policies that permit such adjustments.
For further information on our management of interest rate risk and market
valuation risk, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Market Risk Disclosure".
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<PAGE> 146
The following table summarizes our cash and invested assets at December 31,
1999 and 1998:
INVESTED ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1999 1998
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed maturities available-for-sale, at fair value.......... $ 96,981 69.9% $100,767 72.5%
Mortgage loans on real estate............................... 19,739 14.2 16,827 12.1
Equity real estate and real estate joint ventures........... 5,649 4.1 6,287 4.5
Policy loans................................................ 5,598 4.0 5,600 4.0
Equity securities, at fair value............................ 2,006 1.5 2,340 1.7
Cash and cash equivalents................................... 2,789 2.0 3,301 2.4
Other limited partnership interests......................... 1,331 1.0 1,047 0.7
Short-term investments...................................... 3,055 2.2 1,369 1.0
Other invested assets....................................... 1,501 1.1 1,484 1.1
-------- ----- -------- -----
Total cash and invested assets..................... $138,649 100.0% $139,022 100.0%
======== ===== ======== =====
</TABLE>
INVESTMENT RESULTS
The yield on general account cash and invested assets, excluding net
realized investment gains and losses, was 7.3%, 7.5% and 7.1% for the years
ended December 31, 1999, 1998 and 1997, respectively.
The following table illustrates the yields on average assets for each of
the components of our investment portfolio for the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997
------------------ ------------------- ------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- ------ -------- ------ -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
FIXED MATURITIES:(2)
Investment income.............................. 7.5% $ 7,171 7.4% $ 6,990 7.4% $ 6,481
Net realized gains (losses).................... (538) 573 118
------- -------- -------
Total........................................ $ 6,633 $ 7,563 $ 6,599
------- -------- -------
Ending assets.................................. $96,981 $100,767 $92,630
------- -------- -------
MORTGAGE LOANS:(3)
Investment income.............................. 8.1% $ 1,484 8.5% $ 1,580 8.6% $ 1,692
Net realized gains............................. 28 23 56
------- -------- -------
Total........................................ $ 1,512 $ 1,603 $ 1,748
------- -------- -------
Ending assets.................................. $19,739 $ 16,827 $20,193
------- -------- -------
EQUITY REAL ESTATE AND REAL ESTATE JOINT
VENTURES:(4)
Investment income, net of expenses............. 9.7% $ 581 10.4% $ 687 7.5% $ 586
Net realized gains............................. 265 424 446
------- -------- -------
Total........................................ $ 846 $ 1,111 $ 1,032
------- -------- -------
Ending assets.................................. $ 5,649 $ 6,287 $ 7,080
------- -------- -------
POLICY LOANS:
Investment income.............................. 6.1% $ 340 6.6% $ 387 6.3% $ 368
------- -------- -------
Ending assets.................................. $ 5,598 $ 5,600 $ 5,846
------- -------- -------
</TABLE>
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<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997
------------------ ------------------- ------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- ------ -------- ------ -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CASH, CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS:
Investment income.............................. 4.2% $ 173 5.3% $ 187 5.1% $ 169
------- -------- -------
Ending assets.................................. $ 5,844 $ 4,670 $ 3,590
------- -------- -------
EQUITY SECURITIES:
Investment income.............................. 1.8% $ 40 2.0% $ 78 1.4% $ 50
Net realized gains............................. 99 994 224
------- -------- -------
Total........................................ $ 139 $ 1,072 $ 274
------- -------- -------
Ending assets.................................. $ 2,006 $ 2,340 $ 4,250
------- -------- -------
OTHER LIMITED PARTNERSHIP INTERESTS:
Investment income.............................. 17.2% $ 199 20.3% $ 196 32.7% $ 302
Net realized gains............................. 33 13 12
------- -------- -------
Total........................................ $ 232 $ 209 $ 314
------- -------- -------
Ending assets.................................. $ 1,331 $ 1,047 $ 855
------- -------- -------
OTHER INVESTED ASSETS:
Investment income.............................. 6.0% $ 91 12.2% $ 406 7.3% $ 324
Net realized gains (losses).................... (24) 71 23
------- -------- -------
Total........................................ $ 67 $ 477 $ 347
------- -------- -------
Ending assets.................................. $ 1,501 $ 1,484 $ 4,456
------- -------- -------
TOTAL INVESTMENTS:
Investment income before expenses and fees..... 7.5% $10,079 7.7% $ 10,511 7.5% $ 9,972
Investment expenses and fees................... (0.2%) (263) (0.2%) (283) (0.4%) (481)
---- ------- ---- -------- ---- -------
Net investment income.......................... 7.3% $ 9,816 7.5% $ 10,228 7.1% $ 9,491
Net realized gains (losses).................... (137) 2,098 879
Realized gains from sales of subsidiaries...... -- 531 139
Adjustments to realized gains (losses)(5)...... 67 (608) (231)
------- -------- -------
Total........................................ $ 9,746 $ 12,249 $10,278
======= ======== =======
</TABLE>
- ---------------
(1) Yields are based on quarterly average asset carrying values for 1999 and
1998, and annual average asset carrying values for 1997 excluding unrealized
investment gains(losses), and for yield calculation purposes, average assets
exclude fixed maturities associated with our security 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 $1,079 million, $916
million and $860 million at December 31, 1999, 1998 and 1997, respectively,
which include an equity component as part of the notes' return. Investment
income for fixed maturities includes prepayment fees and income from the
securities lending program that has been reclassed from net investment
income.
(3) Investment income from mortgage loans includes prepayment fees.
(4) Equity real estate and real estate joint venture income is shown net of
operating expenses, including depreciation of $247 million, $282 million and
$338 million in 1999, 1998 and 1997, respectively.
(5) Adjustments to realized gains (losses) include accelerated amortization of
deferred acquisition costs, loss recognition for policy liabilities related
to the assets sold and additional credits to participating contracts.
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<PAGE> 148
FIXED MATURITIES
Fixed maturities consist principally of publicly traded and privately
placed debt securities, and represented 69.9% and 72.5% of total cash and
invested assets at December 31, 1999 and 1998, respectively.
Based on estimated fair value, public fixed maturities and private fixed
maturities comprised 82.6% and 17.4% of total fixed maturities at December 31,
1999, respectively, and 83.3% and 16.7% at December 31, 1998, respectively. We
invest 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 us with protective covenants, call protection features and,
where applicable, a higher level of collateral. However, we may not freely trade
our 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).
The following tables present our public, private and total fixed maturities
by NAIC designation and the equivalent ratings of the Nationally Recognized
Statistical Rating Organizations at December 31, 1999 and 1998, as well as the
percentage, based on estimated fair value, that each designation comprises:
PUBLIC FIXED MATURITIES BY CREDIT QUALITY
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
ESTIMATED ESTIMATED
NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF
RATING EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL
- ------ ---------------------- --------- --------- ----- --------- --------- -----
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C> <C> <C>
1 Aaa/Aa/A.................... $55,258 $54,511 68.1% $57,003 $60,735 72.4%
2 Baa......................... 19,908 19,106 23.8 16,472 17,001 20.2
3 Ba.......................... 4,355 4,232 5.3 4,635 4,609 5.5
4 B........................... 2,184 2,153 2.7 1,532 1,477 1.8
5 Caa and lower............... 64 54 0.1 138 106 0.1
6 In or near default.......... 23 23 0.0 2 5 0.0
------- ------- ----- ------- ------- -----
Total public fixed
maturities................ $81,792 $80,079 100.0% $79,782 $83,933 100.0%
======= ======= ===== ======= ======= =====
</TABLE>
146
<PAGE> 149
PRIVATE FIXED MATURITIES BY CREDIT QUALITY
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
ESTIMATED ESTIMATED
NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF
RATING EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL
- ------ ---------------------- --------- --------- ----- --------- --------- -----
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C> <C> <C>
1 Aaa/Aa/A...................... $ 7,597 $ 7,696 45.5% $ 7,372 $ 7,865 46.7%
2 Baa........................... 6,975 6,845 40.5 6,637 6,862 40.8
3 Ba............................ 1,453 1,404 8.3 1,391 1,362 8.1
4 B............................. 833 816 4.8 621 606 3.6
5 Caa and lower................. 104 87 0.5 129 110 0.6
6 In or near default............ 45 44 0.3 11 14 0.1
------- ------- ----- ------- -------- -----
Subtotal...................... 17,007 16,892 99.9 16,161 16,819 99.9
Redeemable preferred stock.... 10 10 0.1 15 15 0.1
------- ------- ----- ------- -------- -----
Total private fixed
maturities.................. $17,017 $16,902 100.0% $16,176 $ 16,834 100.0%
======= ======= ===== ======= ======== =====
</TABLE>
TOTAL FIXED MATURITIES BY CREDIT QUALITY
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
ESTIMATED ESTIMATED
NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF
RATING EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL
- ------ ---------------------- --------- --------- ----- --------- --------- -----
(DOLLARS IN MILLIONS)
<C> <S> <C> <C> <C> <C> <C> <C>
1 Aaa/Aa/A...................... $62,855 $62,207 64.2% $64,375 $ 68,600 68.1%
2 Baa........................... 26,883 25,951 26.8 23,109 23,863 23.7
3 Ba............................ 5,808 5,636 5.8 6,026 5,971 5.9
4 B............................. 3,017 2,969 3.1 2,153 2,083 2.1
5 Caa and lower................. 168 141 0.1 267 216 0.2
6 In or near default............ 68 67 0.0 13 19 0.0
------- ------- ----- ------- -------- -----
Subtotal...................... 98,799 96,971 100.0 95,943 100,752 100.0
Redeemable preferred stock.... 10 10 0.0 15 15 0.0
------- ------- ----- ------- -------- -----
Total fixed maturities........ $98,809 $96,981 100.0% $95,958 $100,767 100.0%
======= ======= ===== ======= ======== =====
</TABLE>
Based on estimated fair values, total investment grade public and private
placement fixed maturities comprised 91.0% and 91.8% of total fixed maturities
in the general account at December 31, 1999 and 1998, respectively.
147
<PAGE> 150
The following table shows the amortized cost and estimated fair value of
fixed maturities, by contractual maturity dates (excluding scheduled sinking
funds), at December 31, 1999 and 1998:
FIXED MATURITIES BY CONTRACTUAL MATURITY DATES
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------
1999 1998
---------------------- ----------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less..........................
$ 3,180 $ 3,217 $ 2,380 $ 2,462
Due after one year through five years............
18,152 18,061 17,062 17,527
Due after five years through ten years...........
23,755 23,114 23,769 24,714
Due after ten years..............................
26,316 25,918 26,276 29,070
------- ------- ------- --------
Subtotal.......................................
71,403 70,310 69,487 73,773
Mortgage-backed and other asset-backed
securities.....................................
27,396 26,661 26,456 26,979
------- ------- ------- --------
Subtotal.......................................
98,799 96,971 95,943 100,752
Redeemable preferred stock.......................
10 10 15 15
------- ------- ------- --------
Total fixed maturities...........................
$98,809 $96,981 $95,958 $100,767
======= ======= ======= ========
</TABLE>
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED FIXED MATURITIES. We monitor
fixed maturities to identify investments that management considers to be
problems or potential problems. We also monitor investments that have been
restructured.
We define 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.
We define potential problem securities in the fixed maturity category as
securities of an issuer deemed to be experiencing significant operating problems
or difficult industry conditions. We use 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.
We define restructured securities in the fixed maturities category as
securities to which we have granted a concession that we would not have
otherwise considered but for the financial difficulties of the obligor or
issuer. We enter into a restructuring when we believe we 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 or dividend rate, an extension of
the maturity date, an exchange of debt for equity or a partial forgiveness of
principal or interest.
148
<PAGE> 151
The following table presents the estimated fair value of our total fixed
maturities classified as performing, problem, potential problem and restructured
fixed maturities at December 31, 1999 and 1998:
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED FIXED MATURITIES
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1999 1998
------------------- -------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Performing......................................... $96,464 99.5% $100,409 99.6%
Problem............................................ 20 0.0 152 0.2
Potential problem.................................. 482 0.5 192 0.2
Restructured....................................... 15 0.0 14 0.0
------- ----- -------- -----
Total............................................ $96,981 100.0% $100,767 100.0%
======= ===== ======== =====
</TABLE>
We classify all of our fixed maturities as available-for-sale and mark them
to market. We write down to management's expectations of ultimate realizable
value fixed maturities that we deem to be other than temporarily impaired. We
record write-downs as realized losses and include them in earnings and adjust
the cost basis of the fixed maturities accordingly. We do not change the revised
cost basis for subsequent recoveries in value. Such writedowns were $98 million
and $7 million for the years ended December 31, 1999 and 1998, respectively.
Cumulative write-downs on fixed maturities owned were $76 million and $16
million at December 31, 1999 and 1998, respectively.
FIXED MATURITIES BY SECTOR. We diversify our fixed maturities by security
sector. The following tables set forth the estimated fair value of our fixed
maturities by sector, as well as the percentage of the total fixed maturities
holdings that each security sector comprised at December 31, 1999 and 1998, and
show by security type the relative amounts of publicly traded and privately
placed securities:
FIXED MATURITIES BY SECTOR
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
--------------------------------------------------------------
PUBLICLY TRADED PRIVATELY PLACED TOTAL
------------------ ------------------ ------------------
ESTIMATED % OF ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
U.S. treasuries/agencies.......... $ 6,298 7.9% $ 1 0.0% $ 6,299 6.5%
Corporate securities.............. 40,207 50.2 15,336 90.7 55,543 57.3
Foreign government securities..... 4,095 5.1 111 0.7 4,206 4.3
Mortgage-backed securities........ 20,032 25.0 247 1.5 20,279 20.9
Asset-backed securities........... 5,715 7.1 667 3.9 6,382 6.6
Other fixed income assets......... 3,732 4.7 540 3.2 4,272 4.4
------- ----- ------- ----- ------- -----
Total........................... $80,079 100.0% $16,902 100.0% $96,981 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
149
<PAGE> 152
FIXED MATURITIES BY SECTOR
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
--------------------------------------------------------------
PUBLICLY TRADED PRIVATELY PLACED TOTAL
------------------ ------------------ ------------------
ESTIMATED % OF ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
U.S. treasuries/agencies.......... $ 7,744 9.2% $ 3 0.0% $ 7,747 7.7%
Corporate securities.............. 42,525 50.6 15,453 91.8 57,978 57.5
Foreign government securities..... 4,173 5.0 117 0.7 4,290 4.3
Mortgage-backed securities........ 20,452 24.4 440 2.6 20,892 20.7
Asset-backed securities........... 5,852 7.0 235 1.4 6,087 6.0
Other fixed income assets......... 3,187 3.8 586 3.5 3,773 3.8
------- ----- ------- ----- -------- -----
Total........................... $83,933 100.0% $16,834 100.0% $100,767 100.0%
======= ===== ======= ===== ======== =====
</TABLE>
CORPORATE FIXED MATURITIES. The table below shows the major industry types
that comprise our corporate bond holdings at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1999 1998
------------------- -------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Industrial.......................................... $26,480 47.6% $28,388 49.0%
Utility............................................. 6,487 11.7 7,690 13.2
Finance............................................. 11,631 21.0 11,252 19.4
Yankee/Foreign(1)................................... 10,423 18.8 10,295 17.8
Other............................................... 522 0.9 353 0.6
------- ----- ------- -----
Total............................................. $55,543 100.0% $57,978 100.0%
======= ===== ======= =====
</TABLE>
- ---------------
(1) Includes dollar-denominated debt obligations of foreign obligors, known as
Yankee bonds, and other foreign investments.
We diversify our corporate bond holdings by industry and issuer. The
portfolio has no significant exposure to any single issuer. At December 31,
1999, our combined holdings in the ten issuers to which we had the greatest
exposure totaled $3,154 million, which was less than 3% of our total invested
assets at such date. The exposure to the largest single issuer of corporate
bonds we held at December 31, 1999 was $388 million, which was less than 1% of
our total invested assets at such date.
At December 31, 1999, investments of $4,182 million, or 40.1% 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 is primarily dollar-denominated, foreign private placements and project
finance loans. We diversify the Yankee/Foreign portfolio by country and issuer.
We do not have material exposure to foreign currency risk in our invested
assets. In our international insurance operations, both our 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.
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<PAGE> 153
MORTGAGE-BACKED SECURITIES. The following table shows the types of
mortgage-backed securities we held at December 31, 1999 and 1998:
MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1999 1998
------------------- -------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Pass-through securities............................. $ 8,478 41.8% $ 8,546 40.9%
------- ----- ------- -----
Collateralized mortgage obligations
Planned amortization class........................ 3,974 19.6 4,593 22.0
Sequential pay class.............................. 3,359 16.5 3,827 18.3
Other............................................. 361 1.8 141 0.7
------- ----- ------- -----
Subtotal....................................... 7,694 37.9 8,561 41.0
Commercial mortgage-backed securities............... 4,107 20.3 3,785 18.1
------- ----- ------- -----
Total..................................... $20,279 100.0% $20,892 100.0%
======= ===== ======= =====
</TABLE>
At December 31, 1999, pass-through and collateralized mortgage obligations
totaled $16,172 million, or 79.7% 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
December 31, 1999, approximately $2,614 million, or 63.6% of the commercial
mortgage-backed securities and $13,880 million, or 85.9% 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 our 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. Our active monitoring of our 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 represented 41.8% and 40.9% of
our mortgage-backed 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.
We also invested 37.9% and 41.0% of our mortgage-backed securities at
December 31, 1999 and 1998, respectively, in collateralized mortgage obligations
("CMOs") which have a greater degree of cash flow stability than pass-throughs.
Planned Amortization Class bonds ("PAC") represented 19.6% and 22.0% of our
mortgage-backed securities at December 31, 1999 and 1998, respectively. These
bonds or tranches are structured to provide more certain cash flows to the
investor and therefore are subject to less prepayment and extension risk than
other mortgage-backed securities. PAC tranches derive their
151
<PAGE> 154
stability from having a specified principal payment schedule, provided
prepayments of the underlying securities remain within their expected range. The
other tranches of a CMO absorb prepayment variations so that PACs maintain a
better defined maturity profile than other mortgage-backed securities. By buying
PACs, we accept a lower yield in return for more certain cash flow. The
principal risk of holding PACs is that prepayments may differ significantly from
expectations and we will not receive the expected yield on the PAC. In contrast,
Sequential Pay Class tranches receive principal payments in a prescribed
sequence without a pre-determined prepayment schedule. In addition to our PACs
and Sequential Pay Class tranches, we had approximately $108 million invested in
interest-only or principal-only mortgage-backed securities at December 31, 1999.
ASSET-BACKED SECURITIES. The following table below shows the types of
asset-backed securities we held at December 31, 1999 and 1998:
ASSET-BACKED SECURITIES
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------
1999 1998
--------------------- ---------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Credit card receivables..................... $1,960 30.7% $2,885 47.4%
Automobile receivables...................... 1,070 16.8 1,432 23.5
Home equity loans........................... 1,541 24.1 1,026 16.9
Other....................................... 1,811 28.4 744 12.2
------ ----- ------ -----
Total..................................... $6,382 100.0% $6,087 100.0%
====== ===== ====== =====
</TABLE>
Asset-backed securities are purchased both to diversify the overall risks
of our fixed maturities assets and to provide attractive returns. Our
asset-backed securities are diversified both by type of asset and by issuer.
Credit card receivables constitute the largest exposure in our 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 rates. At December 31, 1999, approximately $3,661
million, or 57.4%, 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
Our mortgage loans are collateralized by commercial, agricultural and
residential properties. Mortgage loans comprised 14.2% and 12.1% of our total
cash and invested assets at December 31, 1999 and 1998, respectively. The
carrying value of mortgage loans is stated at original cost net of repayments,
amortization of premiums, accretion of discounts and valuation
152
<PAGE> 155
allowances. The following table shows the carrying value of our mortgage loans
by such types at December 31, 1999 and 1998:
MORTGAGE LOANS BY PORTFOLIO
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------
1999 1998
------------------- -------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Commercial................................... $14,862 75.3% $12,360 73.5%
Agricultural................................. 4,798 24.3 4,227 25.1
Residential.................................. 79 0.4 240 1.4
------- ----- ------- -----
Total...................................... $19,739 100.0% $16,827 100.0%
======= ===== ======= =====
</TABLE>
COMMERCIAL MORTGAGE LOANS. We diversify our commercial mortgage loans by
both geographic region and property type, and manage these investments through a
network of regional offices overseen by our investment department. The following
table presents the distribution across geographic regions and property types for
commercial mortgage loans at December 31, 1999 and 1998:
COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY GEOGRAPHIC REGION AND PROPERTY TYPE
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1999 1998
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REGION
South Atlantic....................................... $ 4,098 27.6% $ 3,463 28.0%
Middle Atlantic...................................... 2,703 18.2 2,220 18.0
Pacific.............................................. 2,596 17.5 1,935 15.7
East North Central................................... 1,865 12.5 1,832 14.8
New England.......................................... 1,095 7.4 1,077 8.7
West South Central................................... 1,012 6.8 676 5.5
West North Central................................... 652 4.4 569 4.6
Mountain............................................. 490 3.3 335 2.7
East South Central................................... 149 1.0 152 1.2
International........................................ 202 1.3 101 0.8
------- ----- ------- -----
Total.............................................. $14,862 100.0% $12,360 100.0%
======= ===== ======= =====
PROPERTY TYPE
Office............................................... $ 6,789 45.7% $ 6,118 49.5%
Retail............................................... 3,620 24.4 2,286 18.5
Apartments........................................... 2,382 16.0 2,378 19.2
Industrial........................................... 1,136 7.6 848 6.9
Hotel................................................ 843 5.7 657 5.3
Other................................................ 92 0.6 73 0.6
------- ----- ------- -----
Total.............................................. $14,862 100.0% $12,360 100.0%
======= ===== ======= =====
</TABLE>
153
<PAGE> 156
The following table presents the scheduled maturities for our commercial
mortgage loans at December 31, 1999 and 1998:
COMMERCIAL MORTGAGE LOAN SCHEDULED MATURITIES
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1999 1998
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Due in 1 year or less................................ $ 806 5.4% $ 808 6.5%
Due after 1 year through 2 years..................... 482 3.2 816 6.6
Due after 2 years through 3 years.................... 708 4.8 532 4.3
Due after 3 years through 4 years.................... 787 5.3 679 5.5
Due after 4 years through 5 years.................... 1,608 10.8 881 7.1
Due after 5 years.................................... 10,471 70.5 8,644 70.0
------- ----- ------- -----
Total.............................................. $14,862 100.0% $12,360 100.0%
======= ===== ======= =====
</TABLE>
We monitor our mortgage loans on a continual basis. Through this monitoring
process, we review loans that are restructured, delinquent or under foreclosure
and identify those that management considers to be potentially delinquent. These
loan classifications are generally consistent with those used in industry
practice.
We define restructured mortgage loans, consistent with industry practice,
as loans in which we, for economic or legal reasons related to the debtor's
financial difficulties, grant a concession to the debtor that we would not
otherwise consider. This definition provides for loans to exit the restructured
category under certain conditions. We define delinquent mortgage loans,
consistent with industry practice, as loans as to which two or more interest or
principal payments are past due. We define mortgage loans under foreclosure,
consistent with industry practice, as loans as to which foreclosure proceedings
have formally commenced. We define potentially delinquent loans as loans which,
in management's opinion, have a high probability of becoming delinquent.
We review 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. We
also review 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.
We establish valuation allowances for loans that we deem impaired, as
determined through our annual review process. We define impaired loans
consistent with Statement of Financial Accounting Standards No. 114, Accounting
by Creditors for Impairment of a Loan, as loans as to which we probably will not
collect all amounts due according to applicable contractual terms of the
agreement. We base 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. We record valuation allowances as realized
losses and include them in earnings. We record subsequent adjustments to
allowances as realized gains or losses and include them in earnings.
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<PAGE> 157
The following table presents the amortized cost and valuation allowances
for commercial mortgage loans distributed by loan classification at December 31,
1999 and 1998:
COMMERCIAL MORTGAGE LOAN DISTRIBUTION AND VALUATION ALLOWANCE BY LOAN
CLASSIFICATION
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
----------------------------------------- -----------------------------------------
% 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.............. $14,098 94.5% $11 0.1% $11,490 91.9% $ 44 0.4%
Restructured............ 810 5.4 52 6.4% 953 7.7 85 8.9%
Delinquent or under
foreclosure........... 17 0.1 4 25.0% 55 0.4 10 18.2%
Potentially
delinquent............ 6 0.0 2 33.3% 4 0.0 3 75.0%
------- ----- --- ------- ----- ----
Total................. $14,931 100.0% $69 0.5% $12,502 100.0% $142 1.1%
======= ===== === ======= ===== ====
</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 years ended December 31, 1999, 1998 and 1997:
CHANGES IN COMMERCIAL MORTGAGE LOAN VALUATION ALLOWANCES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year.................................. $ 142 $ 259 $ 454
Additions................................................... 36 30 46
Deductions for writedowns and dispositions(1)............... (109) (147) (241)
----- ----- -----
Balance, end of year........................................ $ 69 $ 142 $ 259
===== ===== =====
</TABLE>
- ---------------
(1) Includes $26 million related to commercial mortgage loans held by entities
sold in 1998.
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.
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<PAGE> 158
AGRICULTURAL MORTGAGE LOANS. We diversify our agricultural mortgage loans
by both geographic region and product type. We manage these investments through
a network of regional offices and field professionals overseen by our investment
department. The following table presents the distribution across geographic
regions and product types for agricultural mortgage loans at December 31, 1999
and 1998:
AGRICULTURAL MORTGAGE LOAN DISTRIBUTION
BY GEOGRAPHIC REGION AND BY PRODUCT TYPE
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1999 1998
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REGION
Pacific................................................ $1,184 24.7% $1,085 25.6%
West North Central..................................... 1,053 21.9 931 22.0
South Atlantic......................................... 840 17.5 734 17.4
East North Central..................................... 737 15.4 671 15.9
West South Central..................................... 405 8.5 356 8.4
Mountain............................................... 371 7.7 327 7.7
East South Central..................................... 189 3.9 108 2.6
New England............................................ 19 0.4 15 0.4
------ ----- ------ -----
Total................................................ $4,798 100.0% $4,227 100.0%
====== ===== ====== =====
PRODUCT TYPE
Annual Crop............................................ $2,276 47.4% $2,128 50.3%
Permanent.............................................. 932 19.5 848 20.1
Agribusiness........................................... 761 15.8 578 13.7
Livestock.............................................. 655 13.7 564 13.3
Timber................................................. 174 3.6 109 2.6
------ ----- ------ -----
Total................................................ $4,798 100.0% $4,227 100.0%
====== ===== ====== =====
</TABLE>
The following table presents the scheduled maturities for our agricultural
mortgage loans at December 31, 1999 and 1998:
AGRICULTURAL MORTGAGE LOAN MATURITY PROFILE
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1999 1998
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Due in 1 year or less.................................. $ 99 2.1% $ 70 1.7%
Due after 1 year through 2 years....................... 74 1.5 76 1.8
Due after 2 years through 3 years...................... 97 2.0 88 2.1
Due after 3 years through 4 years...................... 135 2.8 112 2.6
Due after 4 years through 5 years...................... 134 2.8 161 3.8
Due after 5 years...................................... 4,259 88.8 3,720 88.0
------ ----- ------ -----
Total................................................ $4,798 100.0% $4,227 100.0%
====== ===== ====== =====
</TABLE>
Approximately 62% of the $4,798 million of agricultural mortgage loans
outstanding at December 31, 1999 was subject to rate resets prior to maturity. A
substantial portion of these loans are successfully renegotiated and remain
outstanding to maturity. The process and policies
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<PAGE> 159
for monitoring the agricultural mortgage loans and classifying them by
performance status are generally the same as those for the commercial mortgage
loans.
The following table presents the amortized cost and valuation allowances
for agricultural mortgage loans distributed by loan classification at December
31, 1999 and 1998:
AGRICULTURAL MORTGAGE LOAN DISTRIBUTION AND VALUATION ALLOWANCE BY LOAN
CLASSIFICATION
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
----------------------------------------- -----------------------------------------
% 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............. $4,616 95.8% $ 1 0.0% $4,051 95.2% $10 0.2%
Restructured........... 165 3.4 11 6.7% 182 4.3 14 7.7%
Delinquent or under
foreclosure.......... 27 0.6 2 7.4% 10 0.2 -- 0.0%
Potentially
delinquent........... 8 0.2 4 50.0% 12 0.3 4 33.3%
------ ----- --- ------ ----- ---
Total................ $4,816 100.0% $18 0.4% $4,255 100.0% $28 0.7%
====== ===== === ====== ===== ===
</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 years ended December 31, 1999, 1998 and
1997:
CHANGES IN AGRICULTURAL MORTGAGE LOAN VALUATION ALLOWANCES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year.................................. $ 28 $27 $12
Additions................................................... 4 10 15
Deductions for writedowns and dispositions.................. (14) (9) --
---- --- ---
Balance, end of year........................................ $ 18 $28 $27
==== === ===
</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 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
Our equity real estate and real estate joint venture investments consist of
commercial and agricultural properties located throughout the U.S. and Canada.
We manage these investments through a network of regional offices overseen by
our investment department. At December 31, 1999 and 1998, the carrying value of
our equity real estate and real estate joint ventures was $5,649 million and
$6,287 million, respectively, or 4.1% and 4.5% of total cash and invested
assets. The carrying value of equity real estate is stated at depreciated cost
net of impairments and valuation allowances. The carrying value of real estate
joint ventures is stated at our 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
157
<PAGE> 160
of commercial and agricultural mortgage loans. The following table presents the
carrying value of our equity real estate and real estate joint ventures at
December 31, 1999 and 1998:
EQUITY REAL ESTATE AND REAL ESTATE JOINT VENTURES
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1999 1998
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
TYPE
Equity real estate..................................... $5,271 93.3% $5,559 88.5%
Real estate joint ventures............................. 331 5.9 574 9.1
------ ----- ------ -----
Subtotal............................................. 5,602 99.2 6,133 97.6
Foreclosed real estate................................. 47 0.8 154 2.4
------ ----- ------ -----
Total................................................ $5,649 100.0% $6,287 100.0%
====== ===== ====== =====
</TABLE>
These investments are diversified by geographic location and property
types. The following table presents the distribution across geographic regions
and property types for equity real estate and real estate joint ventures at
December 31, 1999 and 1998:
EQUITY REAL ESTATE AND REAL ESTATE JOINT VENTURES
DISTRIBUTION BY GEOGRAPHIC REGION AND PROPERTY TYPE
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1999 1998
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REGION
East................................................... $1,863 33.0% $1,960 31.2%
West................................................... 1,657 29.3 1,828 29.1
South.................................................. 1,416 25.1 1,628 25.9
Midwest................................................ 544 9.6 681 10.8
International.......................................... 169 3.0 190 3.0
------ ----- ------ -----
Total................................................ $5,649 100.0% $6,287 100.0%
====== ===== ====== =====
PROPERTY TYPE
Office................................................. $3,846 68.1% $4,265 67.8%
Retail................................................. 587 10.4 640 10.2
Apartments............................................. 474 8.4 418 6.6
Land................................................... 258 4.6 313 5.0
Industrial............................................. 160 2.8 168 2.7
Hotel.................................................. 151 2.7 169 2.7
Agriculture............................................ 96 1.7 195 3.1
Other.................................................. 77 1.3 119 1.9
------ ----- ------ -----
Total................................................ $5,649 100.0% $6,287 100.0%
====== ===== ====== =====
</TABLE>
Office properties representing 68.1% and 67.8% of our equity real estate
and real estate joint venture holdings at December 31, 1999 and 1998,
respectively, are well diversified geographically. The average occupancy level
of office properties was 92% and 93% at December 31, 1999 and 1998,
respectively.
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<PAGE> 161
We classify equity real estate and real estate joint ventures as held for
investment or held for sale. The following table presents the carrying value of
equity real estate and real estate joint ventures by such classifications at
December 31, 1999 and 1998:
EQUITY REAL ESTATE AND REAL ESTATE JOINT VENTURES
CLASSIFICATION BY HELD FOR INVESTMENT AND HELD FOR SALE
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------
1999 1998
---------------- ----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Equity real estate and real estate joint ventures held for
investment............................................... $5,151 91.2% $5,893 93.7%
Equity real estate and real estate joint ventures held for
sale..................................................... 498 8.8 394 6.3
------ ----- -------- -----
Total.................................................... $5,649 100.0% $6,287 100.0%
====== ===== ======== =====
</TABLE>
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 status and our exit strategy. In addition to individual
property reviews, we employ an overall strategy of selective dispositions and
acquisitions as market opportunities arise. Our current strategy follows the
completion of a program to substantially reduce the size of our total real
estate holdings. Our disposition effort began in 1995, when the carrying value
of our holdings at year end was $9,514 million, and ended in 1998 with a
carrying value of our holdings at $6,287 million.
We adjust 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. We write down impaired real estate to estimated fair value, which
we generally compute using the present value of future cash flows from the
property, discounted at a rate commensurate with the underlying risks. We record
writedowns as realized losses through earnings and we reduce the cost basis of
the properties accordingly. We do not change the new cost basis for subsequent
recoveries in value. Cumulative writedowns on equity real estate and real estate
joint ventures that are held for investment, excluding real estate acquired upon
foreclosure of commercial and agricultural mortgage loans, were $289 million and
$408 million at December 31, 1999 and 1998, respectively.
We record 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 we identify a property to be sold and commence a firm plan for
marketing the property, we establish and periodically revise, 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. We record allowances as realized losses and include them in
earnings. We record subsequent adjustments to allowances as realized gains or
losses and include them in earnings.
Our 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 $498 million and $394 million at
December 31, 1999 and 1998, respectively, are net of impairments of $187 million
and $119 million and net of valuation allowances of $34 million and $33 million,
respectively.
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<PAGE> 162
EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
Our equity securities primarily consist of investments in common stocks.
Substantially all of the common stock is publicly traded on major securities
exchanges. The other limited partnership interests primarily represent ownership
interests in pooled investment funds that make private equity investments in
companies in the U.S. and overseas. We classify our investments in common stocks
as available-for-sale and mark them to market except for non-marketable private
equities which are generally carried at cost. We account for our investments in
limited partnership interests in which we do not have a controlling interest in
accordance with the equity method of accounting. Our investments in equity
securities represented 1.5% and 1.7% of cash and invested assets at December 31,
1999 and 1998, respectively.
The following table presents the carrying values of our investments in
equity securities and other limited partnership interests at December 31, 1999
and 1998:
INVESTMENTS IN EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1999 1998
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Equity securities...................................... $2,006 60.1% $2,340 69.1%
Other limited partnership interests.................... 1,331 39.9 1,047 30.9
------ ----- ------ -----
Total................................................ $3,337 100.0% $3,387 100.0%
====== ===== ====== =====
</TABLE>
Equity securities include, at December 31, 1999 and 1998, $237 million and
$239 million, respectively, of private equity securities. We may not freely
trade our private equity securities, because of restrictions imposed by federal
and state securities laws and illiquid trading markets.
At December 31, 1999 and 1998, approximately $380 million and $452 million,
respectively, of our equity securities holdings were effectively fixed at a
minimum value of $355 million and $371 million in these respective periods,
primarily through the use of convertible securities and other derivatives. In
1998, one exchangeable subordinated debt security was terminated resulting in
realized investment gains of $32 million. The remaining exchangeable
subordinated debt securities mature through 2002 and we may terminate them
earlier at our discretion.
PROBLEM AND POTENTIAL PROBLEM EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP
INTERESTS
We monitor our equity securities and other limited partnership interests on
a continual basis. Through this monitoring process, we identify 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 management's
expectation of ultimate realizable value. Writedowns are recorded as realized
investment losses and are included in earnings and the cost
160
<PAGE> 163
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 years ended December 31, 1999 and 1998, such
writedowns were $35 million and $38 million, respectively. Cumulative writedowns
on equity securities and other limited partnership interests owned at December
31, 1999 and 1998 were $35 million and $55 million, respectively.
OTHER INVESTED ASSETS
Our other invested assets consist principally of leveraged leases, which
are recorded net of non-recourse debt. We participate in lease transactions
which are diversified by geographic area. We regularly review residual values
and write down residuals to expected values as needed. Our other invested assets
represented 1.1% of cash and invested assets at both December 31, 1999 and 1998.
DERIVATIVE FINANCIAL INSTRUMENTS
We use 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.
Our derivative strategy employs a variety of instruments including financial
futures, financial forwards foreign exchange contracts, foreign currency swaps,
interest rate swaps, interest rate caps and options.
We held the following positions in derivative financial instruments (other
than equity options) at December 31, 1999 and 1998:
DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------
1999 1998
---------------- ----------------
NOTIONAL % OF NOTIONAL % OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Financial futures...................................... $ 3,140 15.1% $ 2,190 17.0%
Foreign exchange contracts............................. -- 0.0 136 1.1
Foreign currency swaps................................. 4,002 19.2 580 4.5
Interest rate swaps.................................... 1,316 6.3 1,621 12.5
Interest rate caps..................................... 12,376 59.4 8,391 64.9
------- ----- ------- -----
Total................................................ $20,834 100.0% $12,918 100.0%
======= ===== ======= =====
</TABLE>
SECURITIES LENDING
Pursuant to our securities lending program, we lend securities to major
brokerage firms. Our policy requires a minimum of 102% of the fair value of the
loaned securities as collateral, calculated on a daily basis. Our securities on
loan at December 31, 1999 and 1998 had estimated fair values of $6,391 million
and $4,552 million, respectively.
SEPARATE ACCOUNT ASSETS
We manage each separate account's assets in accordance with the prescribed
investment policy that applies to that specific separate account. We establish
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 ours. Separate account
assets are subject to our 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 we use a separate account to support a contract providing
guaranteed benefits, we must comply
161
<PAGE> 164
with the asset maintenance requirements stipulated under Regulation 128 of the
New York Insurance Department. We monitor these requirements at least monthly
and in addition perform cash flow analyses, similar to those conducted for the
general account, on an annual basis. We report separately as assets and
liabilities investments held in separate accounts and liabilities of the
separate accounts. We report 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 contractholders, and, accordingly, we do
not reflect them in our consolidated statements of income and cash flows. We
reflect in our revenues fees charged to the separate accounts by us, including
mortality charges, risk charges, policy administration fees, investment
management fees and surrender charges.
REGULATION
INSURANCE REGULATION
Metropolitan Life Insurance Company is licensed to transact insurance
business in, and is subject to regulation and supervision by, all 50 states, the
District of Columbia, Puerto Rico, the U.S. Virgin Islands and Canada and each
of its 11 provinces. Each of our other insurance subsidiaries is licensed and
regulated in all U.S. and international jurisdictions where it conducts
insurance business. The extent of such regulation varies, but most jurisdictions
have laws and regulations governing the financial aspects of insurers, including
standards of solvency, reserves, reinsurance, capital adequacy and the business
conduct of insurers. In addition, statutes and regulations usually require the
licensing of insurers and their agents, the approval of policy forms and related
materials and, for certain lines of insurance, the approval of rates. Such
statutes and regulations also prescribe the permitted types and concentration of
investments.
The New York Insurance Law limits the sales commissions and certain other
marketing expenses that may be incurred in connection with the sale of life
insurance policies and annuity contracts. Our insurance subsidiaries are each
required to file reports, generally including detailed annual financial
statements, with insurance regulatory authorities in each of the jurisdictions
in which they do business, and their operations and accounts are subject to
periodic examination by such authorities. Our subsidiaries must also file, and
in many jurisdictions and in some lines of insurance obtain regulatory approval
for, rules, rates and forms relating to the insurance written in the
jurisdictions in which they operate.
The NAIC has established a program of accrediting state insurance
departments. NAIC accreditation permits accredited states to conduct periodic
examinations of insurers domiciled in such states. NAIC-accredited states will
not accept reports of examination of insurers from unaccredited states, except
under limited circumstances. As a direct result, insurers domiciled in
unaccredited states may be subject to financial examination by accredited states
in which they are licensed, in addition to any examinations conducted by their
domiciliary states. The accreditation of the New York Insurance Department, our
principal insurance regulator, has been suspended as a result of the New York
legislature's failure to adopt certain model NAIC laws, including provisions
restricting dividends to holding companies. We believe that the suspension of
the NAIC accreditation of the Department, even if continued, will not have a
significant impact upon our ability to conduct our insurance businesses.
State and federal insurance and securities regulatory authorities and other
state law enforcement agencies and attorneys general from time to time make
inquiries regarding compliance by our insurance subsidiaries with insurance,
securities and other laws and regulations regarding the conduct of our insurance
and securities businesses. We endeavor to respond to such inquiries in an
appropriate way and to take corrective action if warranted.
HOLDING COMPANY REGULATION. We and our insurance subsidiaries are subject
to regulation under the insurance holding company laws of various jurisdictions.
The insurance holding company laws and regulations vary from jurisdiction to
jurisdiction, but generally require an
162
<PAGE> 165
insurance holding company (and insurers that are subsidiaries of insurance
holding companies) to register with state regulatory authorities and to file
with those authorities certain reports, including information concerning their
capital structure, ownership, financial condition, certain intercompany
transactions and general business operations.
State insurance statutes also typically place restrictions and limitations
on the amount of dividends or other distributions payable by insurance company
subsidiaries to their parent companies, as well as on transactions between an
insurer and its affiliates. See "Risk Factors -- Dividends and payments on our
indebtedness may be affected by limitations imposed on Metropolitan Life
Insurance Company and our other subsidiaries" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- MetLife, Inc." The New York Insurance Law and the
regulations thereunder also restrict the aggregate amount of investments
Metropolitan Life Insurance Company may make in non-life insurance subsidiaries,
and provide for detailed periodic reporting on subsidiaries.
GUARANTY ASSOCIATIONS AND SIMILAR ARRANGEMENTS. Most of the jurisdictions
in which we are 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 is engaged. Some states permit member insurers to recover assessments
paid through full or partial premium tax offsets.
In none of the past five years have the aggregate assessments levied
against Metropolitan Life Insurance Company and its insurance subsidiaries been
material. While the amount and timing of future assessments are not predictable,
we have established liabilities for guarantee fund assessments that we consider
adequate for assessments with respect to insurers that are currently subject to
insolvency proceedings.
STATUTORY EXAMINATION. As part of their routine regulatory oversight
process, state insurance departments conduct periodic detailed examinations of
the books, records and accounts of insurers domiciled in their states. These
examinations are generally conducted in cooperation with the departments of two
or three other states under guidelines promulgated by the NAIC. The New York
Insurance Department recently completed an examination of Metropolitan Life
Insurance Company for the five-year period ended December 31, 1993. The New York
Insurance Department's Report on Examination of Metropolitan Life Insurance
Company as of December 31, 1993 found that, during the five-year examination
period 1989 through 1993, Metropolitan Life Insurance Company failed to fully
comply with the disclosure requirements of a New York Insurance Department
regulation regarding replacements of certain of its insurance policies with
other policies issued by it, and used certain policy forms that had not been
filed with or approved by the Insurance Department. These findings resulted in a
$250,000 fine and other remedies which, in our view, are not material to our
business, financial condition or results of operations. The Report contained
other findings which did not result in a fine. The New York Insurance Department
recently commenced an examination of Metropolitan Life Insurance Company for
each of the five years in the period ended December 31, 1998.
State insurance departments also periodically conduct market conduct
examinations of the sales practices of insurance companies, including our life
insurance subsidiaries. Regulatory authorities in a small number of states,
including both insurance departments and attorneys general, have ongoing
investigations of our sales of individual life insurance policies or annuities,
including investigations of alleged improper replacement transactions and
alleged improper sales of insurance with inaccurate or inadequate disclosures as
to the period for which premiums would be payable. Over the past several years,
we have resolved a number of investigations by
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other regulatory authorities for monetary payments and certain other relief, and
may continue to do so in the future.
NAIC RATIOS. On the basis of statutory financial statements filed with
state insurance regulators, the NAIC calculates annually twelve financial ratios
to assist state regulators in monitoring the financial condition of insurers. A
"usual range" of results for each ratio is used as a benchmark. Departure from
the "usual range" on four or more of the ratios can lead to inquiries from
individual state insurance departments. In each of the years 1996 through 1999,
at most one ratio for Metropolitan Life Insurance Company fell outside the usual
range.
POLICY AND CONTRACT RESERVE SUFFICIENCY ANALYSIS. Under the New York
Insurance Law, Metropolitan Life Insurance Company is required to conduct
annually an analysis of the sufficiency of all life and health insurance and
annuity statutory reserves. A qualified actuary must submit an opinion which
states that the statutory reserves, when considered in light of the assets held
with respect to such reserves, make good and sufficient provision for the
associated contractual obligations and related expenses of the insurer. If such
an opinion cannot be provided, the insurer must set up additional reserves by
moving funds from surplus. Since the inception of this requirement, we have
provided this opinion without any qualifications.
STATUTORY INVESTMENT RESERVES. Statutory accounting practices require a
life insurer to maintain both an asset valuation reserve and an interest
maintenance reserve to absorb both realized and unrealized gains and losses on a
portion of its investments. The asset valuation reserve is a statutory reserve
for fixed maturity securities, equity securities, mortgage loans, equity real
estate and other invested assets. The asset valuation reserve is designed to
capture all realized and unrealized gains and losses on such assets, other than
those resulting from changes in interest rates. The level of the asset valuation
reserve is based on both the type of investment and its credit rating. In
addition, the reserves required for similar investments, for example, fixed
maturity securities, differ according to the credit ratings of the investments,
which are based upon ratings established periodically by the NAIC Securities
Valuation Office. The interest maintenance reserve applies to all types of fixed
maturity securities, including bonds, preferred stocks, mortgage-backed
securities, asset-backed securities and mortgage loans. The interest maintenance
reserve is designed to capture the net gains which are realized upon the sale of
such investments and which result from changes in the overall level of interest
rates. The captured net realized gains or losses are then amortized into income
over the remaining period to the stated maturity of the investment sold. Any
increase in the asset valuation reserve and interest maintenance reserve causes
a reduction in our insurance companies' statutory capital and surplus which, in
turn, reduces funds available for stockholder dividends.
SURPLUS AND CAPITAL. The New York Insurance Law requires Metropolitan Life
Insurance Company, as a New York domestic insurer, to maintain at least $300,000
in surplus. After the demutualization, Metropolitan Life Insurance Company will
be required to maintain $2,000,000 in capital. In addition, prior to the
demutualization, the New York Insurance Law limited the amount of surplus that
Metropolitan Life Insurance Company, as a New York domestic mutual insurer,
could accumulate. We intend to continue offering participating policies after
the demutualization. We will be subject to statutory restrictions that limit to
10% the amount of statutory profits on participating policies written after the
demutualization (measured before dividends to policyholders) that can inure to
the benefit of stockholders. We believe that the impact of these restrictions on
our earnings will not be significant.
Our U.S. insurance subsidiaries are subject to the supervision of the
regulators in each jurisdiction in which they are licensed to transact business.
Regulators have discretionary authority, in connection with the continued
licensing of these insurance subsidiaries, to limit or prohibit sales to
policyholders if, in their judgment, the regulators determine that such insurer
has not maintained the minimum surplus or capital or if further transaction of
business will be hazardous to policyholders.
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RISK-BASED CAPITAL. Section 1322 of the New York Insurance Law requires
that New York life insurers report their RBC based on a formula calculated by
applying factors to various asset, premium and reserve items. The formula takes
into account the risk characteristics of the insurer, including asset risk,
insurance risk, interest rate risk and business risk. The New York Insurance
Department uses the formula only as an early warning regulatory tool to identify
possibly inadequately capitalized insurers for purposes of initiating regulatory
action, and not as a means to rank insurers generally. Section 1322 imposes
broad confidentiality requirements on those engaged in the insurance business
(including insurers, agents, brokers and others) and on the Insurance Department
as to the use and publication of RBC data.
Section 1322 gives the New York Superintendent of Insurance 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 December 31, 1999, Metropolitan Life Insurance Company's total
adjusted capital was in excess of each of those RBC levels.
The U.S. insurance subsidiaries of Metropolitan Life Insurance Company are
also subject, each individually, to these same RBC requirements. At December 31,
1999, the total adjusted capital of each of these insurance subsidiaries also
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.
Prior to implementation by Metropolitan Life Insurance Company, the Codification
requires adoption by the New York Insurance Department, which may adopt the
standards, in full or in part, or fail to adopt the standards. Based on a study
commissioned by the NAIC, the overall impact to life insurers resulting from
adoption of the codification is not expected to have a material adverse impact;
however, a detailed analysis will be necessary to determine the actual impact of
Codification on the statutory results of operations and statutory financial
position of Metropolitan Life Insurance Company.
REGULATION OF INVESTMENTS. Metropolitan Life Insurance Company and each of
its insurance subsidiaries are subject to state laws and regulations that
require diversification of our investment portfolios and limit the amount of
investments in certain asset categories such as below investment grade fixed
income securities, equity real estate, other equity investments and derivatives.
Failure to comply with these laws and regulations would cause investments
exceeding regulatory limitations to be treated as NON-ADMITTED ASSETS for
purposes of measuring surplus, and, in some instances, would require divestiture
of such non-qualifying investments. We believe that the investments made by
Metropolitan Life Insurance Company and each of its insurance subsidiaries
complied with such regulations at December 31, 1999.
FEDERAL INSURANCE INITIATIVES. Although the federal government generally
does not directly regulate the insurance business, federal initiatives often
have an impact on the business in a variety of ways. Current and proposed
federal measures that may significantly affect the insurance business include
limitations on antitrust immunity and minimum solvency requirements. For a
discussion of the Gramm-Leach-Bliley Act of 1999, permitting affiliations
between banks and insurers, see "Business -- Competition".
VALUATION OF LIFE INSURANCE POLICIES MODEL REGULATION. The NAIC has
adopted a revision to the Valuation of Life Insurance Policies Model Regulation
(known as XXX Regulation). This model regulation would establish new minimum
statutory reserve requirements for certain individual life insurance policies
written in the future. Before the new reserve standards can become effective,
individual states must adopt the model regulation. If these reserve standards
were adopted in their current form, insurers selling certain individual life
insurance products such as term life insurance with guaranteed premium periods
and universal life insurance products with no-lapse guarantees would be required
to redesign their products or hold increased reserves to be consistent with the
new minimum standards with respect to policies issued after the effective date
of the regulation. It is likely that the industry will encourage the states to
adopt
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the regulation with an effective date of January 1, 2000. New York State adopted
a regulation similar to the model regulation in 1994, and amended its regulation
on March 13, 2000 to be consistent with XXX Regulation.
BROKER-DEALER AND SECURITIES REGULATION
Metropolitan Life Insurance Company, some of its subsidiaries and certain
policies and contracts offered by them are subject to various levels of
regulation under the federal securities laws administered by the Securities and
Exchange Commission. Metropolitan Life Insurance Company and some of its
subsidiaries are investment advisers registered under the Investment Advisers
Act of 1940, as amended. In addition, some separate accounts and a variety of
mutual funds are registered under the Investment Company Act of 1940, as
amended. Some annuity contracts and insurance policies issued by Metropolitan
Life Insurance Company and some of its subsidiaries are funded by separate
accounts, the interests in which are registered under the Securities Act of
1933, as amended. Metropolitan Life Insurance Company and some of its
subsidiaries are registered as broker-dealers under the Securities Exchange Act
of 1934, as amended, and with the National Association of Securities Dealers,
Inc.
Metropolitan Life Insurance Company also has certain pooled investment
vehicles that are exempt from registration under the Securities Act and the
Investment Company Act, but may be subject to certain other provisions of such
acts.
Federal and state securities regulatory authorities from time to time make
inquiries regarding compliance by Metropolitan Life Insurance Company and its
subsidiaries with securities and other laws and regulations regarding the
conduct of their securities businesses. We endeavor to respond to such inquiries
in an appropriate way and to take corrective action if warranted.
These laws and regulations are primarily intended to protect investors in
the securities markets and generally grant supervisory agencies broad
administrative powers, including the power to limit or restrict the conduct of
business for failure to comply with such laws and regulations. We may also be
subject to similar laws and regulations in the states and foreign countries in
which we provide investment advisory services, offer the products described
above or conduct other securities-related activities.
ENVIRONMENTAL CONSIDERATIONS
As owners and operators of real property, we are subject to extensive
federal, state and local environmental laws and regulations. Inherent in such
ownership and operation is also the risk that there may be potential
environmental liabilities and costs in connection with any required remediation
of such properties. In addition, we hold equity interests in companies that
could potentially be subject to environmental liabilities, although we routinely
have environmental assessments performed with respect to real estate being
acquired for investment and real property to be acquired through foreclosure. We
cannot provide assurance that unexpected environmental liabilities will not
arise. However, based on information currently available to management,
management believes that any costs associated with compliance with environmental
laws and regulations or any remediation of such properties will not have a
material adverse effect on our business, results of operations and financial
condition.
ERISA CONSIDERATIONS
We provide certain products and services to certain employee benefit plans
that are subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or the Internal Revenue Code of 1986, as amended ("Code"). As
such, our activities are subject to the restrictions imposed by ERISA and the
Code, including the requirement under ERISA that fiduciaries must perform their
duties solely in the interests of ERISA plan participants and beneficiaries and
the requirement under ERISA and the Code that fiduciaries may not cause a
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covered plan to engage in certain prohibited transactions with persons who have
certain relationships with respect to such plans. The applicable provisions of
ERISA and the Code are subject to enforcement by the Department of Labor, the
Internal Revenue Service and the Pension Benefit Guaranty Corporation.
On December 13, 1993, the U.S. Supreme Court issued its opinion in John
Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank. The
Court held that certain assets in excess of amounts necessary to satisfy
guaranteed obligations held by John Hancock in its general account under a
participating group annuity contract are "plan assets" and therefore subject to
certain fiduciary obligations under ERISA, which specifies that fiduciaries must
perform their duties solely in the interest of ERISA plan participants and
beneficiaries. The Court limited the imposition of ERISA fiduciary obligations
in these instances to certain assets in an insurer's general account that were
not reserved to pay benefits of guaranteed benefit policies. On January 5, 2000,
the Secretary of Labor issued final regulations providing guidance for the
purpose of determining, in cases where an insurer issues one or more policies
backed by the insurer's general account to or for the benefit of an employee
benefit plan, the extent to which assets of the insurer constitute plan assets
for purposes of ERISA and the Code. The regulations apply only with respect to a
policy issued by an insurer on or before December 31, 1998 ("Transition
Policy"). In the case of such a policy, the regulations generally become
applicable on July 5, 2001. Generally, no person will be liable under ERISA or
the Code for conduct occurring prior to the applicability dates, where the basis
of a claim is that insurance company general account assets constitute plan
assets. Insurers issuing new policies after December 31, 1998 that are not
guaranteed benefit policies will generally be subject to fiduciary obligations
under ERISA.
The regulations indicate the requirements that must be met so that assets
supporting a Transition Policy will not be considered plan assets for purposes
of ERISA and the Code. These requirements include detailed disclosures to be
made to the employee benefits plan and the requirement that the insurer must
permit the policyholder to terminate the policy on 90 days' notice and receive
without penalty, at the policyholder's option, either (1) the unallocated
accumulated fund balance (which may be subject to market value adjustment) or
(2) a book value payment of such amount in annual installments with interest. We
have taken and are continuing to take steps designed to ensure compliance with
these regulations, as appropriate.
COMPETITION
We believe that competition with our business segments is based on a number
of factors, including service, product features, price, commission structure,
financial strength, claims-paying ratings and name recognition. We compete with
a large number of other insurers, as well as non-insurance financial services
companies, such as banks, broker-dealers and asset managers, for individual
consumers, employer and other group customers and agents and other distributors
of insurance and investment products. Some of these companies offer a broader
array of products, have more competitive pricing or, with respect to other
insurers, have higher claims paying ability ratings. Some may also have greater
financial resources with which to compete. National banks, with their
pre-existing customer bases for financial services products, may increasingly
compete with insurers who sell annuities, as a result of the U.S. Supreme
Court's 1994 decision in NationsBank of North Carolina v. Variable Annuity Life
Insurance Company. That decision permits national banks to sell annuity products
of life insurers in some circumstances.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, implementing fundamental changes in the
regulation of the financial services industry in the U.S. The Act permits
mergers that combine commercial banks, insurers and securities firms under one
holding company. Under the Act, national banks retain their existing ability to
sell insurance products in some circumstances. In addition, bank holding
companies that qualify and elect to be treated as "financial holding companies"
may engage in activities, and acquire
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companies engaged in activities, that are "financial" in nature or "incidental"
or "complementary" to such financial activities, including acting as principal,
agent or broker in selling life, property and casualty and other forms of
insurance and annuities. A financial holding company can own any kind of insurer
or insurance broker or agent, but its bank subsidiary cannot own the insurer.
Under state law, the financial holding company would need to apply to the
insurance commissioner in the insurer's state of domicile for prior approval of
the acquisition of the insurer, and the Act provides that the commissioner, in
considering the application, may not discriminate against the financial holding
company because it is affiliated with a bank. Under the Act, no state may
prevent or interfere with affiliations between banks and insurers, insurance
agents or brokers, or the licensing of a bank or affiliate as an insurer or
agent or broker. Until passage of the Gramm-Leach-Bliley Act, the Glass-Steagall
Act of 1933, as amended, had limited the ability of banks to engage in
securities-related businesses, and the Bank Holding Company Act of 1956, as
amended, had restricted banks from being affiliated with insurers. With the
passage of the Gramm-Leach-Bliley Act, among other things, bank holding
companies may acquire insurers, and insurance holding companies may acquire
banks. The ability of banks to affiliate with insurers may materially adversely
affect all of our product lines by substantially increasing the number, size and
financial strength of potential competitors.
We must attract and retain productive sales representatives to sell our
insurance, annuities and investment products. Strong competition exists among
insurers for sales representatives with demonstrated ability. We compete with
other insurers for sales representatives primarily on the basis of our financial
position, support services and compensation and product features. From 1994 to
1998, the number of agents in the MetLife career agency system declined, from
9,521 to 6,853. We have undertaken several initiatives to grow our career agency
force in the future. At December 31, 1999, the number of agents in the MetLife
career agency system was 6,866. See "Business -- Individual
Business -- Marketing and Distribution". We cannot provide assurance that these
initiatives will succeed in attracting and retaining new agents. Sales of
individual insurance, annuities and investment products and our results of
operations and financial position could be materially adversely affected if we
are unsuccessful in attracting and retaining agents.
Many of our insurance products, particularly those offered by our
Institutional Business segment, are underwritten yearly, and, accordingly, group
purchasers may be able to obtain more favorable terms from competitors rather
than renewing coverage with us. The effect of competition may, as a result,
adversely affect the persistency of these and other products, as well as our
ability to sell products in the future.
The investment management and securities brokerage businesses have
relatively few barriers to entry and continually attract new entrants. Many of
our competitors in these businesses offer a broader array of investment products
and services and are better known than we as sellers of annuities and other
investment products.
The Clinton Administration and various members of Congress have also
proposed reforms to the nation's health care system. While we do offer
non-medical health insurance products (such as group dental insurance, long-term
care and disability insurance), we generally do not offer medical indemnity
products or managed care products, and, accordingly, do not expect to be
directly affected by such proposals to any significant degree. However, the
uncertain environment resulting from health care reform could cause group health
insurance providers to enter some of the markets in which we do business,
thereby increasing competition.
CLAIMS PAYING ABILITY RATINGS
Claims paying ability and financial strength ratings are a factor in
establishing the competitive position of insurers. A ratings downgrade (or the
potential for such a downgrade) of Metropolitan Life Insurance Company or any of
our other subsidiaries could, among other things,
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increase the number of policies surrendered and withdrawals by policyholders of
cash values from their policies, adversely affect relationships with
broker-dealers, banks, agents, wholesalers and other distributors of our
products and services, negatively impact new sales, adversely affect our ability
to compete and thereby have a material adverse effect on our business, results
of operations and financial condition. Our current claims paying ability and
financial strength ratings are listed in the table below:
<TABLE>
<CAPTION>
RATING
AGENCY COMPANIES RATED RATING RATING STRUCTURE
<S> <C> <C> <C>
Standard & Metropolitan Life Insurance AA Second highest of nine
Poor's Company, New England Life ("Very Strong") ratings categories and
Ratings Insurance Company, Security mid-range within the
Services First Life Insurance Company, category based on modifiers
Metropolitan Insurance and (e.g., AA+, AA and AA- are
Annuity Company, Metropolitan "Very Strong")
Property and Casualty Insurance
Company and RGA Reinsurance
Company
General American Life Insurance AA- Second highest of nine
Company, COVA Financial ("Very Strong") ratings categories and
Services Life Insurance lowest within the category
Company, COVA Financial Life based on modifiers
Insurance Company, First COVA
Life Insurance Company, General
Life Insurance Company, General
Life Insurance Company of
America, Paragon Life Insurance
Company and Security Equity
Life Insurance Company
Moody's Metropolitan Life Insurance Aa2 Second highest of nine
Investors Company, New England Life ("Excellent") ratings categories and
Service, Insurance Company, General mid-range within the
Inc. American Life Insurance Company category based on modifiers
and COVA Financial Services (e.g., Aa1, Aa2 and Aa3 are
Life Insurance Company "Excellent")
Security First Life Insurance Aa3 Second highest of nine
Company, Metropolitan Insurance ("Excellent") ratings categories and
and Annuity Company and lower-range within the
Metropolitan Property and category based on modifiers
Casualty Insurance Company
RGA Reinsurance Company A1 Third highest of nine
("Good") ratings categories and
highest within the category
based on modifiers
</TABLE>
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<TABLE>
<CAPTION>
RATING
AGENCY COMPANIES RATED RATING RATING STRUCTURE
<S> <C> <C> <C>
A.M. Best Metropolitan Life Insurance A+ Highest of nine ratings
Company, Company and Metropolitan Tower ("Superior") categories and second
Inc. Life Insurance Company highest within the category
based on modifiers (e.g.,
A++ and A+ are "Superior"
while A and A- are
"Excellent")
New England Life Insurance A Second highest of nine
Company, Security First Life ("Excellent") ratings categories and
Insurance Company, Metropolitan highest within the category
Insurance and Annuity Company, based on modifiers
Texas Life Insurance Company,
Metropolitan Property and
Casualty Insurance Company,
General American Life Insurance
Company, RGA Reinsurance
Company, COVA Financial
Services Life Insurance
Company, COVA Financial Life
Insurance Company, First COVA
Life Insurance Company, General
Life Insurance Company, General
Life Insurance Company of
America, Paragon Life Insurance
Company and Security Equity
Life Insurance Company
Duff & Metropolitan Life Insurance AA+ Second highest of eight
Phelps Company, New England Life ("Very High") ratings categories and
Credit Insurance Company, Security highest within the category
Rating Co. First Life Insurance Company, based on modifiers (e.g.,
General American Life Insurance AA+, AA and AA- are "Very
Company, COVA Financial High")
Services Life Insurance
Company, Paragon Life Insurance
Company and Security Equity
Life Insurance Company
</TABLE>
The foregoing ratings reflect each rating agency's opinion of Metropolitan
Life Insurance Company's and our other subsidiaries' financial strength,
operating performance and ability to meet our obligations to policyholders, and
are not evaluations directed toward the protection of holders of MetLife, Inc.'s
common stock or the units.
EMPLOYEES
At December 31, 1999, we employed approximately 42,300 employees. We
believe that our relations with our employees are satisfactory.
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LEGAL PROCEEDINGS
Metropolitan Life Insurance Company and its affiliates are currently
defendants in approximately 500 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. The settlement class includes most of the owners of
permanent life insurance policies and annuity contracts or certificates issued
pursuant to individual sales in the United States by Metropolitan Life Insurance
Company, Metropolitan Insurance and Annuity Company or Metropolitan Tower Life
Insurance Company between January 1, 1982 and December 31, 1997. This 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 for sales by the
defendant insurers during the class period, effectively resolving all pending
class actions against these insurers. The defendants are in the process of
having these claims dismissed.
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 Insurance Company, 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. Over 400 of the approximately
500 lawsuits noted above are brought by individuals who elected to exclude
themselves from the settlement.
The settlement provides three forms of relief. General relief, in the form
of free death benefits, is provided automatically to class members who did not
exclude themselves from the settlement or who did not elect the claim evaluation
procedures set forth in the settlement. The claim evaluation procedures permit a
class member to have a claim evaluated by a third party under procedures set
forth in the settlement. Claim awards made under the claim evaluation procedures
will be in the form of policy adjustments, free death benefits or, in some
instances, cash payments. In addition, class members who have or had an
ownership interest in specified policies will also automatically receive
deferred acquisition cost tax relief in the form of free death benefits. The
settlement fixes the aggregate amounts that are available under each form of
relief.
We expect that the total cost to us of the settlement will be approximately
$957 million. 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.
We believe that the cost to us of the settlement will be substantially covered
by available reinsurance and the provisions made in our consolidated financial
statements, and thus will not have a material adverse effect on our business,
results of operations or financial position. We have not yet made a claim under
those reinsurance agreements and, although there is a risk that the carriers
will refuse coverage for all or part of the claim, we believe this is very
unlikely to occur. We believe we have made adequate provision in our
consolidated financial statements for all probable losses for sales practices
claims, including litigation costs involving policyholders who are excluded from
the settlement.
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The class action settlement does not resolve nine purported or certified
class actions currently pending against New England Mutual Life Insurance
Company with which we merged in 1996. Eight of those actions have been
consolidated as a multidistrict proceeding for pre-trial purposes in the United
States District Court in Massachusetts. That Court certified a mandatory class
as to those claims. Following an appeal of that certification, the United States
Court of Appeals remanded the case to the District Court for further
consideration. We are negotiating a settlement with class counsel.
The class action settlement also does not resolve three putative sales
practices class action lawsuits which have been brought against General American
Life Insurance Company. These lawsuits have been consolidated in a single
proceeding in the United States District Court for the Eastern District of
Missouri. General American Life Insurance Company and counsel for plaintiffs
have negotiated a settlement in principle of this consolidated proceeding.
General American Life Insurance Company has not reached agreement with
plaintiffs' counsel on the attorneys' fees to be paid. However, negotiations are
ongoing.
In addition, the class action settlement does not resolve two putative
class actions involving sales practices claims filed against Metropolitan Life
Insurance Company in Canada. The class action settlement also does not resolve a
certified class action with conditionally certified subclasses against
Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity Company,
Metropolitan Tower Life Insurance Company and various individual defendants
alleging improper sales abroad. That lawsuit is pending in a New York federal
court.
In the past, we have resolved some individual sales practices claims
through settlement, dispositive motion or, in a few instances, trial. Most of
the current cases seek substantial damages, including in some cases punitive and
treble damages and attorneys' fees. Additional litigation relating to our
marketing and sales of individual life insurance may be commenced in the future.
The following table sets forth the number of sales practices claims pending
against Metropolitan Life Insurance Company and its affiliates, as of the dates
indicated, the number of new claims during the periods ending on those dates and
the total settlement payments made to resolve sales practices claims during
those periods:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31(1)
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Sales practices claims at period end (approximate).......... 447 458 321
Number of new claims during period (approximate)............ 194 136 79
Settlement payments during period (Dollars in
millions)(2).............................................. $13.7 $15.3 $12.4
</TABLE>
- ---------------
(1) The table does not include information concerning sales practices claims
against General American Life Insurance Company.
(2) Settlement payments represent payments made during the period in connection
with settlements made in that period and in prior periods. Amounts do not
include our attorneys' fees and expenses.
Regulatory authorities in a small number of states, including both
insurance departments and one state attorney general, as well as the National
Association of Securities Dealers, Inc., have ongoing investigations or
inquiries relating to our sales of individual life insurance policies or
annuities, including investigations or inquiries of alleged improper replacement
transactions and alleged improper sales of insurance with inaccurate or
inadequate disclosures as to the period for which premiums would be payable.
Over the past several years, we have resolved a number of investigations by
other regulatory authorities for monetary payments and certain other relief, and
may continue to do so in the future.
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Metropolitan Life Insurance Company is also a defendant in numerous
lawsuits seeking compensatory and punitive damages for personal injuries
allegedly caused by exposure to asbestos or asbestos-containing products. We
have 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 Insurance Company's employees during the period
from the 1920s through approximately the 1950s and alleging that Metropolitan
Life Insurance Company learned or should have learned of certain health risks
posed by asbestos and, among other things, improperly publicized or failed to
disclose those health risks. Legal theories asserted against Metropolitan Life
Insurance Company have included negligence, intentional tort claims and
conspiracy claims concerning the health risks associated with asbestos. While
Metropolitan Life Insurance Company 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
Insurance Company intends to continue to exercise its best judgment regarding
settlement or defense of such cases. The number of such cases that may be
brought or the aggregate amount of any liability that Metropolitan Life
Insurance Company 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
Insurance Company's primary, umbrella and first level excess liability insurance
carriers. Metropolitan Life Insurance Company 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 Insurance Company has
appealed. There can be no assurances regarding the outcome of this litigation or
the amount and timing of recoveries, if any, from these excess liability
insurers. Metropolitan Life Insurance Company's asbestos-related litigation with
these insurers should have no effect on its recoveries under the excess
insurance policies described below.
The following table sets forth the total number of asbestos personal injury
claims pending against Metropolitan Life Insurance Company as of the dates
indicated, the number of new claims during the periods ending on those dates and
the total settlement payments made to resolve asbestos personal injury claims
during those periods:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Asbestos personal injury claims at period end
(approximate)............................................. 60,000 72,000 71,000
Number of new claims during period (approximate)............ 35,500 31,000 28,000
Settlement payments during period (Dollars in
millions)(1).............................................. $113.3 $47.0 $27.3
</TABLE>
- ---------------
(1) Settlement payments represent payments made during the period in connection
with settlements made in that period and in prior periods. Amounts do not
include our attorneys' fees and expenses and do not reflect amounts received
from insurance carriers.
We have recorded, in other expenses, charges of $499 million ($317 million
after-tax), $1,895 million ($1,203 million after-tax) and $300 million ($190
million after-tax) for the years ended December 31, 1999, 1998 and 1997,
respectively, for sales practices claims and claims for personal injuries caused
by exposure to asbestos or asbestos-containing products. The charge for the year
ended December 31, 1999 was principally related to the settlement of the
multidistrict litigation proceeding involving alleged improper sales practices
claims, accruals for sales practices claims not covered by the settlement and
other legal costs. The 1998 charge of $1,895 million was comprised of $925
million and $970 million for sales practices claims and asbestos-related claims,
respectively. We recorded the charges for sales practices claims based on
preliminary settlement discussions and the settlement history of other insurers.
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Prior to the fourth quarter of 1998, we established a liability for
asbestos-related claims based on settlement costs for claims that we had
settled, estimates of settlement costs for claims pending against us and an
estimate of settlement costs for unasserted claims. The amount for unasserted
claims was based on management's estimate of unasserted claims that would be
probable of assertion. A liability is not established for claims which we
believe are only reasonably possible of assertion. Based on this process, the
accrual for asbestos-related claims at December 31, 1997 was $386 million.
Potential liabilities for asbestos-related claims are not easily quantified, due
to the nature of the allegations against us, which are not related to the
business of manufacturing, producing, distributing or selling asbestos or
asbestos-containing products, adding to the uncertainty as to the number of
claims that may be brought against us.
During 1998, we decided to pursue the purchase of excess insurance to limit
our exposure to asbestos-related claims. In connection with our negotiations
with the casualty insurers to obtain this insurance, we obtained information
that caused us to reassess our accruals for asbestos-related claims. This
information included:
- Information from the insurers regarding the asbestos-related claims
experience of other insureds, which indicated that the number of claims
that were probable of assertion against us in the future was
significantly greater than we had assumed in our accruals. The number of
claims brought against us is generally a reflection of the number of
asbestos-related claims brought against asbestos defendants generally and
the percentage of those claims in which we are included as a defendant.
The information provided to us relating to other insureds indicated that
we had been included as a defendant for a significant percentage of total
asbestos-related claims and that we may be included in a larger
percentage of claims in the future, because of greater awareness of
asbestos litigation generally by potential plaintiffs and plaintiffs'
lawyers and because of the bankruptcy and reorganization or the
exhaustion of insurance coverage of other asbestos defendants; and that,
although volatile, there was an upward trend in the number of total
claims brought against asbestos defendants.
- Information derived from actuarial calculations we made in the fourth
quarter of 1998 in connection with these negotiations, which helped us to
frame, define and quantify this liability. These calculations were made
using, among other things, current information regarding our claims and
settlement experience (which reflected our decision to resolve an
increased number of these claims by settlement), recent and historic
claims and settlement experience of selected other companies and
information obtained from the insurers.
Based on this information, we concluded that certain claims that previously
were considered as only reasonably possible of assertion were now probable of
assertion, increasing the number of assumed claims to approximately three times
the number assumed in prior periods. As a result of this reassessment, we
increased our liability for asbestos-related claims to $1,278 million at
December 31, 1998.
During 1998, we paid $1,407 million of premiums for excess of loss
reinsurance agreements and excess insurance policies, consisting of $529 million
for the excess of loss reinsurance agreements for sales practices claims and
excess mortality losses and $878 million for the excess insurance policies for
asbestos-related claims.
We obtained the excess of loss reinsurance agreements to provide
reinsurance with respect to sales practices claims made on or prior to December
31, 1999 and for certain mortality losses in 1999. These reinsurance agreements
have a maximum aggregate limit of $650 million, with a maximum sublimit of $550
million for losses for sales practices claims. This coverage is in excess of an
aggregate self-insured retention of $385 million with respect to sales practices
claims and $506 million, plus our statutory policy reserves released upon the
death of insureds, with respect to life mortality losses. At December 31, 1999,
the subject losses under the reinsurance agreements due to sales practices
claims and related counsel fees from the time
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Metropolitan Life Insurance Company entered into the reinsurance agreements did
not exceed that self-insured retention. The maximum sublimit of $550 million for
sales practices claims was within a range of losses that management believed
were reasonably possible at December 31, 1998. Each excess of loss reinsurance
agreement for sales practices claims and mortality losses contains an experience
fund, which provides for payments to us at the commutation date if experience is
favorable at such date. We account for the aggregate excess of loss reinsurance
agreements as reinsurance; however, if deposit accounting were applied, the
effect on our consolidated financial statements in 1998, 1999 and 2000 would not
be significant.
Under reinsurance accounting, the excess of the liability recorded for
sales practices losses recoverable under the agreements of $550 million over the
premium paid of $529 million results in a deferred gain of $21 million which is
being amortized into income over the settlement period from January 1999 through
April 2000. Under deposit accounting, the premium would be recorded as an other
asset rather than as an expense, and the reinsurance loss recoverable and the
deferred gain would not have been recorded. Because the agreements also contain
an experience fund which increases with the passage of time, the increase in the
experience fund in 1999 and 2000 under deposit accounting would be recognized as
interest income in an amount approximately equal to the deferred gain that will
be amortized into income under reinsurance accounting.
The excess insurance policies for asbestos-related claims provide for
recovery of losses of up to $1,500 million, which is in excess of a $400 million
self-insured retention ($878 million of which was recorded as a recoverable at
December 31, 1999 and 1998). The asbestos-related policies are also subject to
annual and per-claim sublimits. Amounts are recoverable under the policies
annually with respect to claims paid during the prior calendar year. Although
amounts paid in any given year that are recoverable under the policies will be
reflected as a reduction in our operating cash flows for that year, management
believes that the payments will not have a material adverse effect on our
liquidity. Each asbestos-related policy contains an experience fund and a
reference fund that provides for payments to us at the commutation date if
experience under the policy to such date has been favorable, or pro rata
reductions from time to time in the loss reimbursements to us if the cumulative
return on the reference fund is less than the return specified in the experience
fund.
We believe that the excess of loss reinsurance agreements should provide
coverage for a portion of the multidistrict sales practices settlement described
above, although we have yet to file a claim under those agreements. The increase
in liabilities for death benefits and policy adjustments and the cash payments
to be made under the settlement should be substantially offset by amounts
recoverable under those agreements, as well as amounts provided in our
consolidated financial statements, and accordingly we do not believe that they
will have a material adverse effect on our business, results of operations,
financial position or cash flows in future periods.
We believe adequate provision has been made in our consolidated financial
statements for all reasonably probable and estimable losses for sales practices
and asbestos-related claims.
A purported class action suit involving policyholders in 32 states has been
filed in a Rhode Island state court against Metropolitan Life Insurance
Company's subsidiary, Metropolitan Property and Casualty Insurance Company, with
respect to claims by policyholders for the alleged diminished value of
automobiles after accident-related repairs. 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 Metropolitan Casualty
Insurance Company 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
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Property and Casualty Insurance Company and Metropolitan Casualty Insurance
Company intend to vigorously defend themselves against these suits. Similar
suits have been filed against several other personal lines property and casualty
insurers.
The U. S., the Commonwealth of Puerto Rico and various hotels and
individuals have sued MetLife Capital Corporation, a former subsidiary of
Metropolitan Life Insurance 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, we 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 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 U. S. and Puerto
Rico have claimed damages in excess of $150 million. At a mediation, the action
brought by the U. S. and Puerto Rico was conditionally settled, provided that
the governments have access to additional sums from a fund contributed to by oil
companies to help remediate oil spills. We can provide no assurance that this
action will be settled in this manner.
Three putative class actions have been filed by Conning shareholders
alleging that Metropolitan Life Insurance Company's announced offer to purchase
the publicly-held Conning shares is inadequate and constitutes a breach of
fiduciary duty. We believe the actions are without merit, and expect that they
will not materially affect our offer to purchase the shares.
In addition, six lawsuits have been filed challenging the fairness of the
plan of reorganization and the adequacy and accuracy of Metropolitan Life
Insurance Company's disclosures to policyholders regarding the plan. The first
of these lawsuits was filed in the Supreme Court of the State of New York for
Kings County on January 14, 2000. It was brought on behalf of a putative class
consisting of all policyholders of Metropolitan Life Insurance Company who
should have membership benefits in Metropolitan Life Insurance Company and were
and are eligible to receive notice, vote and receive consideration in the
demutualization. The complaint seeks to enjoin or rescind the plan, as well as
other relief. The defendants named in the complaint are Metropolitan Life
Insurance Company, the individual members of its board of directors and MetLife,
Inc. Discovery is underway in this case. The five other lawsuits were filed
between March 10, 2000 and March 29, 2000 in the Supreme Court of the State of
New York for New York County. The same defendants are named in these five cases
as in the Kings County case, with the addition of the New York Superintendent of
Insurance. All five of the New York County cases are brought on behalf of a
putative class consisting of the eligible policyholders of Metropolitan Life
Insurance Company as of September 28, 1999, the adoption date of the plan. The
claims in these five additional cases are substantially similar to those in the
Kings County case, as is the relief sought. Metropolitan Life Insurance Company
has entered into a stipulation with the plaintiffs in the five New York County
cases in which it does not oppose consolidation of the cases, agrees that the
plaintiffs have until April 30, 2000 to file a consolidated amended complaint,
and agrees that the defendants' time to answer, move or otherwise respond to the
consolidated amended complaint will be thirty days after service of the
consolidated amended complaint. Metropolitan Life Insurance Company has agreed
to provide certain information to the plaintiffs in three of the New York County
cases. Metropolitan Life Insurance Company, MetLife, Inc. and the individual
defendants believe they have meritorious defenses to the plaintiffs' claims and
intend vigorously to contest all of the plaintiffs' claims in these six
lawsuits.
Various litigation, claims and assessments against us, in addition to those
discussed above and those otherwise provided for in our consolidated financial
statements, have arisen in the course of our business, including, but not
limited to, in connection with our 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
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investigations concerning our 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 our management that their outcomes, after
consideration of available insurance and reinsurance and the provisions made in
our consolidated financial statements, are not likely to have a material adverse
effect on our 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 our
operating results or cash flows in particular quarterly or annual periods.
PROPERTIES
One Madison Avenue in New York, New York, serves as our headquarters, and
it, along with the adjacent MetLife Tower, contains approximately 1.1 million
rentable square feet, most of which we occupy. In addition to this property, we
own 24 other buildings in the U.S. that we use in the operation of our business.
These buildings contain approximately 5.5 million rentable square feet and are
in the following states: Florida, Illinois, Massachusetts, Minnesota, Missouri,
New York, New Jersey, Ohio, Oklahoma, Pennsylvania, Rhode Island and Texas. We
also lease space in approximately 1,000 other locations throughout the U.S., and
these leased facilities consist of approximately 7.6 million rentable square
feet. Approximately 56% of these leases are occupied as sales offices for
Individual Business, and we use the balance for our other business activities.
We also own several buildings outside the U.S., comprising more than 48,000
rentable square feet. We lease approximately 367,000 rentable square feet in
various locations outside the U.S. We believe that our properties are suitable
and adequate for our current and anticipated business operations.
TRADEMARKS
We have a worldwide trademark portfolio that we consider important in the
marketing of our products and services, including, among others, the trademarks
"MetLife" and the use of the Peanuts(TM) characters. We have the exclusive right
to use the Peanuts(TM) characters in the area of financial services and health
care services in the U.S. and some foreign countries under an advertising and
premium agreement with United Feature Syndicate. The agreement with United
Feature Syndicate expires on December 31, 2002. We believe that our rights in
our trademarks are adequately protected.
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MANAGEMENT
Set forth below is information regarding the directors and executive
officers of MetLife, Inc. and Metropolitan Life Insurance Company.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION
- ---- ------ --------
<S> <C> <C>
Robert H. Benmosche......... 55 Chairman of the Board, President, Chief Executive
Officer and Director
Curtis H. Barnette.......... 65 Director
Gerald Clark................ 56 Vice-Chairman of the Board, Chief Investment Officer
and Director
Joan Ganz Cooney............ 70 Director
Burton A. Dole, Jr.......... 62 Director
James R. Houghton........... 63 Director
Harry P. Kamen.............. 66 Director
Helene L. Kaplan............ 66 Director
Charles M. Leighton......... 64 Director
Allen E. Murray............. 70 Director
Stewart G. Nagler........... 57 Vice-Chairman of the Board, Chief Financial Officer
and Director
John J. Phelan, Jr.......... 68 Director
Hugh B. Price............... 58 Director
Ruth J. Simmons............. 54 Director
William C. Steere, Jr....... 63 Director
Gary A. Beller.............. 61 Senior Executive Vice-President and General Counsel
James M. Benson............. 53 President, Individual Business; Chairman of the
Board, Chief Executive Officer and President, New
England Life Insurance Company
C. Robert Henrikson......... 52 President, Institutional Business
Richard A. Liddy............ 64 Senior Executive Vice-President
Catherine A. Rein........... 57 Senior Executive Vice-President; President and Chief
Executive Officer of Metropolitan Property and
Casualty Insurance Company
William J. Toppeta.......... 51 President, Client Services and Chief Administrative
Officer
John H. Tweedie............. 54 Senior Executive Vice-President
Lisa M. Weber............... 38 Executive Vice-President
Judy E. Weiss............... 47 Executive Vice-President and Chief Actuary
</TABLE>
- ---------------
(1) At February 29, 2000.
Set forth below is biographical information for the directors and executive
officers of MetLife, Inc. and Metropolitan Life Insurance Company:
Robert H. Benmosche has been a director of MetLife, Inc. since August 1999
and a director of Metropolitan Life Insurance Company since 1997. Mr. Benmosche
has been Chairman of the Board, President and Chief Executive Officer of
MetLife, Inc. since September 1999. He has been Chairman of the Board, President
and Chief Executive Officer of Metropolitan Life Insurance Company since July
1998, was President and Chief Operating Officer from November 1997 to June 1998,
and was Executive Vice-President from September 1995 to October 1997.
Previously, he was Executive Vice-President of PaineWebber Group Incorporated
from 1989 to 1995.
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Curtis H. Barnette has been a director of MetLife, Inc. since August 1999
and a director of Metropolitan Life Insurance Company since 1994. Mr. Barnette
has been Chairman of the Board and Chief Executive Officer of Bethlehem Steel
Corporation since November 1992. He is a director of Owens Corning Incorporated.
Gerald Clark has been a director of MetLife, Inc. since August 1999 and a
director of Metropolitan Life Insurance Company since 1997. Mr. Clark has been
Vice-Chairman of the Board and Chief Investment Officer of MetLife, Inc. since
September 1999. He has been Vice-Chairman of the Board and Chief Investment
Officer of Metropolitan Life Insurance Company since July 1998, was Senior
Executive Vice-President and Chief Investment Officer from December 1995 to July
1998, and was Executive Vice-President and Chief Investment Officer from
September 1992 to December 1995. Mr. Clark is a director of Credit Suisse Group.
Joan Ganz Cooney has been a director of MetLife, Inc. since August 1999 and
a director of Metropolitan Life Insurance Company since 1980. Ms. Cooney has
been Chairman of the Executive Committee of Children's Television Workshop since
1990. Ms. Cooney is a director of Johnson & Johnson Inc.
Burton A. Dole, Jr. has been a director of MetLife, Inc. since August 1999
and a director of Metropolitan Life Insurance Company since 1996. Mr. Dole was
Chairman of the Board of Nellcor Puritan Bennett, Incorporated from 1995 until
his retirement in 1997. He had been the Chairman of the Board, President and
Chief Executive Officer of Puritan Bennett, Incorporated from 1986 to 1995 and
the President and Chief Executive Officer of Puritan Bennett, Incorporated from
1980 to 1986.
James R. Houghton has been a director of MetLife, Inc. since August 1999
and a director of Metropolitan Life Insurance Company since 1975. Mr. Houghton
has been Chairman of the Board Emeritus of Corning Incorporated since 1996. He
was the Chairman of the Board of Corning Incorporated from 1983 until his
retirement in 1996. Mr. Houghton is a director of Corning Incorporated, Exxon
Mobil Corporation and J.P. Morgan & Co. Incorporated.
Harry P. Kamen has been a director of MetLife, Inc. since August 1999 and a
director of Metropolitan Life Insurance Company since 1992. He was the Chairman
of the Board and Chief Executive Officer of Metropolitan Life Insurance Company
from April 1993 until his retirement in July 1998 and, in addition, was its
President from December 1995 to November 1997. Mr. Kamen is a director of Banco
Santander Central Hispano SA (Spain), Bethlehem Steel Corporation, the National
Association of Securities Dealers, Inc., Nvest Corporation, a subsidiary of
Metropolitan Life Insurance Company, and Pfizer, Inc.
Helene L. Kaplan has been a director of MetLife, Inc. since August 1999 and
a director of Metropolitan Life Insurance Company since 1987. Ms. Kaplan is of
counsel to the law firm of Skadden, Arps, Slate, Meagher & Flom LLP. Ms. Kaplan
is a director of Bell Atlantic Corporation, The Chase Manhattan Corporation, The
May Department Stores Company and Exxon Mobil Corporation.
Charles M. Leighton has been a director of MetLife, Inc. since August 1999
and a director of Metropolitan Life Insurance Company since 1996. Mr. Leighton
was the Chairman of the Board and Chief Executive Officer of the CML Group, Inc.
from 1969 until his retirement in March 1998. CML Group, Inc. filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code in December 1998.
Mr. Leighton is a director of Nvest Corporation, a subsidiary of Metropolitan
Life Insurance Company.
Allen E. Murray has been a director of MetLife, Inc. since August 1999 and
a director of Metropolitan Life Insurance Company since 1983. Mr. Murray was
Chairman of the Board, President and Chief Executive Officer of Mobil
Corporation from February 1986 until March 1993, and was Chairman of the Board
and Chief Executive Officer from March 1993 until his retirement
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in March 1994. Mr. Murray is a director of Morgan Stanley Dean Witter & Co. and
Minnesota Mining & Manufacturing Company.
Stewart G. Nagler has been a director of MetLife, Inc. since August 1999
and a director of Metropolitan Life Insurance Company since 1997. Mr. Nagler has
been Vice-Chairman of the Board and Chief Financial Officer of MetLife, Inc.
since September 1999. He has been Vice-Chairman of the Board and Chief Financial
Officer of Metropolitan Life Insurance Company since July 1998, and was its
Senior Executive Vice-President and Chief Financial Officer from April 1993 to
July 1998.
John J. Phelan, Jr. has been a director of MetLife, Inc. since August 1999
and a director of Metropolitan Life Insurance Company since 1985. Mr. Phelan has
been a senior advisor to the Boston Consulting Group since 1992. Prior to that
time, Mr. Phelan was Chairman and Chief Executive Officer of the New York Stock
Exchange. Mr. Phelan is a director of Eastman Kodak Company and Merrill Lynch &
Co., Inc.
Hugh B. Price has been a director of MetLife, Inc. since August 1999 and a
director of Metropolitan Life Insurance Company since 1994. Mr. Price has been
President and Chief Executive Officer of the National Urban League, Inc. since
1994. Mr. Price is a director of Sears, Roebuck and Co. and Bell Atlantic
Corporation.
Ruth J. Simmons has been a director of MetLife, Inc. since August 1999 and
a director of Metropolitan Life Insurance Company since 1995. Dr. Simmons has
been President of Smith College since 1995. Prior to that time, she was
Vice-Provost of Princeton University from 1992 to 1995. Dr. Simmons is a
director of Goldman, Sachs & Co., Pfizer Inc. and Texas Instruments, Inc.
William C. Steere, Jr. has been a director of MetLife, Inc. since August
1999 and a director of Metropolitan Life Insurance Company since 1997. Mr.
Steere has been Chairman of the Board and Chief Executive Officer of Pfizer Inc.
since 1992. Mr. Steere is a director of Dow Jones & Company, Inc., Minerals
Technologies, Inc. and Texaco Inc.
Gary A. Beller has been Senior Executive Vice-President and General Counsel
of MetLife, Inc. since September 1999 and of Metropolitan Life Insurance Company
since February 1998. He was Executive Vice-President and General Counsel of
Metropolitan Life Insurance Company from August 1996 to January 1998. Mr. Beller
served as Executive Vice-President and Chief Legal Officer from November 1994 to
July 1996.
James M. Benson has been President of Individual Business of MetLife, Inc.
since September 1999 and of Individual Business of Metropolitan Life Insurance
Company since May 1999. He has been Chairman of the Board of New England Life
Insurance Company since May 1998, Chief Executive Officer since January 1998,
and President since June 1997. He was Chief Operating Officer of New England
Life Insurance Company from June 1997 to December 1997. Mr. Benson was the
President and Chief Operating Officer of The Equitable Companies Incorporated
from February 1996 to May 1997, and was President of The Equitable Life
Assurance Society of the United States from February 1994 to May 1997, Chief
Executive Officer from February 1996 to May 1997, and Chief Operating Officer
from February 1994 to February 1996.
C. Robert Henrikson has been President of Institutional Business of
MetLife, Inc. since September 1999 and of Institutional Business of Metropolitan
Life Insurance Company since May 1999. He was Senior Executive Vice-President,
Institutional Business of Metropolitan Life Insurance Company, from December
1997 to May 1999, Executive Vice-President, Institutional Business, from January
1996 to December 1997, Executive Vice-President, Pensions, from January 1995 to
January 1996, and Senior Vice-President, Pensions, from January 1991 to January
1995.
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Richard A. Liddy has been Senior Executive Vice-President of MetLife, Inc.
and of Metropolitan Life Insurance Company since February 2000. He has been
Chairman, President and Chief Executive Officer of GenAmerica Corporation since
January 1997 and has held the same offices at General American Life Insurance
Company since 1995. Mr. Liddy is a director of Reinsurance Group of America,
Inc., Conning Corporation, Brown Shoe Company, Ralston Purina Company, Energizer
Holdings, Inc. and Ameren Corporation.
Catherine A. Rein has been Senior Executive Vice-President of MetLife, Inc.
since September 1999 and President and Chief Executive Officer of Metropolitan
Property and Casualty Insurance Company since March 1999. She has been Senior
Executive Vice-President of Metropolitan Life Insurance Company since February
1998 and was Executive Vice-President from October 1989 to February 1998. Ms.
Rein is a director of Corning Incorporated, The Bank of New York Company, Inc.
and GPU, Inc.
William J. Toppeta has been President of Client Services and Chief
Administrative Officer of MetLife, Inc. since September 1999 and President of
Client Services and Chief Administrative Officer of Metropolitan Life Insurance
Company since May 1999. He was Senior Executive Vice-President, Head of Client
Services, of Metropolitan Life Insurance Company from March 1999 to May 1999,
Senior Executive Vice-President, Individual Business, from February 1998 to
March 1999, Executive Vice-President, Individual Business, from July 1996 to
February 1998, Senior Vice-President from October 1995 to July 1996 and
President and Chief Executive Officer, Canadian Operations, from January 1994 to
October 1995.
John H. Tweedie has been Senior Executive Vice-President of MetLife, Inc.
since September 1999 and Senior Executive Vice-President, Finance and
International, of Metropolitan Life Insurance Company since March 1999. He was
Senior Executive Vice-President of Metropolitan Life Insurance Company from May
1998 to March 1999 and Executive Vice-President from January 1994 to April 1998.
Lisa M. Weber has been Executive Vice-President of MetLife, Inc. and
Metropolitan Life Insurance Company since December 1999 and head of Human
Resources since March 1998. She was Senior Vice-President of MetLife, Inc. from
September 1999 to November 1999 and Senior Vice-President of Metropolitan Life
Insurance Company from March 1998 to November 1999. Previously, she was Senior
Vice-President of Human Resources of PaineWebber Group Incorporated, where she
was employed for ten years.
Judy E. Weiss has been Executive Vice-President and Chief Actuary of
MetLife, Inc. since September 1999 and of Metropolitan Life Insurance Company
since February 1998. She was Senior Vice-President and Chief Actuary of
Metropolitan Life Insurance Company from June 1996 to February 1998 and Senior
Vice-President from May 1991 to June 1996.
INFORMATION ABOUT THE BOARD OF DIRECTORS OF METLIFE, INC.
RESPONSIBILITIES AND COMPOSITION OF THE BOARD
The business of MetLife, Inc. is managed under the direction of its board
of directors. The board currently consists of 15 directors, a majority of whom
are Outside Directors. An "Outside Director" of MetLife, Inc. is a director who
is not an officer or employee of MetLife, Inc. or of any entity controlling,
controlled by or under common control with MetLife, Inc., and is not the
beneficial owner of a controlling interest in the voting stock of MetLife, Inc.
or of any such entity.
MetLife, Inc.'s certificate of incorporation provides that the directors
will be divided into three classes, as nearly equal in number as possible, with
the term of office of each class to be three years. The classes serve staggered
terms, such that the term of office of one class of directors expires each year.
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BOARD COMMITTEES
There are five standing committees of MetLife, Inc.'s board of directors
that perform essential functions of the Board. The responsibilities of the
standing committees are summarized below. Only Outside Directors may be members
of the Audit, Compensation and Nominating and Corporate Governance committees.
From time to time, the board, in its discretion, may form other committees. Not
less than one-third of the members of any board committee, including the
standing committees, may consist of Outside Directors.
THE EXECUTIVE COMMITTEE
The Executive Committee, except as otherwise provided in MetLife, Inc.'s
certificate of incorporation, in the intervals between meetings of the board of
directors, will have and may exercise the powers and authority of the board of
directors in the management of the property, affairs and business of MetLife,
Inc., including the power to declare dividends.
The Executive Committee currently consists of the following seven members:
Robert H. Benmosche, Chairman; James R. Houghton; Harry P. Kamen; Helene L.
Kaplan; Charles M. Leighton; Allen E. Murray; and John J. Phelan, Jr.
THE AUDIT COMMITTEE
The Audit Committee, except as otherwise provided in any resolution of the
board of directors, will have and may exercise the authority of the board of
directors:
- to recommend to the board of directors the selection of MetLife, Inc.'s
independent certified public accountants;
- to review the scope, plans and results relating to the internal and
external audits of MetLife, Inc. and its financial statements;
- to review the financial condition of MetLife, Inc.;
- to monitor and evaluate the integrity of MetLife, Inc.'s financial
reporting processes and procedures;
- to assess the significant business and financial risks and exposures of
MetLife, Inc. and to evaluate the adequacy of its internal controls in
connection with such risks and exposures, including, but not limited to,
accounting and audit controls over cash, securities, receipts,
disbursements and other financial transactions; and
- to review MetLife, Inc.'s policies on ethical business conduct and
monitor its compliance with those policies.
The Audit Committee currently consists of the following six members: James R.
Houghton, Chairman; Curtis H. Barnette; Burton A. Dole, Jr.; John J. Phelan,
Jr.; Hugh B. Price; and William C. Steere, Jr.
THE COMPENSATION COMMITTEE
The Compensation Committee, except as otherwise provided in any resolution
of the board of directors, will have and may exercise all the authority of the
board of directors with respect to compensation, benefits and personnel
administration of MetLife, Inc.'s employees, and:
- will nominate persons for election or appointment by the board of
directors of all principal officers (as determined by the Committee) and
such other officers as the Committee may determine to elect or appoint as
officers;
- will evaluate the performance and recommend to the board of directors the
compensation of such principal officers and such other officers as the
Committee may determine;
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- may elect or appoint officers as provided in MetLife, Inc.'s by-laws;
- may recommend to the board of directors any plan to issue options for the
purchase of shares of the stock of MetLife, Inc. to its officers or
employees and those of its subsidiaries; and
- will administer the MetLife, Inc. 2000 Stock Incentive Plan.
The Compensation Committee currently consists of the following seven
members: Allen E. Murray, Chairman; Curtis H. Barnette; Joan Ganz Cooney; James
R. Houghton; Charles M. Leighton; Ruth J. Simmons; and William C. Steere, Jr.
THE NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
The Nominating and Corporate Governance Committee, except as otherwise
provided in any resolution of the board of directors:
- will make recommendations to the board of directors with respect to
electing directors and filling vacancies on the Board;
- will review and make recommendations to the board of directors with
respect to the organization, structure, size, composition and operation
of the board and its committees, including, but not limited to, the
compensation for non-employee directors;
- may recommend to the board of directors any plan to issue options for the
purchase of shares of the stock of MetLife, Inc. to its non-employee
directors;
- will administer the MetLife, Inc. 2000 Directors Stock Plan; and
- will review and make recommendations with respect to other corporate
governance matters and matters that relate to the status of MetLife, Inc.
as a publicly-traded company.
The Nominating and Corporate Governance Committee currently consists of the
following seven members: Helene L. Kaplan, Chairman; Curtis H. Barnette; James
R. Houghton; Harry P. Kamen; Allen E. Murray; John J. Phelan, Jr.; and William
C. Steere, Jr.
THE CORPORATE SOCIAL RESPONSIBILITY COMMITTEE
The Corporate Social Responsibility Committee, except as otherwise provided
in any resolution of the board of directors, will exercise general supervision
of MetLife, Inc.'s charitable contributions, public benefit programs and other
corporate responsibility matters.
The Corporate Social Responsibility Committee currently consists of the
following six members: Joan Ganz Cooney, Chairman; Gerald Clark; Burton A. Dole,
Jr.; Helene L. Kaplan; Stewart G. Nagler; and Hugh B. Price.
COMPENSATION OF DIRECTORS
In 1999, Outside Directors received an annual retainer fee of $50,000. At
January 1, 2000, the annual retainer increased to $60,000. Each chairman of a
board committee who is an Outside Director receives an additional $5,000 annual
retainer. Outside Directors are paid attendance fees of $2,000 on days that they
attend one or two board or committee meetings held on the same day. If they
attend more than two meetings on a single day, they are paid an additional
$1,000 for each other meeting they attend on that day. Directors may defer the
receipt of the payment of all or a portion of their retainer and attendance
fees.
MetLife provides $200,000 of life insurance to each Outside Director.
MetLife will recover the premiums for each policy upon the death of the Outside
Director. The cost to MetLife of providing this life insurance is nominal.
MetLife also provides each of the Outside Directors with business travel
accident coverage while traveling on MetLife business. The Outside Directors are
eligible to participate in MetLife's Long-Term Care Insurance Program on a fully
contributory basis.
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Outside Directors elected prior to October 1, 1999 participate in a
charitable gift program under which each Outside Director is able to recommend
one or more charitable or educational institutions to receive, in the aggregate,
a $1 million contribution from MetLife in the name of the Outside Director. In
connection with this program, MetLife purchased and pays the premiums on life
insurance policies covering such Outside Directors. The death benefits under the
policies will be paid to MetLife. The cost to MetLife of providing this program
is not significant. Outside Directors elected on or after October 1, 1999 are
not eligible to participate in this program.
Under the MetLife, Inc. 2000 Directors Stock Plan, the Nominating and
Corporate Governance Committee may determine that up to one-half of an Outside
Director's retainer and attendance fees be paid in common stock. The Directors
Stock Plan also provides that the Nominating and Corporate Governance Committee
may, with the board's approval, grant non-qualified stock options to the Outside
Directors to purchase shares of MetLife, Inc. common stock at a price no less
than the fair market value of a share of common stock on the grant date of the
stock option. Any options granted before the fifth anniversary of the effective
date of the plan of reorganization will replace all or any portion of the
Outside Directors' fees otherwise payable in cash. No stock options may be
granted and no stock may be issued under the Directors Stock Plan in lieu of
Outside Directors' fees before the first anniversary of the effective date of
the plan of reorganization. Up to a maximum of 500,000 shares may be issued
under the Directors Stock Plan in lieu of fees and no more than 0.05% of the
shares outstanding immediately after the effective date of the plan of
reorganization may be issued with respect to stock options under the Directors
Stock Plan.
Common stock paid in lieu of fees under the Directors Stock Plan may not be
sold prior to the second anniversary of the effective date of the plan of
reorganization. Stock options granted under the Directors Stock Plan will
generally be exercisable on the date of grant, but in no event exercised before
the second anniversary of the effective date of the plan of reorganization.
Outside Directors may elect to receive all or a portion of their retainer and
attendance fees that would otherwise be paid in cash with respect to services
rendered after the second anniversary of the effective date of the plan of
reorganization in the form of common stock. In addition, an Outside Director may
elect to defer receipt of any shares issuable under the terms of the Directors
Stock Plan in lieu of their retainer and attendance fees and any dividends
payable on the shares, until after he or she is no longer a director of MetLife,
Inc.
The board of directors may terminate, modify or amend the Directors Stock
Plan at any time, subject, in certain instances, to shareholder approval, and
prior to the fifth anniversary of the effective date of the plan of
reorganization, the approval of the New York Superintendent of Insurance. Unless
terminated earlier by action of the board of directors, the 2000 Directors Stock
Plan will continue in effect until no more shares are available for issuance
pursuant to it.
Metropolitan Life Insurance Company entered into an agreement with Harry P.
Kamen pursuant to which he served as a consultant from July 1, 1998 to June 30,
1999 for a fee of $500,000. Upon the expiration of that agreement by its terms,
a new agreement between Metropolitan Life Insurance Company and Mr. Kamen became
effective pursuant to which Mr. Kamen serves as a consultant for the one-year
period of July 1, 1999 to June 30, 2000. Mr. Kamen will be paid for services
rendered under the agreement up to an aggregate amount of $50,000. Pursuant to
the agreement, Metropolitan Life Insurance Company provides Mr. Kamen, at no
charge to him, an office and secretarial support, as well as a car for use in
connection with the services rendered under the agreement.
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MANAGEMENT COMPENSATION
EXECUTIVE COMPENSATION
Since the formation of MetLife, Inc., in August 1999, none of its officers
or other personnel has received any compensation from MetLife, Inc. All
compensation has been paid by Metropolitan Life Insurance Company or New England
Financial. It is expected that after the demutualization, all employees of
MetLife, Inc., including the executive officers, will continue to be paid only
by Metropolitan Life Insurance Company or its subsidiary, as applicable, with an
allocation of their compensation to be made for services rendered to MetLife,
Inc. MetLife, Inc. will pay the amount of such allocation to Metropolitan Life
Insurance Company or its subsidiary, as applicable, pursuant to a cost
allocation agreement.
The information set forth below describes the components of the total
compensation of the Chief Executive Officer and the four other most highly
compensated executive officers of Metropolitan Life Insurance Company and
MetLife, Inc. for services rendered during the fiscal year ended December 31,
1999 ("Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------- ------------
OTHER ANNUAL LTIP(2) ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION PAYOUTS COMPENSATION
- --------------------------- ---- ------ -------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Benmosche...... 1999 $1,000,000 $2,714,200 -- $3,422,200 $225,143(3)
Chairman of the Board,
President and Chief
Executive Officer
Stewart G. Nagler........ 1999 630,000 1,100,000 -- 2,387,000 133,741(3)
Vice-Chairman of the Board
and Chief Financial Officer
Gerald Clark............. 1999 630,000 900,000 -- 2,387,000 138,986(3)
Vice-Chairman of the Board
and Chief Investment
Officer
James M. Benson.......... 1999 600,000 900,000 737,549(5) 1,800,000 38,130(4)
President, Individual
Business; Chairman of the
Board, Chief Executive
Officer and President, New
England Life Insurance
Company
C. Robert Henrikson...... 1999 500,000 875,000 -- 1,743,000 92,543(3)
President, Institutional
Business
</TABLE>
- ---------------
(1) Actual annual incentive awards based on 1999 performance were paid in the
first quarter of 2000. For all Named Executive Officers, other than Mr.
Benson, such award was paid pursuant to the MetLife Annual Variable
Incentive Plan. Mr. Benson's award was paid pursuant to The New England
Short-Term Incentive Plan.
(2) Long-term compensation plan payouts to all Named Executive Officers for
services performed during the three-year performance period 1997-1999 were
made in the first quarter of 2000. For all Named Executive Officers, other
than Mr. Benson, such payouts were made pursuant to the MetLife Long-Term
Performance Compensation Plan. Mr. Benson's payout was made pursuant to the
New England Financial Long-Term Incentive Plan.
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(3) Includes: MetLife contributions to the Savings and Investment Plan for
Employees of MetLife and Participating Affiliates of $6,400 for each of the
above named individuals; MetLife contributions to, or with respect to, the
Auxiliary Savings and Investment Plan as follows: Mr. Benmosche: $87,077;
Mr. Nagler: $54,240; Mr. Clark: $58,240; and Mr. Henrikson: $40,640;
payments representing the dollar value of the benefit of the portion of
split dollar life insurance premiums paid by MetLife as follows: Mr.
Benmosche: $131,666; Mr. Nagler: $73,101; Mr. Clark: $74,346; and Mr.
Henrikson: $45,503.
(4) Includes: company contributions to The New England 401(k) Plan and Trust of
$8,200; $29,660 to The New England Life Insurance Company Select Employees
Supplemental 401(k) Plan and $270 representing the premium paid by New
England Life Insurance Company with respect to term life insurance covering
Mr. Benson.
(5) Amount paid on Mr. Benson's behalf pursuant to The New England Financial
Relocation Policy.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
OR OTHER PRICE-BASED PLANS
PERIOD ----------------------------------------
UNTIL ESTIMATED
MATURATION THRESHOLD TARGET MAXIMUM
NAME OR PAYOUT PAYMENT PAYMENT(A) PAYMENT
- ---- ----------- --------- ---------- -------
<S> <C> <C> <C> <C>
Robert H. Benmosche..................... 1999-2001 $0 $2,500,000 $5,000,000
Stewart G. Nagler....................... 1999-2001 0 1,260,000 2,520,000
Gerald Clark............................ 1999-2001 0 1,260,000 2,520,000
James M. Benson......................... 1999-2001 0 1,200,000 2,400,000
C. Robert Henrikson..................... 1999-2001 0 975,000 1,950,000
</TABLE>
- ---------------
(a) Estimated target payments under the MetLife Long-Term Performance
Compensation Plan for all Named Executive Officers other than Mr. Benson,
whose payment is made pursuant to the New England Financial Long-Term
Incentive Plan. Actual target payments will be based on the average of the
year-end annual base salaries over the three-year performance period, except
in the case of Mr. Benson, whose target will remain at $1,200,000,
regardless of changes in his annual base salary.
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METLIFE RETIREMENT PLAN INFORMATION
The following table shows the estimated annual retirement benefits payable
at normal retirement age (generally 65) to a person retiring with the indicated
final average pay and years of credited service on a 30% joint and survivor
basis, if married, and on a straight life annuity basis with a 5-year guarantee,
if single, under the Metropolitan Life Retirement Plan for United States
Employees ("Retirement Plan"), as supplemented by the Metropolitan Life
Supplemental Retirement Benefit Plan ("Supplemental Retirement Plan"), each as
described below. Except for Mr. Benson, each of the Named Executive Officers
participates in the Retirement Plan and the Supplemental Retirement Plan. Mr.
Benson participates in separate New England Financial plans.
ESTIMATED ANNUAL BENEFITS AT RETIREMENT
WITH INDICATED YEARS OF CREDITED SERVICE
<TABLE>
<CAPTION>
FINAL
AVERAGE PAY 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS
- ----------- ------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 500,000 $ 41,400 $ 82,900 $124,300 $165,800 $ 207,200 $ 248,700 $ 290,100 $ 302,600
750,000 62,700 125,400 188,100 250,800 313,500 376,200 438,900 457,600
1,000,000 83,900 167,900 251,800 335,800 419,700 503,700 587,600 612,600
1,250,000 105,200 210,400 315,600 420,800 526,000 631,200 736,400 767,600
1,500,000 126,400 252,900 379,300 505,800 632,200 758,700 885,100 922,600
1,750,000 147,700 295,400 443,100 590,800 738,500 886,200 1,033,900 1,077,600
2,000,000 168,900 337,900 506,800 675,800 844,700 1,013,700 1,182,600 1,232,600
2,250,000 190,200 380,400 570,600 760,800 951,000 1,141,200 1,331,400 1,387,600
2,500,000 211,400 422,900 634,300 845,800 1,057,200 1,268,700 1,480,100 1,542,600
</TABLE>
The annual retirement benefit under the Retirement Plan and the
Supplemental Retirement Plan is generally equal to the sum of (a)(i) a
percentage of an executive's "final average compensation" up to his or her
"covered compensation" (i.e., the average of the social security taxable wage
base for the 35 years up to the date the executive attains social security
retirement age), plus (ii) a percentage of the executive's "final average
compensation" in excess of his or her "covered compensation", and the sum
thereof times (iii) years of "credited service" not exceeding 35 years, and (b)
a percentage of "final average compensation" multiplied by years of "credited
service" in excess of 35 years. "Final average compensation" is defined as the
highest average "annual compensation" of an executive for any 60 consecutive
months in the 120 months of service prior to the executive's retirement. "Annual
Compensation" used to determine the retirement benefit under the Retirement Plan
and the Supplemental Retirement Plan consists of "annual basic compensation"
which includes annual base salary and "annual variable incentive compensation"
which includes payments under the annual variable incentive plan. Such
"compensation" is generally the same as the compensation reflected in the
"salary" and "bonus" columns of the Summary Compensation Table. The Supplemental
Retirement Plan is designed to provide benefits which eligible employees would
have received under the Retirement Plan but for limits applicable under the
Retirement Plan. Benefits payable under the Retirement Plan and the Supplemental
Retirement Plan are not subject to reduction for social security benefits or
other offset amounts.
At December 31, 1999 (assuming retirement as of such date), the estimated
"final average compensation" under the Retirement Plan and the Supplemental
Retirement Plan is $1,581,710 for Mr. Benmosche, $1,281,350 for Mr. Nagler,
$1,258,000 for Mr. Clark and $904,980 for Mr. Henrikson. The estimated years of
credited service under the Retirement Plan and the Supplemental Retirement Plan
as of such date is four years for Mr. Benmosche, 37 years for Mr. Nagler, 31
years for Mr. Clark and 27 years for Mr. Henrikson.
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NEW ENGLAND RETIREMENT PLAN INFORMATION
The following table shows the estimated annual retirement benefits payable
at normal retirement age (generally 65) to a person retiring with the indicated
final average pay and years of credited service on a straight life annuity basis
under The New England Retirement Plan and Trust, as supplemented by The New
England Life Insurance Company Supplemental Retirement Plan and The New England
Life Insurance Company Select Employees Supplemental Retirement Plan, each as
described below.
ESTIMATED ANNUAL BENEFITS AT RETIREMENT
WITH INDICATED YEARS OF CREDITED SERVICE
<TABLE>
<CAPTION>
FINAL
AVERAGE PAY 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS
----------- ------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 500,000 $ 48,300 $ 96,600 $144,800 $193,100 $ 241,400 $ 253,900 $ 253,900 $ 253,900
750,000 73,300 146,600 219,800 293,100 366,400 385,200 385,200 385,200
1,000,000 98,300 196,600 294,800 393,100 491,400 516,400 516,400 516,400
1,250,000 123,300 246,600 369,800 493,100 616,400 647,700 647,700 647,700
1,500,000 148,300 296,600 444,800 593,100 741,400 778,900 778,900 778,900
1,750,000 173,300 346,600 519,800 693,100 866,400 910,200 910,200 910,200
2,000,000 198,300 396,600 594,800 793,100 991,400 1,041,400 1,041,400 1,041,400
2,250,000 223,300 446,600 669,800 893,100 1,116,400 1,172,700 1,172,700 1,172,700
2,500,000 248,300 496,600 744,800 993,100 1,241,400 1,303,900 1,303,900 1,303,900
</TABLE>
The annual benefit under The New England Retirement Plan and Trust, The New
England Life Insurance Company Supplemental Retirement Plan and The New England
Life Insurance Company Select Employees Supplemental Retirement Plan is
generally equal to the sum of (a) the product of a percentage of an executive's
"final average compensation" times years of service up to 25 and (b) the product
of a percentage of an executive's "final average compensation" for years 26 to
30 times such years of service, less (c) the product of a percentage of an
executive's age 65 social security benefit times years of service up to 25 years
of service. "Final average compensation" is defined as the highest five years of
eligible compensation of an executive during the last ten years of service prior
to the executive's retirement. "Annual Compensation" used to determine the
retirement benefit under The New England Retirement Plan and Trust, The New
England Life Insurance Company Supplemental Retirement Plan and The New England
Life Insurance Company Select Employees Supplemental Retirement Plan consists of
salary paid to an executive. Such Annual Compensation is generally the same as
the compensation reflected in the "salary" and "bonus" columns of the Summary
Compensation Table. The New England Life Insurance Company Supplemental
Retirement Plan and The New England Life Insurance Company Select Employees
Supplemental Retirement Plan are designed to provide benefits which eligible
employees would have received under The New England Retirement Plan and Trust
but for limits applicable under The New England Retirement Plan and Trust. The
estimated "final average pay" for Mr. Benson under The New England Retirement
Plan and Trust, The New England Life Insurance Company Supplemental Retirement
Plan and The New England Life Insurance Company Select Employees Supplemental
Retirement Plan at December 31, 1999 (assuming retirement at such date) is
$1,419,800 and the estimated years of credited service under such Plans at such
date is 2 years. In addition, Mr. Benson's employment agreement provides for an
enhanced retirement benefit of $400,000 vesting in equal annual installments
over ten years and payable at age 62 as a 20-year continuous and certain
annuity. At December 31, 1999, Mr. Benson was vested as to 20% of this benefit,
or $80,000 per annum. In the event of a termination by New England Life
Insurance Company "without cause" or by Mr. Benson for "good reason" (as each
such term is defined in the agreement), the enhanced retirement benefit will
retroactively vest at double the above rate.
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<PAGE> 191
LONG-TERM INCENTIVE COMPENSATION PLANS
METLIFE LONG-TERM PERFORMANCE COMPENSATION PLAN. All officers at the level
of senior vice-president and above and select vice-presidents are eligible to
participate in the MetLife Long-Term Performance Compensation Plan ("Long-Term
Plan"). The Long-Term Plan is a three-year plan with a new plan period beginning
each January 1. Under the Long-Term Plan, performance objectives for the
enterprise are established at the beginning of each three-year performance
period and may include specific objectives for earnings and return on equity, as
well as management performance against select strategic objectives. At the end
of the performance period, the performance of MetLife is judged against the set
objectives, with some results compared relatively to the results of other
companies in the insurance and financial service industries. Actual performance,
expressed as a percentage, may range from 0% to 200%. This percentage is
multiplied by the participants' total incentive opportunities to establish the
aggregate incentive fund for distribution. Individual awards are recommended by
management and are reflective of the participant's individual performance and
relative contribution to the long-range results of MetLife. Senior management
approves all awards before they are submitted to the Compensation Committee of
the board, which is comprised of Outside Directors, and to the full board for
approval. Any award under the Long-Term Plan in each performance period will
become payable only upon approval of the board in its discretion and will be
paid in the year immediately following the end of each performance period.
NEW ENGLAND FINANCIAL LONG-TERM INCENTIVE PLAN. From 1997 through 1999,
New England Financial maintained a substantially similar long-term incentive
plan for the benefit of certain of its officers, under which any amounts payable
are determined based on the performance of New England Financial and the
individual's contribution to its success.
The personnel committee awards certain of its officers "growth units" that
measure value creation over a three-year performance cycle based on growth in
equity computed pursuant to generally accepted accounting principles and the
present value of future profits on in-force business. At the end of the
three-year performance cycle, the growth in value of the "growth units" is
determined by New England Financial's board and paid in cash to each participant
still employed with New England Financial.
In 2000, New England Financial adopted a long-term incentive plan identical
to the MetLife Long-Term Plan.
Each of the Named Executive Officers participates in the MetLife Long-Term
Plan, except Mr. Benson who participates in The New England Financial Long-Term
Incentive Plan. See "-- Management Compensation -- Long-Term Incentive Plan
Awards in Last Fiscal Year".
SHORT-TERM INCENTIVE PLANS
METLIFE ANNUAL VARIABLE INCENTIVE PLAN. Persons exempt from the Fair Labor
Standards Act who are not participating in an alternative annual incentive plan
are eligible to participate in the Annual Variable Incentive Plan ("Annual
Incentive Plan"). Under the Annual Incentive Plan, a formula including
performance objectives for operating earnings and return on equity is
established at the beginning of each calendar year to determine the maximum
aggregate incentive pool for distribution under the Annual Incentive Plan. The
actual incentive pool will be established at the end of each year based on the
actual operating earnings relative to return on equity target by using the
formula. Eighty percent of this pool is distributed based on corporate results,
while 20% is distributed based on business unit performance. In all incentive
award determinations, individual performance is a significant factor in the
manager's determination of the amount of an individual's actual final incentive
award. Final approval of individual incentive awards rests with senior
management. Awards for certain senior officers (executive vice-president and
above) are submitted to the Compensation Committee of the board, comprised of
Outside Directors, and to the full board for approval and endorsement. Awards
are payable in
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<PAGE> 192
cash as soon as practicable after individual award amounts have been approved.
There is no maximum on individual awards, but there is no guarantee an
individual will receive an award. The total of all individual awards may not
exceed the maximum aggregate incentive pool. Each of the Named Executive
Officers participates in the MetLife Annual Incentive Plan, except Mr. Benson,
who participates in the New England Short-Term Incentive Plan.
THE NEW ENGLAND SHORT-TERM INCENTIVE PLAN. In 1999, New England Financial
maintained a substantially similar short-term executive incentive plan ("The New
England Short-Term Incentive Plan") for the benefit of certain of its officers,
under which any amounts payable are determined based on the performance of New
England Financial and the individual's contribution to its success. Under The
New England Short-Term Incentive Plan, in determining the amounts available for
incentive payments, key considerations include financial results and growth
compared to target and business plan, together with non-financial objectives and
judgment of the Personnel Committee, and results are compared with the results
of other insurance and financial services companies. Specific percentages are
established under The New England Short-Term Incentive Plan with respect to the
portion of the award that is based on business unit performance, and such
performance is an important consideration in determining an individual's award.
The maximum award payable to any given individual under The New England
Short-Term Incentive Plan is capped at 200% of the target award amount. In 2000,
New England Financial adopted a short-term incentive plan identical to the
MetLife Annual Incentive Plan.
METLIFE, INC. 2000 STOCK INCENTIVE PLAN
The Compensation Committee of the board of directors of MetLife, Inc. will
administer the MetLife, Inc. 2000 Stock Incentive Plan ("Stock Incentive Plan").
Under the Stock Incentive Plan, the Compensation Committee may from time to time
grant stock options for the purchase of common stock to officers (including
officers who are also directors), employees and insurance agents of MetLife,
Inc. and its subsidiaries, provided that the Compensation Committee may not
grant any stock or stock options prior to the first anniversary of the effective
date of the plan of reorganization. The Compensation Committee may, in its
discretion, delegate its authority and power under the Stock Incentive Plan to
MetLife, Inc.'s Chief Executive Officer with respect to individuals who are
below the rank of Senior Vice-President. Such delegation of authority is limited
to 1.5% of the total number of shares authorized for issuance under the Stock
Incentive Plan, and no individual may receive more than 5% of the shares of the
Chief Executive Officer's total authorization in any twelve-month period.
The maximum number of shares issuable under the Stock Incentive Plan is 5%
of the shares outstanding immediately after the effective date of the plan of
reorganization, reduced by the shares issuable pursuant to options granted under
the MetLife, Inc. 2000 Directors Stock Plan. The maximum number of shares which
may be subject to awards under the Stock Incentive Plan may not exceed 60% of
the shares available under the Stock Incentive Plan prior to the second
anniversary of the effective date of the plan of reorganization or 80% of the
shares available under the Stock Incentive Plan prior to the third anniversary
of the effective date of the plan of reorganization. No participant in the Stock
Incentive Plan may be granted, during any five-year period, options in respect
of more than 5% of the shares available for issuance under the Stock Incentive
Plan. The shares to be issued under the Stock Incentive Plan may be authorized
but unissued shares or treasury shares. Upon the occurrence of certain events
that affect the capitalization of MetLife, Inc., appropriate adjustments will be
made in the number of shares that may be issued under the Stock Incentive Plan
in the future and in the number of shares and the exercise price under
outstanding grants made before the event. If any grant is for any reason
canceled, terminated or otherwise settled without the issuance of some or all of
the shares of common stock subject to the grant, such shares will be available
for future grants.
The board of directors of MetLife, Inc. may terminate, modify or amend
(subject, in some cases, to the approval of its stockholders and, prior to the
fifth anniversary of the effective date
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<PAGE> 193
of the plan of reorganization, to the approval of the New York Superintendent of
Insurance) the Stock Incentive Plan at any time, but such termination,
modification or amendment may not adversely affect any stock option then
outstanding under the Stock Incentive Plan without the consent of the recipient
thereof. The Stock Incentive Plan will continue in effect until it is terminated
by the board of directors or until no more shares are available for issuance,
but stock options granted prior to such date will continue in effect until they
expire in accordance with their terms.
The Compensation Committee may grant nonqualified stock options
("Nonqualified Stock Options") and stock options qualifying as incentive stock
options ("ISOs") under the Internal Revenue Code of 1986, as amended. The
exercise price per share of common stock subject to either a Nonqualified Stock
Option or an ISO will be not less than the fair market value (as defined in the
Stock Incentive Plan) of such share on the date of grant of such option. To
exercise an option, a holder may pay the exercise price as permitted by the
Compensation Committee (1) in cash, (2) by delivering on the date of exercise
other shares of common stock owned by the holder, (3) through an arrangement
with a broker approved by MetLife, Inc. for the payment of the exercise price
with the proceeds of the sale of shares of common stock owned by the holder, or
(4) by a combination of the foregoing. Options generally may not be transferred
by the grantee, except in the event of death. The Compensation Committee may, in
its discretion, permit the transfer of Nonqualified Stock Options by gift or
domestic relations order to the participant's immediate family members.
Unless otherwise specified, each option will become exercisable on a
cumulative basis in three approximately equal installments on each of the first
three anniversaries of the date of grant thereof, provided, that in no event
will any option be or become exercisable prior to the second anniversary of the
effective date of the plan of reorganization. In addition, the Compensation
Committee may establish longer periods of service or performance-based criteria
at the time of the grant. The term of each option will be fixed by the
Compensation Committee but may not be more than ten years from its date of
grant.
Any option granted to an insurance agent will comply with the provisions of
Section 4228 of the New York Insurance Law and any regulations thereunder.
In the event of the termination of service of a grantee by reason of death,
any options previously granted to such grantee will become immediately
exercisable in full and may be exercised by the grantee's designated beneficiary
at any time prior to the expiration of the term of the options or within three
years following the grantee's death, whichever occurs first (or such shorter
time as the Compensation Committee may determine at the time of grant).
In the event of the termination of service of a grantee by reason of
disability or approved retirement (as defined in the Stock Incentive Plan), any
option previously granted to such grantee will continue to vest as if the
grantee's service had not terminated. A grantee may exercise any vested option
in full for a period of three years following termination of employment (or such
shorter period as the Compensation Committee shall determine at the time of
grant) or, if earlier, the expiration of the term of the option. In the event of
the termination of service of a grantee for cause (as defined in the Stock
Incentive Plan), the grantee will forfeit any outstanding options. In the event
of the termination of service of a grantee in connection with a divestiture of a
business unit or subsidiary or similar transaction, the Compensation Committee
may provide that all or some outstanding options will continue to become
exercisable and may be exercised at any time prior to the expiration of the term
of the options or within three years following the grantee's termination of
service (or such shorter time as the Compensation Committee may determine at or
following the time of grant) or, if earlier, the expiration of the term of the
option. In general, in the event of the termination of service of a grantee for
any reason other than in connection with certain divestitures of a subsidiary or
business unit, for disability, death, approved retirement or cause, any options
granted to such grantee exercisable
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at the date of termination will remain exercisable for a period of 30 days (or,
if earlier, the expiration of the term of the options).
Upon a change of control (as defined in the Stock Incentive Plan), each
option then outstanding will become fully exercisable regardless of the exercise
schedule otherwise applicable. In connection with such change of control, the
Compensation Committee may, in its discretion, require that, upon the change of
control, each such option be canceled in exchange for a payment in an amount
equal to the excess, if any, of the change of control price (as defined in the
Stock Incentive Plan) over the exercise price of the option. In addition, no
cancellation, acceleration of exercisability, cash settlement or other payment
for options will occur upon a change of control if the Compensation Committee
determines in good faith that an alternate award (as defined in the Stock
Incentive Plan) will be issued by the acquiror in the change of control.
FEDERAL INCOME TAX ASPECTS
The following is a brief summary of the federal income tax consequences of
awards under the Stock Incentive Plan based on the federal income tax laws in
effect on the date hereof. This summary is not intended to be exhaustive and
does not describe state or local tax consequences.
No taxable income is realized by the grantee upon the grant or exercise of
an ISO. If a grantee does not sell the stock received upon the exercise of an
ISO ("ISO Shares") for at least two years from the date of grant and one year
from the date of exercise, when the ISO Shares are sold any gain or loss
realized will be treated as long-term capital gain or loss. In such
circumstances, no deduction will be allowed to the grantee's employer for
federal income tax purposes.
If ISO Shares are disposed of prior to the expiration of the holding
periods described above, the grantee generally will realize ordinary income at
that time equal to the lesser of the excess of the fair market value of the
shares at exercise over the price paid for such ISO Shares or the actual gain on
the disposition. The grantee's employer will generally be entitled to deduct any
such recognized amount. Any further gain or loss realized by the grantee will be
taxed as short-term or long-term capital gain or loss. Subject to certain
exceptions for disability or death, if an ISO is exercised more than three
months following the termination of the grantee's employment, the ISO will
generally be taxed as a Nonqualified Stock Option.
No income is realized by the grantee at the time a Nonqualified Stock
Option is granted. Generally upon exercise of a Nonqualified Stock Option, the
grantee will realize ordinary income in an amount equal to the difference
between the price paid for the shares and the fair market value of the shares on
the date of exercise. The grantee's employer will generally be entitled to a tax
deduction in the same amount and at the same time as the grantee recognizes
ordinary income. Any appreciation or depreciation after the date of exercise
will be treated as either short-term or long-term capital gain or loss,
depending upon the length of time that the grantee has held the shares.
EMPLOYMENT-RELATED AGREEMENTS
Metropolitan Life Insurance Company has entered into employment
continuation agreements with several of its key executives, including each of
the Named Executive Officers. These agreements, the provisions of which only
become effective upon the occurrence of a change of control or a potential
change of control (as defined in such agreements), are intended generally to
preserve for the covered executives the same duties, responsibilities and
compensation opportunities for a period of three years following a change of
control as were in effect prior to such an event. Accordingly, after the
occurrence of such a change of control event, the agreements provide for certain
minimum levels with respect to a covered executive's base salary, incentive
compensation opportunities and participation in employee benefit plans. These
agreements also generally assure the covered executive that he or she will not
incur a significant
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change in the other terms and conditions of his or her employment. If the
successor management does not honor these assurances, a covered executive may
terminate employment for "good reason". In such case, or in the event that,
after these agreements become effective, the executive's employment is
terminated without "cause", the executive will receive certain termination
benefits, including a lump sum severance payment equal to three times the sum of
the executive's:
- base salary;
- average annual bonus award over the preceding three years; and
- average long-term incentive award over the preceding three years (reduced
by the value conveyed to the executive in the change of control under any
equity compensation awards).
Notwithstanding the foregoing, the amount of any such termination benefits
will be reduced, to the extent necessary, so that no amount payable to such
executives will fail to be deductible by Metropolitan Life Insurance Company
(or, in the case of the executives, be subject to a special excise tax) under
the so-called "golden parachute" provisions of the Internal Revenue Code of
1986, as amended.
In addition, Messrs. Benmosche, Nagler and Clark may also generally elect
to terminate employment voluntarily, during the 30-day period beginning six
months after the date on which a change of control occurs, and receive the same
termination benefits they would receive had such executive's employment
terminated without cause.
New England Life Insurance Company has entered into an employment agreement
with Mr. Benson, which expires on June 16, 2000, pursuant to which Mr. Benson
serves as its Chief Executive Officer. Under the agreement, Mr. Benson is
entitled to a minimum base salary and participation in the New England Financial
annual and long-term incentive plans described above. The agreement also
provides Mr. Benson with an enhanced retirement benefit of $400,000 vesting in
equal annual installments over ten years and payable at age 62 as a 20-year
continuous and certain annuity. At December 31, 1999, Mr. Benson had vested as
to 20% of this benefit, or $80,000 per annum.
In the event that Mr. Benson's employment is terminated by New England Life
Insurance Company "without cause" or by Mr. Benson for "good reason" (as each
such term is defined in the agreement), Mr. Benson will receive severance
benefits equal to two times the sum of his annual base salary and his target
annual bonus for the year of termination, as well as the earned and unpaid
salary and the award payable for any long-term incentive period then in effect
and an annual bonus for the year of termination, in each case pro-rated to the
date of his termination. In addition, the enhanced retirement benefit will
retroactively vest at double the above rate. Except in the event that Mr. Benson
terminates his employment voluntarily without good reason or his employment is
terminated for cause, he and his spouse will be eligible to receive the same
retiree medical benefits generally made available to MetLife executives, except
that any service requirement to obtain such benefits will be waived and such
benefits will be secondary in all circumstances to any other coverage that Mr.
Benson or his spouse may be eligible to receive.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Helene L. Kaplan, a director of MetLife, Inc. and Metropolitan Life
Insurance Company and the chairman of the Nominating and Compensation Committee
of Metropolitan Life Insurance Company in 1999, is of counsel to Skadden, Arps,
Slate, Meagher & Flom LLP. Skadden, Arps, Slate, Meagher & Flom LLP has in the
past performed, and continues to perform, legal services for Metropolitan Life
Insurance Company and its affiliates.
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OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of MetLife, Inc.'s common stock as of the effective date of the plan
of reorganization by:
- each person who we believe will own beneficially more than 5% of the
outstanding shares of MetLife, Inc.'s common stock;
- each director and each Named Executive Officer; and
- all of our directors and Named Executive Officers as a group.
The number of shares of common stock beneficially owned by each director and
executive officer is based upon an estimate of the number of shares each
director and Named Executive Officer and certain persons and entities affiliated
with each director and Named Executive Officer will receive as eligible
policyholders pursuant to the plan of reorganization. The plan of reorganization
provides that for the first five years after the plan effective date, officers,
directors and employees of Metropolitan Life Insurance Company, MetLife, Inc.
and their affiliates, including their family members and their spouses, may not
acquire common stock in any manner except through the following acquisitions:
- officers, directors and employees who are eligible policyholders may
receive common stock (to be held in the trust) in exchange for their
policyholders' membership interests under the plan of reorganization;
- officers and directors and their spouses and family members may purchase
common stock through the purchase and sale program (if eligible) or in
open market purchases through a broker or dealer registered with the
Securities and Exchange Commission beginning two years after the plan
effective date;
- other employees and their spouses and family members may purchase common
stock through the purchase and sale program (if eligible) or in open
market purchases through a registered broker or dealer on or after the
plan effective date; and
- subject to certain limitations as to both the amount and timing of the
acquisition of stock, officers, directors, employees and insurance agents
may acquire common stock (or interests in common stock) under one or more
of the MetLife, Inc. 2000 Stock Incentive Plan, the MetLife, Inc. 2000
Directors Stock Plan and specified other savings and investment plans,
incentive compensation plans and deferred compensation plans.
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See "Management -- Management Compensation -- MetLife, Inc. 2000 Stock
Incentive Plan" and "Management -- Information about the Board of Directors of
MetLife, Inc. -- Compensation of Directors". No person will own more than 5% of
the outstanding shares of common stock, other than the MetLife Policyholder
Trust, as a result of the shares distributed pursuant to the plan of
reorganization. Except as noted below, each holder listed below will have sole
investment and voting power with respect to the shares beneficially owned by the
holder. The number of shares of common stock owned by the trust is based on our
preliminary calculation of the allocation of consideration to be distributed
under the plan of reorganization and assumptions described under "Pro Forma
Consolidated Financial Information".
<TABLE>
<CAPTION>
NUMBER OF SHARES
TO BE
NAME BENEFICIALLY OWNED
- ---- ------------------
<S> <C>
MetLife Policyholder Trust.................................. (1)
Robert H. Benmosche......................................... *
Curtis H. Barnette.......................................... *
Gerald Clark................................................ *
Joan Ganz Cooney............................................ *
Burton A. Dole, Jr. ........................................ *
James R. Houghton........................................... *
Harry P. Kamen.............................................. *
Helene L. Kaplan............................................ *
Charles M. Leighton......................................... *
Allen E. Murray............................................. *
Stewart G. Nagler........................................... *
John J. Phelan, Jr. ........................................ *
Hugh B. Price............................................... *
Robert G. Schwartz.......................................... *
Ruth J. Simmons............................................. *
William C. Steere, Jr....................................... *
Gary A. Beller.............................................. *
James M. Benson............................................. *
C. Robert Henrikson......................................... *
Catherine A. Rein........................................... *
William J. Toppeta.......................................... *
John H. Tweedie............................................. *
Lisa M. Weber............................................... *
Judy E. Weiss............................................... *
Board of directors of MetLife, Inc., but not in each
director's individual capacity............................ 493,476,118(1)
All directors and Named Executive Officers as a group....... * (2)
</TABLE>
- ---------------
* Number of shares represents less than one percent of the number of shares of
common stock expected to be outstanding on the effective date of the plan.
(1) The board of directors of MetLife, Inc., but not in each director's
individual capacity, is deemed to beneficially own the shares of common
stock held by the MetLife Policyholder Trust because the board will direct
the voting of these shares on certain matters submitted to a vote of
stockholders. See "The Demutualization -- Establishment and Operation of the
MetLife Policyholder Trust". The amount shown does not include shares
beneficially owned by a director in the director's individual capacity.
(2) Does not include shares of common stock held by the MetLife Policyholder
Trust beneficially owned by the board of directors, other than in each
director's individual capacity.
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COMMON STOCK ELIGIBLE FOR FUTURE SALE
The MetLife Policyholder Trust will hold 493,476,118 shares of common stock
on behalf of the approximately nine million eligible policyholders that we
estimate will become beneficiaries of the trust in the demutualization. The
trust provides that a trust beneficiary may sell the beneficiary's allocated
shares of MetLife, Inc.'s common stock through the purchase and sale program,
subject to certain limitations. Sales may be made at any time beginning on the
later of (1) termination of any stabilization arrangements and trading
restrictions in connection with the initial public offering or (2) the closing
of all underwriters' over-allotment options which have been exercised and the
expiration of all unexercised options. We expect that these sales may begin
within 30 days after the effective date of the plan of reorganization. In
addition, beginning one year after that effective date, trust beneficiaries may
also withdraw all (but not less than all) of their allocated shares of MetLife,
Inc.'s common stock from the trust and hold or dispose of their shares. Shares
withdrawn from the trust will be issued in book-entry form as uncertificated
shares, to the extent permitted by applicable law, unless a trust beneficiary
requests a certificate for the shares. See "The Demutualization -- Establishment
and Operation of the MetLife Policyholder Trust" for a description of the
purchase and sale program and its limitations. Counsel has advised us that those
beneficiaries who are not "affiliates" of MetLife, Inc. within the meaning of
Rule 144 under the Securities Act of 1933, as amended, may resell their shares
in the purchase and sale program or otherwise without registration under that
Securities Act and without compliance with the time, volume, manner of sale and
other limitations set forth in Rule 144. Substantially all of the shares of
MetLife, Inc.'s common stock allocated in the demutualization to policyholders
that will be beneficiaries of the trust will be allocated to non-affiliates of
MetLife, Inc. Accordingly, most trust beneficiaries may freely transfer such
shares, without limitations, through the purchase and sale program. In addition
to the shares issued in the demutualization, the shares of common stock sold in
the initial public offering and the shares issued upon settlement of the units
will be freely transferable without restriction in the public market, except to
the extent that those shares are acquired by affiliates of MetLife, Inc. and are
therefore subject to restrictions under Rule 144.
Banco Santander Central Hispano, S.A. and Credit Suisse Group have agreed
that they or their respective affiliates will purchase from us, at a price per
share equal to the initial public offering price, in the aggregate not less than
14,900,000 shares nor more than 73,000,000 shares of our common stock in private
placements that will close concurrently with the initial public offering and the
offering of equity security units described below. We will determine at the time
of the pricing of the initial public offering whether to sell any shares to
these purchasers in excess of the minimum amount. Any shares in excess of the
minimum amount that we determine not to sell to these investors may increase the
number of shares available for sale to the general public under this prospectus.
The maximum number of shares that each investor, individually, and the
investors, in the aggregate, could be obligated to purchase in the private
placements represents approximately 4.9% and 9.8%, respectively, of the total
number of shares of our common stock to be outstanding upon consummation of the
initial public offering and the private placements. Each of these purchasers has
entered into an agreement with us that provides that any shares purchased by it
will be restricted, subject to certain limited exceptions, from sale or transfer
for a period of one year after the initial public offering, except for sales to
affiliates or pursuant to a tender or exchange offer recommended by our board of
directors. In addition, each purchaser has agreed that it will not, without our
consent, increase its ownership of voting securities above 4.9% of the
outstanding shares (or 5.0% with the New York Superintendent of Insurance's
approval), except for any increase resulting from transactions in the ordinary
course of the business of purchaser as underwriter, broker/dealer, investment
manager or investment adviser or from ordinary trading activities, unless such
transactions were made with the purpose of changing or influencing the control
of MetLife, seek to obtain board representation, solicit proxies in opposition
to management or take certain other actions for five years. Although these
investors will receive common stock which has not been registered under the
Securities Act, they
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will also receive registration rights with respect to such stock, which rights
are not exercisable until one year after the closing of the initial public
offering. Pursuant to these registration rights, the purchasers will be able to
have their shares of common stock registered for resale under the Securities
Act, beginning after the first anniversary of the closing, on not more than one
occasion for each purchaser each year, or not more than five occasions for each
purchaser in total (known as a "demand" registration right). In addition, we
have agreed to use our reasonable efforts to register the shares for resale on a
shelf registration statement on Form S-3 as soon as practicable after the first
anniversary of the closing. If the shares are registered on a Form S-3, each
purchaser will be allowed to make not more than two offerings under the
registration statement each year, subject to a minimum offering size of
$50,000,000 per offering, although underwritten offerings will be subject to the
limitations on the number of demand registrations described above. The
purchasers will also be able to participate, subject to specified limitations,
in registrations effected by us for our own account or others.
Sales of substantial amounts of MetLife, Inc. common stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices for our common stock.
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DESCRIPTION OF THE EQUITY SECURITY UNITS
THE UNITS
Concurrently with the closings of the initial public offering and the
planned private placements, we and MetLife Capital Trust I, a Delaware statutory
business trust wholly-owned by us, are selling 20,000,000 % equity security
units for a total gross offering of $1,000 million, plus up to an additional
$150 million if the underwriters' options to purchase additional units are
exercised in full. Each unit will initially consist of and represent:
- a purchase contract under which the holder agrees to purchase, for $50,
shares of our common stock on May 15, 2003. The number of shares the
holder will receive will be determined by the settlement rate described
below, based on the average trading price of our common stock at that
time; and
- beneficial ownership of a capital security of MetLife Capital Trust I,
with a stated liquidation amount of $50. The capital security will
initially be pledged to secure the holder's obligations under the
purchase contract.
THE CAPITAL SECURITIES
The capital securities, and the common securities issued to MetLife, Inc.,
represent undivided beneficial ownership interests in the assets of MetLife
Capital Trust I. These assets consist solely of debentures issued by us to the
trust. The debentures will have an interest rate and principal amount that are
the same as the distribution rate and stated liquidation amount of the capital
securities and the common securities.
Distributions on the capital securities will accrue from the date the
capital securities are issued, and, subject to the distribution deferral
provisions described below, they will be paid quarterly in arrears on each
February 15, May 15, August 15 and November 15, commencing August 15, 2000. The
initial annual distribution rate on the capital securities will be %. The
interest rate on the debentures, and therefore the distribution rate on the
capital securities, will be reset for the quarterly payments payable on and
after May 15, 2003 to the rate, determined by the reset agent, that will be
sufficient to cause the then current aggregate market value of the capital
securities to be equal to 100.5% of the remarketing value. If the reset rate
cannot be established prior to February 15, 2003, the distribution rate will not
be reset and will continue to be the initial annual rate of % until a reset
rate can be established on a later remarketing date.
We can, on one or more occasions, defer the interest payments due on the
debentures for up to five years, unless an event of default under the debentures
has occurred and is continuing. However, we cannot defer interest payments
beyond the maturity date of the debentures, which is May 15, 2005. If we defer
interest payments on the debentures, the trust will also defer distributions on
the capital securities. During any deferral period, distributions will continue
to accumulate quarterly at the initial annual rate of % of the stated
liquidation amount of $50 per capital security through and including February
15, 2003, and at the reset rate on the capital securities after that date. Also,
the deferred distributions will themselves accumulate additional distributions
at the deferred rate, to the extent permitted by law. During any period in which
we defer interest payments on the debentures, in general we cannot:
- declare or pay any dividend or distribution on our capital stock;
- redeem, purchase, acquire or make a liquidation payment on any of our
capital stock;
- make any interest, principal or premium payment on, or repurchase or
redeem, any of our debt securities that rank equally with or junior to
the debentures; or
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- make any payment on any guarantee of the debt securities of any of our
subsidiaries if the guarantee ranks equal or junior to the debentures.
REMARKETING
Through a remarketing, the capital securities of holders of units, other
than those electing not to participate in the remarketing, will be sold and the
proceeds used to purchase treasury securities, which will be pledged to secure
the unitholders' obligations under the purchase contracts. Cash payments
received on the pledged treasury securities will be used to satisfy the
unitholders' obligations to purchase our common stock on May 15, 2003. Unless a
holder elects not to participate in the remarketing by delivering treasury
securities to secure its obligations under the purchase contract, the capital
securities will be remarketed on the remarketing date, which is the third
business day immediately preceding February 15, 2003.
SETTLEMENT
The settlement rate is the number of newly issued shares of our common
stock that we are obligated to sell and the holders are obligated to buy upon
settlement of a purchase contract on May 15, 2003. The settlement rate for each
purchase contract will be as follows, subject to adjustment under specified
circumstances:
- if the applicable market value of our common stock is equal to or greater
than $ , the settlement rate will be shares of our common
stock per purchase contract;
- if the applicable market value of our common stock is less than $
but greater than $ , the settlement rate will be equal to $50
divided by the applicable market value of our common stock per purchase
contract; and
- if the applicable market value of our common stock is less than or equal
to $ , the settlement rate will be shares of our common stock
per purchase contract.
In addition to the remarketing, the holder's obligations under the purchase
contract may be satisfied:
- if the holder has elected not to participate in the remarketing by
delivering treasury securities to secure its obligations under the
purchase contract, and in certain other circumstances, through the
application of the cash payments received on the treasury securities;
- through the early delivery of cash to the purchase contract agent in the
manner described in the purchase contracts; and
- if we are involved in a merger or consolidation prior to the stock
purchase date in which at least 30% of the consideration for our common
stock consists of cash or cash equivalents, through an early settlement
as described in the purchase contracts.
In addition, the purchase contracts, our related rights and obligations and
those of the holders of the units, including their obligations to purchase
common stock, will automatically terminate upon the occurrence of particular
events of our bankruptcy, insolvency or reorganization. Upon termination, the
capital securities or treasury securities pledged to secure the holder's
obligations under the purchase contract will be released and distributed to the
holder.
MATURITY
The capital securities do not have a stated maturity. However, the
debentures issued by us to the trust will mature on May 15, 2005. Upon
redemption of the debentures on that date, the trust will redeem the capital
securities at their stated liquidation amounts plus any accrued and unpaid
distributions.
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We, as the holder of all the common securities of the trust, have the right
at any time to dissolve the trust. If we dissolve the trust, holders of capital
securities will receive, after satisfaction of liabilities of creditors of the
trust, debentures having a principal amount equal to the stated liquidation
amount of the capital securities they hold. In such event, the capital
securities will no longer be outstanding, and a normal unit that had included
capital securities would thereafter consist of a debenture with a principal
amount equal to the stated amount of the normal unit and the related purchase
contract.
GUARANTEE
MetLife, Inc. will irrevocably guarantee, on a senior and unsecured basis,
the payment in full of the following:
- distributions on the capital securities to the extent of available trust
funds; and
- the stated liquidation amount of the capital securities to the extent of
available trust funds.
The guarantee will be unsecured and will rank equally in right of payment
to all of our other senior unsecured debt.
LISTING
The units have been approved for listing on the New York Stock Exchange
under the symbol "MIU", subject to official notice of issuance.
ACCOUNTING TREATMENT
The financial statements of MetLife Capital Trust I will be consolidated in
our financial statements, with the capital securities shown on our consolidated
balance sheet under the caption "Company-obligated mandatorily redeemable
securities of subsidiary trust holding solely debentures of Parent". The
proceeds from the units will be allocated to the underlying purchase contracts
and capital securities based on their relative fair values at the offering date.
The forward contracts will be reported in additional paid-in capital and
subsequent changes in fair value will not be recognized. The notes to our
consolidated financial statements will disclose that the sole asset of the trust
will be the debentures. Distributions on the capital securities will be reported
as a charge to minority interest in our consolidated statements of income,
whether paid or accrued.
The purchase contracts are forward transactions in our common stock. Upon
settlement of a purchase contract, we will receive $50 on that purchase contract
and will issue the requisite number of shares of MetLife, Inc. common stock. The
$50 we receive will be credited to shareholders' equity and allocated between
the common stock and additional paid-in-capital accounts.
Before the issuance of shares of our common stock upon settlement of the
purchase contracts, the equity security units will be reflected in our diluted
earnings per share calculations using the treasury stock method. Under this
method, the number of shares of our common stock used in calculating earnings
per share for any period is deemed to be increased by the excess, if any, of the
number of shares issuable upon settlement of the purchase contracts over the
number of shares that could be purchased by us in the market, at the average
market price during that period, using the proceeds receivable upon settlement.
Consequently, we anticipate that there will be no dilutive effect on our
earnings per share except during periods when the average market price of our
common stock is above $ per share.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of MetLife, Inc. consists of 3,000,000,000
shares of common stock and 200,000,000 shares of preferred stock.
COMMON STOCK
Holders of our common stock are entitled to receive such dividends as may
from time to time be declared by our board of directors out of funds legally
available therefor. See "Dividend Policy". Holders of our common stock are
entitled to one vote per share on all matters on which the holders of common
stock are entitled to vote and do not have any cumulative voting rights. Holders
of our common stock have no preemptive, conversion, redemption or sinking fund
rights. In the event of a liquidation, dissolution or winding up of MetLife,
Inc., holders of our common stock are entitled to share equally and ratably in
our assets, if any, remaining after the payment of all liabilities of MetLife,
Inc. and the liquidation preference of any outstanding class or series of
preferred stock. The outstanding shares of our common stock are, and the shares
of common stock issued by us in the demutualization, the initial public offering
and the private placements and upon settlement of the purchase contracts
comprising the equity security units, when issued, will be fully paid and
nonassessable. The rights and privileges of holders of our common stock are
subject to any series of preferred stock that we may issue in the future, as
described below.
PREFERRED STOCK
Our board of directors has the authority to issue preferred stock in one or
more series and to fix the number of shares constituting any such series and the
voting rights, designations, powers, preferences and qualifications, limitations
and restrictions of the shares constituting any series, without any further vote
or action by stockholders. The issuance of preferred stock by our board of
directors could adversely affect the rights of holders of common stock.
We have authorized 10,000,000 shares of Series A Junior Participating
Preferred Stock for issuance in connection with our stockholder rights plan. See
"-- Stockholder Rights Plan".
CERTAIN PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BY-LAWS AND IN
DELAWARE AND NEW YORK LAW
A number of provisions of our certificate of incorporation and by-laws deal
with matters of corporate governance and rights of stockholders. The following
discussion is a general summary of selected provisions of our certificate of
incorporation and by-laws and regulatory provisions that might be deemed to have
a potential "anti-takeover" effect. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by our board of
directors but which individual stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the incumbent board of
directors or management more difficult. Some provisions of the Delaware General
Corporation Law and the New York Insurance Law may also have an antitakeover
effect. The following description of selected provisions of our certificate of
incorporation and by-laws and selected provisions of the Delaware General
Corporation Law and the New York Insurance Law is necessarily general and
reference should be made in each case to our certificate of incorporation and
by-laws, which are filed as exhibits to our registration statement of which this
prospectus forms a part, and to the provisions of those laws. See "Additional
Information" for information on where to obtain a copy of our certificate of
incorporation and by-laws.
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UNISSUED SHARES OF CAPITAL STOCK
COMMON STOCK. Based upon the assumptions described under "Pro Forma
Consolidated Financial Information", we currently plan to issue an estimated
179,000,000 shares of our authorized common stock in the initial public
offering, 73,000,000 shares of our common stock in the planned private
placements and 493,476,118 shares of common stock in the demutualization. This
information does not include shares of our common stock issuable upon the
settlement of the purchase contracts comprising equity security units offered
concurrently with this offering. The remaining shares of authorized and unissued
common stock will be available for future issuance without additional
stockholder approval. While the authorized but unissued shares are not designed
to deter or prevent a change of control, under some circumstances we could use
the authorized but unissued shares to create voting impediments or to frustrate
persons seeking to effect a takeover or otherwise gain control by, for example,
issuing those shares in private placements to purchasers who might side with our
board of directors in opposing a hostile takeover bid.
PREFERRED STOCK. Our board of directors has the authority to issue
preferred stock in one or more series and to fix the number of shares
constituting any such series and the designations, powers, preferences,
limitations and relative rights, including dividend rights, dividend rate,
voting rights, terms of redemption, redemption price or prices, conversion
rights and liquidation preferences of the shares constituting any series,
without any further vote or action by stockholders. The existence of authorized
but unissued preferred stock could reduce our attractiveness as a target for an
unsolicited takeover bid since we could, for example, issue shares of the
preferred stock to parties who might oppose such a takeover bid or issue shares
of the preferred stock containing terms the potential acquiror may find
unattractive. This may have the effect of delaying or preventing a change of
control, may discourage bids for our common stock at a premium over the market
price of our common stock, and may adversely affect the market price of, and the
voting and other rights of the holders of, our common stock. See "-- Stockholder
Rights Plan" for a description of our Series A Junior Participating Preferred
Stock.
CLASSIFIED BOARD OF DIRECTORS AND REMOVAL OF DIRECTORS
Pursuant to our certificate of incorporation, the directors are divided
into three classes, as nearly equal in number as possible, with each class
having a term of three years. The classes serve staggered terms, such that the
term of one class of directors expires each year. Any effort to obtain control
of our board of directors by causing the election of a majority of the board may
require more time than would be required without a staggered election structure.
Our certificate of incorporation also provides that, subject to the rights of
the holders of any class of preferred stock, directors may be removed only for
cause at a meeting of stockholders by a vote of a majority of the shares then
entitled to vote. This provision may have the effect of slowing or impeding a
change in membership of our board of directors that would effect a change of
control.
EXERCISE OF DUTIES BY BOARD OF DIRECTORS
Our certificate of incorporation provides that while the MetLife
Policyholder Trust is in existence, each MetLife, Inc. director is required, in
exercising his or her duties as a director, to take the interests of the trust
beneficiaries into account as if they were holders of the shares of common stock
held in the trust, except to the extent that any such director determines, based
on advice of counsel, that to do so would violate his or her duties as a
director under Delaware law.
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RESTRICTION ON MAXIMUM NUMBER OF DIRECTORS AND FILLING OF VACANCIES ON OUR
BOARD OF DIRECTORS
Pursuant to our by-laws and subject to the rights of the holders of any
class of preferred stock, the number of directors may be fixed and increased or
decreased from time to time by resolution of the board of directors, but the
board of directors will at no time consist of fewer than three directors.
Subject to the rights of the holders of any class of preferred stock,
stockholders can only remove a director for cause by a vote of a majority of the
shares entitled to vote, in which case the vacancy caused by such removal may be
filled at such meeting by the stockholders entitled to vote for the election of
the director so removed. Any vacancy on the board of directors, including a
vacancy resulting from an increase in the number of directors or resulting from
a removal for cause where the stockholders have not filled the vacancy, subject
to the rights of the holders of any class of preferred stock, may be filled by a
majority of the directors then in office, although less than a quorum. If the
vacancy is not so filled, it will be filled by the stockholders at the next
annual meeting of stockholders. The stockholders are not permitted to fill
vacancies between annual meetings, except where the vacancy resulted from a
removal for cause. These provisions give incumbent directors significant
authority that may have the effect of limiting the ability of stockholders to
effect a change in management.
ADVANCE NOTICE REQUIREMENTS FOR NOMINATION OF DIRECTORS AND PRESENTATION OF
NEW BUSINESS AT MEETINGS OF STOCKHOLDERS; ACTION BY WRITTEN CONSENT
Our by-laws provide for advance notice requirements for stockholder
proposals and nominations for director. In addition, pursuant to the provisions
of both the certificate of incorporation and the by-laws, action may not be
taken by written consent of stockholders; rather, any action taken by the
stockholders must be effected at a duly called meeting. Moreover, the
stockholders do not have the power to call a special meeting. Only the chief
executive officer or the secretary pursuant to a board resolution or, under some
circumstances, the president or a director who also is an officer, may call a
special meeting. These provisions make it more procedurally difficult for a
stockholder to place a proposal or nomination on the meeting agenda and prohibit
a stockholder from taking action without a meeting, and therefore may reduce the
likelihood that a stockholder will seek to take independent action to replace
directors or with respect to other matters that are not supported by management
for stockholder vote.
LIMITATIONS ON DIRECTOR LIABILITY
Our certificate of incorporation contains a provision that is designed to
limit the directors' liability to the extent permitted by the Delaware General
Corporation Law and any amendments to that law. Specifically, directors will not
be held liable to MetLife, Inc. or our stockholders for an act or omission in
their capacity as a director, except for liability as a result of:
- a breach of the duty of loyalty to MetLife, Inc. or our stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- payment of an improper dividend or improper repurchase of our stock under
Section 174 of the Delaware General Corporation Law; or
- actions or omissions pursuant to which the director received an improper
personal benefit.
The principal effect of the limitation on liability provision is that a
stockholder is unable to prosecute an action for monetary damages against a
director of MetLife, Inc. unless the stockholder can demonstrate one of the
specified bases for liability. This provision, however, does not eliminate or
limit director liability arising in connection with causes of action brought
under the federal securities laws. Our certificate of incorporation also does
not eliminate the directors' duty of care. The inclusion of the limitation on
liability provision in the certificate may,
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however, discourage or deter stockholders or management from bringing a lawsuit
against directors for a breach of their fiduciary duties, even though such an
action, if successful, might otherwise have benefited MetLife, Inc. and its
stockholders. This provision should not affect the availability of equitable
remedies such as injunction or rescission based upon a director's breach of the
duty of care.
Our by-laws also provide that we indemnify our directors and officers to
the fullest extent permitted by Delaware law. We are required to indemnify our
directors and officers for all judgments, fines, settlements, legal fees and
other expenses reasonably incurred in connection with pending or threatened
legal proceedings because of the director's or officer's position with us or
another entity, including Metropolitan Life Insurance Company, that the director
or officer serves at our request, subject to certain conditions, and to advance
funds to our directors and officers to enable them to defend against such
proceedings. To receive indemnification, the director or officer must succeed in
the legal proceeding or act in good faith and in a manner reasonably believed to
be in or not opposed to the best interests of MetLife, Inc. and, with respect to
any criminal action or proceeding, in a manner he or she reasonably believed to
be lawful.
SUPERMAJORITY VOTING REQUIREMENT FOR AMENDMENT OF CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION AND BY-LAWS
Some of the provisions of our certificate of incorporation, including those
that authorize the board of directors to create stockholder rights plans, that
set forth the duties, election and exculpation from liability of directors and
that prohibit stockholders from actions by written consent, may not be amended,
altered, changed or repealed unless the amendment is approved by the vote of
holders of 75% of the then outstanding shares entitled to vote at an election of
directors. This requirement exceeds the majority vote of the outstanding stock
that would otherwise be required by the Delaware General Corporation Law for the
repeal or amendment of such provisions of the certificate of incorporation. Our
by-laws may be amended, altered or repealed by the board of directors or by the
vote of holders of 75% of the then outstanding shares entitled to vote in the
election of directors. These provisions make it more difficult for any person to
remove or amend any provisions that have an antitakeover effect.
BUSINESS COMBINATION STATUTE
In addition, as a Delaware corporation, MetLife, Inc. is subject to Section
203 of the Delaware General Corporation Law, unless it elects in its certificate
of incorporation not to be governed by the provisions of Section 203. We have
not made that election. Section 203 can affect the ability of an "interested
stockholder" of MetLife, Inc. to engage in certain business combinations,
including mergers, consolidations or acquisitions of additional shares of
MetLife, Inc., for a period of three years following the time that the
stockholder becomes an "interested stockholder". An "interested stockholder" is
defined to mean any person owning directly or indirectly 15% or more of the
outstanding voting stock of a corporation. The provisions of Section 203 are not
applicable in some circumstances, including those in which (1) the business
combination or transaction which results in the stockholder becoming an
"interested stockholder" is approved by the corporation's board of directors
prior to the time the stockholder becomes an "interested stockholder" or (2) the
"interested stockholder", upon consummation of such transaction, owns at least
85% of the voting stock of the corporation outstanding prior to such
transaction.
RESTRICTIONS ON ACQUISITIONS OF SECURITIES
Section 7312 of the New York Insurance Law provides that, for a period of
five years after the distribution of consideration pursuant to the plan of
reorganization is completed, no person may directly or indirectly offer to
acquire or acquire in any manner the beneficial ownership
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(defined as the power to vote or dispose of, or to direct the voting or
disposition of, a security) of 5% or more of any class of voting security (which
term includes our common stock) of MetLife, Inc. without the prior approval of
the New York Superintendent of Insurance. Pursuant to Section 7312, voting
securities acquired in excess of the 5% threshold without such prior approval
will be deemed non-voting.
The insurance laws and regulations of New York, the jurisdiction in which
our principal insurance subsidiary, Metropolitan Life Insurance Company, is
organized, may delay or impede a business combination involving us. In addition
to the limitations described in the immediately preceding paragraph, the New
York Insurance Law prohibits any person from acquiring control of MetLife, Inc.,
and thus indirect control of Metropolitan Life Insurance Company, without the
prior approval of the New York Superintendent of Insurance. That law presumes
that control exists where any person, directly or indirectly, owns, controls,
holds the power to vote or holds proxies representing 10% or more of our
outstanding voting stock, unless the New York Superintendent, upon application,
determines otherwise. Even persons who do not acquire beneficial ownership of
more than 10% of the outstanding shares of MetLife, Inc.'s common stock may be
deemed to have acquired such control, if the New York Superintendent determines
that such persons, directly or indirectly, exercise a controlling influence over
our management and policies. Therefore, any person seeking to acquire a
controlling interest in MetLife, Inc. would face regulatory obstacles which may
delay, deter or prevent an acquisition that stockholders might consider in their
best interests.
The insurance holding company law and other insurance laws of many states
also regulate changes of control (generally presumed upon acquisitions of 10% or
more of voting securities) of insurance holding companies, such as MetLife, Inc.
STOCKHOLDER RIGHTS PLAN
Our board of directors has adopted a stockholder rights plan under which
each outstanding share of our common stock issued between the date on which
MetLife, Inc. enters into the underwriting agreement for the initial public
offering and the distribution date (as described below) will be coupled with a
stockholder right. Initially, the stockholder rights will be attached to the
certificates representing outstanding shares of common stock, and no separate
rights certificates will be distributed. Each right will entitle the holder to
purchase one one-hundredth of a share of our Series A Junior Participating
Preferred Stock. Each one one-hundredth of a share of Series A Junior
Participating Preferred Stock will have economic and voting terms equivalent to
one share of MetLife, Inc.'s common stock. Until it is exercised, the right
itself will not entitle the holder thereof to any rights as a stockholder,
including the right to receive dividends or to vote at stockholder meetings. The
description and terms of the rights are set forth in a rights agreement ("Rights
Agreement") to be entered into between MetLife, Inc. and ChaseMellon Shareholder
Services, L.L.C., as rights agent. Although the material provisions of the
Rights Agreement have been accurately summarized, the statements below
concerning the Rights Agreement are not necessarily complete, and in each
instance reference is made to the form of Rights Agreement itself, a copy of
which has been filed as an exhibit to the Registration Statement of which this
prospectus forms a part. Each statement is qualified in its entirety by such
reference.
Stockholder rights are not exercisable until the distribution date, and
will expire at the close of business on the tenth anniversary of the date on
which the initial public offering price is determined, unless earlier redeemed
or exchanged by us. A distribution date would occur upon the earlier of:
- the tenth day after the first public announcement or communication to us
that a person or group of affiliated or associated persons (referred to
as an acquiring person) has
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acquired beneficial ownership of 10% or more of our outstanding common
stock (the date of such announcement or communication is referred to as
the stock acquisition time); or
- the tenth business day after the commencement or announcement of the
intention to commence a tender offer or exchange offer that would result
in a person or group becoming an acquiring person.
If any person becomes an acquiring person, each holder of a stockholder right
will be entitled to exercise the right and receive, instead of Series A Junior
Participating Preferred Stock, common stock (or, in certain circumstances, cash,
a reduction in purchase price, property or other securities of MetLife, Inc.)
having a value equal to two times the purchase price of the stockholder right.
All stockholder rights that are beneficially owned by an acquiring person or its
transferee will become null and void.
If at any time after a public announcement has been made or MetLife, Inc.
has received notice that a person has become an acquiring person, (1) MetLife,
Inc. is acquired in a merger or other business combination or (2) 50% or more of
MetLife, Inc.'s assets, cash flow or earning power is sold or transferred, each
holder of a stockholder right (except rights which previously have been voided
as set forth above) will have the right to receive, upon exercise, common stock
of the acquiring company having a value equal to two times the purchase price of
the right.
The purchase price payable, the number of one one-hundredths of a share of
Series A Junior Participating Preferred Stock or other securities or property
issuable upon exercise of rights and the number of rights outstanding, are
subject to adjustment from time to time to prevent dilution. With certain
exceptions, no adjustment in the purchase price or the number of shares of
Series A Junior Participating Preferred Stock issuable upon exercise of a
stockholder right will be required until the cumulative adjustment would require
an increase or decrease of at least one percent in the purchase price or number
of shares for which a right is exercisable.
At any time until the earlier of (1) the stock acquisition time or (2) the
final expiration date of the Rights Agreement, we may redeem all the stockholder
rights at a price of $0.01 per right. At any time after a person has become an
acquiring person and prior to the acquisition by such person of 50% or more of
the outstanding shares of our common stock, we may exchange the stockholder
rights, in whole or in part, at an exchange ratio of one share of common stock,
or one one-hundredth of a share of Series A Junior Participating Preferred Stock
(or of a share of a class or series of preferred stock having equivalent rights,
preferences and privileges), per right.
The stockholder rights plan is designed to protect stockholders in the
event of unsolicited offers to acquire MetLife, Inc. and other coercive takeover
tactics which, in the opinion of its board of directors, could impair its
ability to represent stockholder interests. The provisions of the stockholder
rights plan may render an unsolicited takeover more difficult or less likely to
occur or may prevent such a takeover, even though such takeover may offer our
stockholders the opportunity to sell their stock at a price above the prevailing
market rate and may be favored by a majority of our stockholders.
METLIFE POLICYHOLDER TRUST
Under the plan of reorganization, we will establish the MetLife
Policyholder Trust to hold the shares of common stock allocated to eligible
policyholders under the plan. 493,476,118 shares of common stock, or 66.2% of
the total number of shares expected to be outstanding based upon an initial
public offering price of $14.00 per share, will be issued to the trust on the
effective date of the plan, to be held on behalf of approximately nine million
eligible policyholders. Because of the number of shares held by the trust and
the voting provisions of the trust, the trust may affect the outcome of matters
brought to a stockholder vote.
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The trustee will generally vote all of the shares of common stock held in
the trust in accordance with the recommendations given by our board of directors
to our stockholders or, if the board gives no such recommendation, as directed
by the board, except on votes regarding certain fundamental corporate actions.
As a result of the voting provisions of the trust, our board of directors will
effectively be able to control votes on all matters submitted to a vote of
stockholders, excluding those fundamental corporate actions described below, so
long as the trust holds a substantial number of shares of our common stock.
If the vote relates to fundamental corporate actions specified in the
trust, the trustee will solicit instructions from the beneficiaries and vote all
shares held in the trust in proportion to the instructions it receives, which
would give disproportionate weight to the instructions actually given by trust
beneficiaries. These actions include:
- an election or removal of directors in which a stockholder has properly
nominated one or more candidates in opposition to a nominee or nominees
of our board of directors or a vote on a stockholder's proposal to oppose
a board nominee for director, remove a director for cause or fill a
vacancy caused by the removal of a director by stockholders, subject to
certain conditions;
- a merger or consolidation, a sale, lease or exchange of all or
substantially all of the assets, or a recapitalization or dissolution of,
MetLife, Inc., in each case requiring a vote of our stockholders under
applicable Delaware law;
- any transaction that would result in an exchange or conversion of shares
of common stock held by the trust for cash, securities or other property;
- issuances of common stock during the first year after the effective date
of the plan at a price materially less than the then prevailing market
price of our common stock, if a vote of stockholders is required to
approve the issuance under Delaware law, other than issuances in an
underwritten public offering or pursuant to an employee benefit plan;
- for the first year after the effective date of the plan, any matter that
requires a supermajority vote of stockholders under Delaware law or our
certificate of incorporation or by-laws, and any amendment to our
certificate of incorporation or by-laws that is submitted for approval to
our stockholders; and
- any proposal requiring our board of directors to amend or redeem the
rights under our stockholder rights plan, other than a proposal with
respect to which we have received advice of nationally-recognized legal
counsel to the effect that the proposal is not a proper subject for
stockholder action under Delaware law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
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UNDERWRITING
Credit Suisse First Boston Corporation, Goldman, Sachs & Co., Banc of
America Securities LLC, Donaldson, Lufkin and Jenrette Securities Corporation,
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co. Incorporated, Salomon Smith Barney Inc., Conning & Company,
Fox-Pitt, Kelton Inc., J.P. Morgan Securities Inc., Santander Investment
Securities Inc., Utendahl Capital Partners, L.P. and Warburg Dillon Read LLC are
acting as representatives for the U.S. underwriters named below, with respect to
the shares of common stock being offered in the U.S. offering.
<TABLE>
<CAPTION>
U.S. UNDERWRITERS NUMBER OF SHARES
- ----------------- ----------------
<S> <C>
Credit Suisse First Boston Corporation......................
Goldman, Sachs & Co. .......................................
Banc of America Securities LLC..............................
Donaldson, Lufkin and Jenrette Securities Corporation.......
Lehman Brothers Inc. .......................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Morgan Stanley & Co. Incorporated...........................
Salomon Smith Barney Inc. ..................................
Conning & Company...........................................
Fox-Pitt, Kelton Inc. ......................................
J.P. Morgan Securities Inc. ................................
Santander Investment Securities Inc. .......................
Utendahl Capital Partners, L.P. ............................
Warburg Dillon Read LLC.....................................
Total....................................................... 152,150,000
</TABLE>
Credit Suisse First Boston (Europe) Limited, Goldman Sachs International, Bank
of America International Limited, Donaldson, Lufkin and Jenrette International,
Lehman Brothers International (Europe), Merrill Lynch International, Morgan
Stanley & Co. International Limited, Salomon Brothers International Limited,
BSCH Bolsa, Sociedad de Valores, S.A., Credit Lyonnais Securities, Fox-Pitt,
Kelton N.V., J.P. Morgan Securities Ltd. and UBS AG, acting through its division
Warburg Dillon Read are acting as representatives for the international
underwriters named below, with respect to the shares being offered in the
international offering.
<TABLE>
<CAPTION>
INTERNATIONAL UNDERWRITERS NUMBER OF SHARES
- -------------------------- ----------------
<S> <C>
Credit Suisse First Boston (Europe) Limited.................
Goldman Sachs International.................................
Bank of America International Limited.......................
Donaldson, Lufkin and Jenrette International................
Lehman Brothers International (Europe)......................
Merrill Lynch International.................................
Morgan Stanley & Co. International Limited..................
Salomon Brothers International Limited......................
BSCH Bolsa, Sociedad de Valores, S.A. ......................
Credit Lyonnais Securities..................................
Fox-Pitt, Kelton N.V. ......................................
J.P. Morgan Securities Ltd. ................................
UBS AG, acting through its division, Warburg Dillon Read....
Total....................................................... 26,850,000
</TABLE>
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Each of the U.S. and international underwriters have agreed to purchase the
number of shares of common stock set forth above opposite its name. Their
obligations are subject to certain conditions to be contained in a U.S.
underwriting agreement dated , 2000, and an international underwriting
agreement dated , 2000.
The terms and conditions of both the U.S. offering and the international
offering are the same and the sale of shares of common stock in both offerings
are conditioned on each other. Each of the offerings is conditioned on the
consummation of the demutualization, the consummation of the offering of the
equity security units and the consummation of the private placements. References
in this prospectus to the "underwriters" refer to both the U.S. underwriters and
the international underwriters.
If the U.S. underwriters sell more shares than the total number set forth
in the applicable table above, the U.S. underwriters have an option to buy up to
an additional 22,822,500 shares of common stock from MetLife to cover such
sales. They may exercise that option for 30 days following the date of this
offering. If any shares are purchased pursuant to this option, the U.S.
underwriters will severally purchase shares in approximately the same proportion
as set forth in the applicable table above. We have granted the international
underwriters a similar option to purchase up to an additional 4,027,500 shares
of common stock.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts paid by
us............................. $ $ $ $
Expenses payable by us........... $ $ $ $
</TABLE>
Shares sold by the underwriters will be offered to the public at the
initial public offering price set forth on the cover page of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. After the initial public offering, the
representatives of the underwriters may change the offering price and the other
selling terms.
The underwriters for both of the offerings have entered into an agreement
in which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares of common stock as a part of the
distribution of the shares. The underwriters also have agreed that they may sell
shares of common stock among each of the underwriting groups.
In this respect, each U.S. underwriter has agreed that, as part of its
distribution of the common stock and subject to permitted exceptions, it has not
offered or sold, and will not offer or sell, directly or indirectly, any shares
of common stock or distribute any prospectus relating to the common stock to any
person outside the United States and Canada or to any other dealer who does not
so agree. Each international underwriter has agreed that, as part of its
distribution of the common stock and subject to permitted exceptions, it has not
offered, and will not offer or sell, directly or indirectly, any shares of
common stock or distribute any prospectus relating to the common stock in the
United States or Canada or to any other dealer who does not so agree. The
foregoing limitations do not apply to stabilization transactions or to
transactions between the U.S. and international underwriters. As used herein,
"United States" means the United States of America (including the States and the
District of Columbia), its territories, possessions and other areas subject to
its jurisdiction, "Canada" means Canada, its provinces, territories, possessions
and other areas subject to its jurisdiction, and an offer or sale shall be in
the United States or Canada if it is made to (i) any individual resident in the
United States or Canada or (ii) any corporation, partnership, pension,
profit-sharing or other trust or entity (including any such entity
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acting as an investment adviser with discretionary authority) whose office most
directly involved with the purchase is located in the United States or Canada.
We agreed that during the period beginning from , 2000 and
continuing to and including the date 180 days after the date of this prospectus,
we will not offer, sell, contract to sell or otherwise dispose of, except as
provided under the U.S. and international underwriting agreements and except for
the issuance of common stock pursuant to the private placements and to the
MetLife Policyholder Trust pursuant to the plan of reorganization, any common
stock or any of our securities that are substantially similar to our common
stock, including but not limited to any securities that are convertible into or
exchangeable for, or represent the right to receive, shares of our common stock
or any such substantially similar securities (other than the equity security
units to be offered and sold concurrently with the initial public offering and
other than pursuant to employee stock option plans existing on the date of the
U.S. and international underwriting agreements), without the prior written
consent of Credit Suisse First Boston Corporation and Goldman, Sachs & Co. In
addition, Banco Santander Central Hispano, S.A. and Credit Suisse Group have
agreed in principle with us that they will not, without our prior written
consent, sell the shares of our common stock that they or their affiliates
purchase in the private placements for one year after the initial public
offering, except for sales to affiliates or pursuant to a tender or exchange
offer recommended by our boards of directors.
Prior to the offerings, there has been no public market for our common
stock. The initial public offering price will be negotiated among MetLife, Inc.,
Metropolitan Life Insurance Company and the representatives of the underwriters.
Among the factors to be considered in determining the initial public offering
price of our common stock, in addition to prevailing market conditions, will be
our historical performance, estimates of our business potential and earnings
prospects, an assessment of our management and the consideration of the above
factors in relation to market valuation of companies in related businesses. In
addition, the final terms of the offering, including the initial public offering
price, will be subject to the approval of the New York Superintendent of
Insurance.
Our common stock has been approved for listing on the New York Stock
Exchange under the symbol "MET", subject to official notice of issuance. In
order to meet the requirements for listing our common stock on the NYSE, the
underwriters have undertaken to sell lots of 100 or more shares to a minimum of
2,000 beneficial holders.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934 (the "Exchange Act").
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the underwriters to reclaim a selling concession from
a syndicate member when the common stock originally sold by such
syndicate member is purchased in a stabilizing transaction or a syndicate
covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of our common stock to be higher than it would otherwise be
in the absence of such
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transactions. These transactions may be effected on the New York Stock Exchange,
in the over-the-counter market or otherwise, and if continued, may be
discontinued at any time.
Each of the underwriters severally represents and agrees that:
- It has not offered or sold and prior to the date six months after the
date of issuance of the common stock will not offer or sell any common
stock to persons in the United Kingdom, except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses
or otherwise in circumstances which have not resulted and will not result
in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995;
- It has complied, and will comply with, all applicable provisions of the
Financial Services Act of 1986 with respect to anything done by it in
relation to the common stock in, from or otherwise involving the United
Kingdom; and
- It has only issued or passed on and will only issue and pass on in the
United Kingdom any document received by it in connection with the issue
of the common stock to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996, as amended, or is a person to whom such document
may otherwise lawfully be issued or passed on.
The underwriters may not confirm sales to discretionary accounts without
the prior written approval of the customer.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make Internet distributions on the same
basis as other allocations.
Other than the prospectus in electronic format, the information contained
on any underwriter's website and any information contained on any other website
maintained by an underwriter is not part of this prospectus or the registration
statement of which this prospectus forms a part, have not been approved or
endorsed by us or any underwriter in its capacity as an underwriter and should
not be relied upon by investors.
MetLife, Inc. and Metropolitan Life Insurance Company have agreed to
indemnify the several underwriters against liabilities under the Securities Act
of 1933, as amended, or to contribute to payments that the underwriters may be
required to make in respect thereof.
Certain of the underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment banking, financial
advisory and other related services to us and our affiliates, for which they
have received and may continue to receive customary fees and commissions. We and
the underwriters and our respective affiliates, also participate together from
time to time in investing activities. The joint-lead managing underwriters,
Credit Suisse First Boston Corporation and Goldman, Sachs & Co., are currently
acting as financial advisors to us in connection with the demutualization. In
addition, we have engaged Merrill Lynch & Co. to render a fairness opinion to
our board of directors in connection with the demutualization. In this regard,
we have agreed to indemnify each of them against certain liabilities, including
liabilities under the Securities Act. In addition, Credit Suisse First Boston
Corporation and Goldman, Sachs & Co. may, as principal or agent, assist in the
sale of shares of our common stock on behalf of trust beneficiaries who elect to
sell shares under the purchase and sale program established by the plan of
reorganization and, during the first ninety days following the plan effective
date, Credit Suisse First Boston Corporation and Goldman, Sachs & Co. jointly
have certain rights under such program to assist in sales on behalf of large
trust beneficiaries if certain volume limitations are exceeded.
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Other relationships we have with certain underwriters include the
following:
- Some of our directors are members of the boards of directors of certain
of the underwriters or their affiliates. See "Management" for a
description of these directorships.
- We own approximately 3% or less of the outstanding common stock of
certain subsidiaries of Banco Santander Central Hispano, S.A. and Credit
Suisse Group, certain of which are co-managers of the initial public
offering or the offering of the equity security units. We operate in
Spain and Portugal through joint venture arrangements with Banco
Santander Central Hispano, S.A., the indirect parent of Santander
Investment Securities Inc. and BSCH Bolsa, Sociedad de Valores, S.A.,
which are acting as co-managers in the initial public offering. One of
our officers is a member of the investment committee of Credit Suisse
First Boston International Equity Partners, L.P. We are a limited partner
of certain limited partnerships affiliated with Credit Suisse First
Boston Corporation.
- Our subsidiary Conning & Company will act as a co-manager of the initial
public offering.
- Certain of the underwriters also maintain arrangements with us relating
to the lease of office buildings.
In addition to the foregoing, Banco Santander Central Hispano, S.A. and
Credit Suisse Group have agreed in principle that they or their respective
affiliates will purchase from us, at a price per share equal to the initial
public offering price, in the aggregate not less than 14,900,000 shares, nor
more than 73,000,000 shares, of our common stock in private placements that will
close concurrently with the initial public offering and the offering of equity
security units. We will determine at the time of the pricing of the initial
public offering whether to sell any shares to these purchasers in excess of the
minimum amount. Any shares in excess of the minimum amount that we determine not
to sell to these investors may increase the number of shares available for sale
to the general public. The maximum number of shares that each investor,
individually, and the investors, in the aggregate, could be obligated to
purchase in the private placements represents approximately 4.9% and 9.8%,
respectively, of the total number of shares of our common stock to be
outstanding upon consummation of the initial public offering and the private
placements. The investors would purchase these shares from us at the initial
public offering price. We expect each of these purchasers to enter into an
agreement with us that provides that any shares purchased by it will be
restricted from sale or transfer for a period of one year after the initial
public offering, except for sales to affiliates or pursuant to a tender or
exchange offer recommended by our board of directors, and that it will not,
without our consent, increase its ownership of voting securities above 4.9% of
the outstanding shares (or 5.0% with the New York Superintendent's approval),
except for any increase resulting from transactions in the ordinary course of
the business of purchaser as underwriter, broker/dealer, investment manager or
investment adviser or from ordinary trading activities, unless such transactions
were made with the purpose of changing or influencing the control of MetLife,
seek to obtain board representation, solicit proxies in opposition to management
or take certain other actions for five years.
In connection with this offering, Goldman, Sachs & Co. has agreed to act as
a "qualified independent underwriter" under Rule 2720 of the NASD Conduct Rules
and the initial public offering price will not be higher than the price
recommended by Goldman, Sachs & Co. In its role as qualified independent
underwriter, Goldman, Sachs & Co. has participated in due diligence
investigations and in the preparation of this prospectus and the registration
statement of which this prospectus forms a part.
Rule 312(g) of the New York Stock Exchange effectively prohibits our
subsidiary, Conning & Company, and its affiliates, following the initial public
offering, from effecting any transaction (except on an unsolicited basis) for
the account of any customer in, or making any recommendation with respect to,
our common stock.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
Credit Suisse First Boston Corporation and Credit Suisse First Boston
(Europe) Limited, both of which are underwriters, are affiliates of Credit
Suisse Group. In addition, Santander Investment Securities Inc. and BSCH Bolsa,
Sociedad de Valores, S.A., both of which are underwriters, are affiliates of
Banco Santander Central Hispano, S.A.
We may be considered a connected issuer of Credit Suisse First Boston
Corporation, Credit Suisse First Boston (Europe) Limited, Santander Investment
Securities Inc. and BSCH Bolsa, Sociedad de Valores, S.A. under applicable
securities legislation by virtue of the participation of Credit Suisse Group,
Banco Santander Central Hispano, S.A. or their respective affiliates in the
private placements of our common stock as described in this prospectus. Credit
Suisse First Boston Corporation, Credit Suisse First Boston (Europe) Limited,
Santander Investment Securities Inc. and BSCH Bolsa, Sociedad de Valores, S.A.
will not receive any benefit in connection with this offering other than as
described in this prospectus.
Conning & Company, an underwriter, is our subsidiary. We may be considered
a related issuer of Conning & Company under applicable securities legislation by
virtue of our interest in Conning & Company. Conning & Company will not receive
any benefit in connection with this offering other than as described in the
attached prospectus. Conning & Company was introduced to the transaction by us.
Canadian investors should refer to the headings "Prospectus
Summary -- Private Placements" and "Underwriting" in this prospectus for
additional information.
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VALIDITY OF COMMON STOCK
The validity of the shares of common stock offered hereby will be passed
upon for MetLife, Inc. by Debevoise & Plimpton, and for the underwriters by
Skadden, Arps, Slate, Meagher & Flom LLP. Helene L. Kaplan, a director of
MetLife, Inc. and Metropolitan Life Insurance Company and the Chairman of the
Nominating and Compensation Committee of Metropolitan Life Insurance Company in
1999, is of counsel to Skadden, Arps, Slate, Meagher & Flom LLP. Skadden, Arps,
Slate, Meagher & Flom LLP has in the past performed, and continues to perform,
legal services for Metropolitan Life Insurance Company and our affiliates.
EXPERTS
The consolidated financial statements of Metropolitan Life Insurance
Company and its subsidiaries at December 31, 1999 and 1998, and for each of the
three years in the period ended December 31, 1999 and the balance sheet of
MetLife, Inc. as of February 11, 2000 included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
We have retained PricewaterhouseCoopers LLP to advise us in connection with
actuarial matters involved in the development of the plan of reorganization and
the establishment and operation of the closed block. The opinion of Kenneth
Beck, a consulting actuary associated with PricewaterhouseCoopers LLP, dated
November 16, 1999, which is subject to the limitations described within the
opinion, is included as Annex A of this prospectus in reliance upon his
authority as an expert in actuarial matters generally and in the application of
actuarial concepts to insurance matters.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 (together with all amendments, exhibits, schedules and
supplements thereto, "Registration Statement"), under the Securities Act of
1933, as amended and the rules and regulations thereunder, for the registration
of the common stock offered hereby. This prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted as permitted by
rules and regulations of the Securities and Exchange Commission. For further
information with respect to MetLife, Inc. and the common stock offered hereby,
please see the Registration Statement. Statements made in this prospectus as to
the contents of any contract, agreement or other document referred to including,
but not limited to, the certificate of incorporation and by-laws of MetLife,
Inc., are not necessarily complete. With respect to statements made as to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, please refer to the exhibit for a more complete
description of the matter involved, and each such statement will be deemed
qualified in its entirety by such reference. The Registration Statement may be
inspected and copied at the Securities and Exchange Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission maintains an Internet site, http://www.sec.gov, that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission.
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As a result of this initial public offering of common stock and the
offering of equity security units, we will become subject to the informational
requirements of the Securities Exchange Act of 1934, as amended. We will fulfill
our obligations with respect to such requirements by filing periodic reports and
other information with the Securities and Exchange Commission. We intend to
furnish our stockholders with annual reports containing consolidated financial
statements audited by an independent public accounting firm.
Our common stock has been approved for listing on the New York Stock
Exchange, subject to official notice of issuance. Upon such listing, copies of
the Registration Statement, including all exhibits thereto, and periodic
reports, proxy statements and other information will be available for inspection
at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York,
New York 10005.
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GLOSSARY
The following Glossary includes definitions of certain insurance terms.
Each term defined in this Glossary is printed in boldface type the first time it
appears in this prospectus.
ACCOUNT VALUE.............. The amount of money held under a contract in either
a general account or separate account of an insurer
to support policyholder liabilities.
ADMITTED ASSETS............ Assets which are included in an insurer's statutory
financial statements to measure POLICYHOLDER
SURPLUS as determined in accordance with state
insurance laws.
ANNUAL STATEMENT........... The report filed annually with state insurance
regulatory authorities that contains financial and
other information on a calendar year basis and is
prepared in accordance with statutory accounting
practices. The form of the Annual Statement is
prescribed by the NAIC.
ANNUITY.................... A contract that pays or permits the election of a
periodic income benefit for the life of a person,
the lives of two or more persons for a specific
period of time, or a combination thereof.
CASH VALUE................. The amount of cash available to a policyholder on
the surrender of or withdrawal from a life
insurance policy or annuity contract.
CATASTROPHE................ An event that produces pretax losses before
reinsurance in excess of $25 million involving
multiple first-party policyholders. Common
catastrophe events include hurricanes, earthquakes,
tornadoes, wind and hail storms, fires and
explosions.
CEDE, CEDED or CEDING...... The reinsurance of all or a portion of an insurer's
risk with another insurer.
COMBINED RATIO............. A property and casualty term, meaning the sum of
the loss ratio and the expense ratio. A combined
ratio below 100 generally indicates profitable
underwriting. A combined ratio over 100 generally
indicates unprofitable underwriting.
DIVIDEND SCALES............ The actuarial formulas used by life insurers to
determine amounts payable as dividends on
participating policies based on experience factors
relating to, among other things, investment
results, mortality, lapse rates, expenses, premium
taxes and policy loan interest and utilization
rates.
EXPENSE RATIO.............. The ratio of a property and casualty insurer's
operating expenses to net premiums earned.
FIRST-YEAR PREMIUMS AND
DEPOSITS................. The amount of premiums on insurance policies sold
plus the amount of deposits on variable and
universal life policies sold or additional premiums
or deposits from conversions received over the
specified period. This figure does not reflect
policies that lapse in their first year.
GENERAL ACCOUNT............ The aggregate of a life insurer's assets, other
than those allocated to separate accounts.
GUARANTEED INTEREST
CONTRACTS (GICS)......... Group annuity contracts that guarantee a return on
principal and a stated interest rate for a
specified period of time.
IN FORCE................... A policy that is shown on records to be in force on
a given date and that has not matured by death or
otherwise or been surrendered or otherwise
terminated.
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LOSS ADJUSTMENT EXPENSES
(LAE).................... The expenses of settling property and casualty
claims, including legal and other fees and general
expenses.
LOSS RATIO................. The ratio of incurred losses and LAE to earned
premiums.
MORBIDITY.................. Incidence rates and duration of disability used in
pricing and computing liabilities for disability
insurance. Morbidity varies by such parameters as
age, gender and duration since disability.
MORTALITY.................. Rates of death, varying by such parameters as age,
gender and health, used in pricing and computing
liabilities for future policyholder benefits for
life and annuity products, which contain
significant mortality risk.
NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS
(NAIC)................... The National Association of Insurance
Commissioners, a national association of state
insurance regulators that sets guidelines for
statutory policies, procedures and reporting for
insurers.
NET SALES CREDITS.......... An industry measure of agent productivity. Net
sales credits are the annualized first-year
commissions, which vary by product, paid to agents
and other sales representatives.
NON-ADMITTED ASSETS........ Certain assets or portions thereof which are not
permitted to be reported as ADMITTED ASSETS in an
insurer's Annual Statement. As a result, certain
assets which normally would be accorded value in
the financial statements of non-insurance
corporations are accorded no value and thus reduce
the reported statutory policyholder surplus of the
insurer.
PARTICIPATING POLICY....... Policies or annuity contracts under which the owner
is eligible to share in the divisible surplus of
the insurer through policyholder dividends, whether
or not such dividends are currently payable. For
purposes of the plan, participating policies also
include policies or annuity contracts that are not
by their terms non-participating and certain
supplementary contracts.
PERSISTENCY................ Measurement of the percentage of insurance policies
remaining in force from year to year, as measured
by premiums.
POLICYHOLDER SURPLUS....... The excess of admitted assets over liabilities, in
each case under statutory accounting practices.
PREMIUMS................... Payments and considerations received on insurance
policies issued or reinsured by an insurer. Under
GAAP, premiums on universal life and other
investment-type contracts are not accounted for as
revenues.
RISK-BASED CAPITAL (RBC)... Risk-based capital, which is the regulatory
targeted surplus level based on the relationship of
statutory capital and surplus, with certain
adjustments, to the sum of stated percentages of
each element of a specified list of company risk
exposures.
REINSURANCE................ The acceptance by one or more insurers of a portion
of risk underwritten by another insurer that has
directly written the coverage in return for a
portion of the premium related thereto. The legal
rights of the insured generally are not affected by
the reinsurance transaction, and the insurer
issuing the insurance contract remains liable to
the insured for payment of policy benefits.
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SEPARATE ACCOUNTS.......... Investment accounts maintained by an insurer to
which funds have been allocated for certain
policies under provisions of relevant state
insurance laws. The investments in each separate
account are maintained separately from those in
other separate accounts and an insurer's general
account and generally are not subject to the
general liabilities of the insurer. The investment
results of the separate account assets generally
pass through to the separate account policyholders
and contractholders, less management fees, so that
an insurer bears limited or no investment risk on
such assets.
STATUTORY ACCOUNTING
PRACTICES................ Those accounting practices prescribed or permitted
by an insurer's domiciliary state insurance
regulator for purposes of financial reporting to
the insurance regulator.
STATUTORY RESERVES......... Monetary amounts established by state insurance law
that an insurer must have available to provide for
future obligations with respect to all policies.
Statutory reserves are liabilities on the balance
sheet of financial statements prepared in
conformity with statutory accounting practices.
STATUTORY SURPLUS.......... The excess of admitted assets over statutory
liabilities as shown on an insurer's statutory
financial statements.
SURRENDER CHARGE........... The fee charged to a policyholder when a life
insurance policy or annuity is surrendered for its
cash value prior to the end of the surrender charge
period. Such charge is intended to recover all or a
portion of policy acquisition costs and act as a
deterrent to early surrender. Surrender charges
typically decrease over a set period of time as a
percentage of the ACCOUNT VALUE.
UNDERWRITING............... The process of examining, accepting or rejecting
insurance risks, and classifying those accepted, in
order to charge an appropriate premium for each
accepted risk.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
METLIFE, INC.
Independent Auditors' Report................................ F-2
Balance Sheet at February 11, 2000.......................... F-3
Notes to Balance Sheet...................................... F-4
METROPOLITAN LIFE INSURANCE COMPANY
Independent Auditors' Report................................ F-7
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................... F-8
Consolidated Balance Sheets at December 31, 1999 and 1998... F-9
Consolidated Statements of Equity for the years ended
December 31, 1999, 1998 and 1997.......................... F-10
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-11
Notes to Consolidated Financial Statements.................. F-12
</TABLE>
F-1
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INDEPENDENT AUDITORS' REPORT
The Board of Directors of MetLife, Inc.:
We have audited the accompanying balance sheet of MetLife, Inc. (the
"Company") as of February 11, 2000. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of MetLife, Inc. at February 11, 2000 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 11, 2000
F-2
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METLIFE, INC.
BALANCE SHEET
FEBRUARY 11, 2000
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents................................. $100
====
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; 100 shares issued and outstanding... 1
Additional paid-in capital................................ 99
----
$100
====
</TABLE>
See accompanying notes to balance sheet.
F-3
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METLIFE, INC.
NOTES TO BALANCE SHEET
1. BUSINESS
MetLife, Inc. was incorporated on August 10, 1999, under the laws of
Delaware and is a wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan Life") for the purpose of becoming the parent holding company of
Metropolitan Life under a plan of reorganization, as amended (the "plan of
demutualization"), whereby Metropolitan Life will convert from a mutual life
insurance company to a stock life insurance company.
MetLife, Inc. has had no operations since its formation. The only cash
transaction has been the receipt of $100 in connection with the issuance of 100
shares of common stock to Metropolitan Life.
2. PLAN OF REORGANIZATION
On September 28, 1999, the board of directors of Metropolitan Life adopted,
pursuant to the New York Insurance Law, a plan of reorganization, and
subsequently adopted amendments to the plan, pursuant to which Metropolitan Life
proposes to convert from a mutual life insurance company to a stock life
insurance company and become a wholly-owned subsidiary of MetLife, Inc. The plan
was approved by Metropolitan Life's voting policyholders on February 7, 2000.
The plan will become effective at such time as the New York Superintendent of
Insurance ("Superintendent") approves it based on finding, among other things,
that the plan is fair and equitable to policyholders. The plan requires an
initial public offering of common stock and permits other capital raising
transactions on the effective date of the plan.
3. DIVIDEND RESTRICTIONS
Assuming the plan of demutualization becomes effective, MetLife, Inc.'s
ability to meet its cash requirements and pay dividends depends on the receipt
of dividends and other payments from Metropolitan Life. Metropolitan Life will
be restricted as to the amounts it may pay as dividends to MetLife, Inc. Under
the New York Insurance Law, the Superintendent has broad discretion to determine
whether the financial condition of a stock life insurance company would support
the payment of dividends to its shareholders. The New York Insurance Department
has established informal guidelines for the Superintendent's determination which
focus upon, among other things, the overall financial condition and
profitability of the insurer under statutory accounting practices.
4. STOCK INCENTIVE PLAN
On October 20, 1999, MetLife, Inc. adopted the MetLife, Inc. 2000 stock
incentive plan (the "plan"). Under the plan, options granted may be either
non-qualified stock options or incentive stock options qualifying under the
Internal Revenue Code of 1986, as amended. The maximum number of shares issuable
under the plan is equal to 5% of the shares outstanding immediately after the
effective date of the plan of reorganization, reduced by the shares issued
pursuant to options granted under the MetLife, Inc. 2000 directors stock plan.
The maximum number of shares which may be subject to awards under the plan may
not exceed 60% of the shares available under the plan prior to the second
anniversary of the effective date of the plan of reorganization or 80% of the
shares available under the plan prior to the third anniversary of the effective
date of the plan of reorganization. No participant in the plan may be granted,
during any five-year period, options in respect of more than 5% of the shares
available for issuance under the plan. The shares to be issued under the plan
may be authorized, but unissued shares or treasury shares. The exercise price
per share of common stock subject to either a non-qualified stock option or an
incentive stock option will not be less than the fair market value of such
F-4
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METLIFE, INC.
NOTES TO BALANCE SHEET -- (CONTINUED)
shares on the date of grant. Upon the occurrence of certain events that affect
the capitalization of MetLife, Inc., appropriate adjustments will be made in the
number of shares that may be issued under the plan in the future and in the
number of shares and the exercise price under outstanding grants made before the
event. If any grant is for any reason canceled, terminated or otherwise settled
without the issuance of some or all the shares of common stock subject to the
grant, such shares will be available for future grants. At February 11, 2000,
there were no options granted or outstanding relating to the plan.
5. DIRECTORS STOCK PLAN
On October 20, 1999, MetLife, Inc. also adopted the MetLife, Inc. 2000
directors stock plan (the "director's plan"). Under the director's plan, up to
one-half of an outside director's retainer and attendance fees can be paid in
common stock. The director's plan also provides that, with board approval,
outside directors can be granted non-qualified stock options to purchase shares
of MetLife, Inc. common stock at a price no less than the fair market value of a
share of common stock on the grant date of the stock option. Up to a maximum of
500,000 shares may be issued under the director's plan in lieu of fees and no
more than .05% of the shares outstanding immediately after the effective date of
the plan of reorganization may be issued with respect to stock options under the
directors plan. Common stock paid in lieu of fees under the director's plan may
not be sold prior to the second anniversary of the effective date of the plan of
reorganization. Stock options granted under the director's plan will generally
be exercisable on the date of grant, but in no event exercised before the second
anniversary of the effective date of the plan of reorganization. Outside
directors may elect to receive all or a portion of their retainer and attendance
fees that would otherwise be paid in cash with respect to services rendered
after the second anniversary of the effective date of the plan of reorganization
in the form of common stock. In addition, an outside director may elect to defer
receipt of any shares issuable under the terms of the directors plan in lieu of
their retainer and attendance fees and any dividends payable on the shares,
until he or she is no longer a director of MetLife, Inc. At February 11, 2000
there were no options granted or outstanding relating to this plan.
6. STOCKHOLDER RIGHTS PLAN
On September 29, 1999, MetLife, Inc. also approved a stockholder rights
plan (the "rights plan"). Under the rights plan, each outstanding share of
common stock issued between the entry into the underwriting agreement for the
initial public offering and the distribution date (as defined in the rights
plan) will be coupled with a stockholder right. Each right will entitle the
holder to purchase one one-hundredth of a share of Series A Junior Participating
Preferred Stock. Each one one-hundredth of a share of Series A Junior
Participating Preferred Stock will have economic and voting terms equivalent to
one share of common stock. Until it is exercised, the right itself will not
entitle the holder thereof to any rights as a stockholder, including the right
to receive dividends or to vote at stockholder meetings. Stockholder rights are
not exercisable until the distribution date, and will expire at the close of
business on the tenth anniversary of the date on which the initial public
offering price is determined, unless earlier redeemed or exchanged by MetLife,
Inc.
7. COMMITMENTS AND CONTINGENCIES
The New York Superintendent held a public hearing relating to the plan of
demutualization on January 24, 2000. At the public hearing, some policyholders
and others raised objections to certain aspects of the plan. These objections
alleged, among other things, that the plan was not fair and equitable to
policyholders of Metropolitan Life. In addition, a civil complaint challenging
F-5
<PAGE> 227
METLIFE, INC.
NOTES TO BALANCE SHEET -- (CONTINUED)
the fairness of the plan and the adequacy and accuracy of the disclosures to
policyholders regarding the plan has been filed in New York Supreme Court for
Kings County on behalf of the alleged class consisting of the policyholders of
Metropolitan Life who should have membership benefits in Metropolitan Life and
were and are eligible to receive notice, vote and receive consideration in the
demutualization. The complaint seeks to enjoin or rescind the plan and seeks
other relief. The defendants named in the compliant are Metropolitan Life, the
individual members of its board of directors, and MetLife, Inc. The management
of Metropolitan Life and MetLife, Inc. believe that the allegations made in the
compliant are wholly without merit, and intend to vigorously contest the
complaint.
F-6
<PAGE> 228
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Policyholders of
Metropolitan Life Insurance Company:
We have audited the accompanying consolidated balance sheets of
Metropolitan Life Insurance Company and subsidiaries (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of income,
equity and cash flows for each of the three years in the period ended December
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Metropolitan Life
Insurance Company and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 7, 2000
F-7
<PAGE> 229
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums.................................................... $12,088 $11,503 $11,278
Universal life and investment-type product policy fees...... 1,438 1,360 1,418
Net investment income....................................... 9,816 10,228 9,491
Other revenues.............................................. 2,154 1,994 1,491
Net realized investment gains (losses) (net of amounts
allocable to other accounts of $(67), $608 and $231,
respectively)............................................. (70) 2,021 787
------- ------- -------
25,426 27,106 24,465
------- ------- -------
EXPENSES
Policyholder benefits and claims (excludes amounts directly
related to net realized investment gains (losses) of
$(21), $368 and $161, respectively)....................... 13,105 12,638 12,403
Interest credited to policyholder account balances.......... 2,441 2,711 2,878
Policyholder dividends...................................... 1,690 1,651 1,742
Other expenses (excludes amounts directly related to net
realized investment gains (losses) of $(46), $240 and $70,
respectively)............................................. 6,755 8,019 5,771
------- ------- -------
23,991 25,019 22,794
------- ------- -------
Income before provision for income taxes and extraordinary
item...................................................... 1,435 2,087 1,671
Provision for income taxes.................................. 593 740 468
------- ------- -------
Income before extraordinary item............................ 842 1,347 1,203
Extraordinary item -- demutualization expense............... 225 4 --
------- ------- -------
Net income.................................................. $ 617 $ 1,343 $ 1,203
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 230
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value........ $ 96,981 $100,767
Equity securities, at fair value.......................... 2,006 2,340
Mortgage loans on real estate............................. 19,739 16,827
Real estate and real estate joint ventures................ 5,649 6,287
Policy loans.............................................. 5,598 5,600
Other limited partnership interests....................... 1,331 1,047
Short-term investments.................................... 3,055 1,369
Other invested assets..................................... 1,501 1,484
-------- --------
135,860 135,721
Cash and cash equivalents................................... 2,789 3,301
Accrued investment income................................... 1,725 1,994
Premiums and other receivables.............................. 6,681 5,972
Deferred policy acquisition costs........................... 8,492 6,538
Deferred income taxes....................................... 603 --
Other....................................................... 4,141 3,752
Separate account assets..................................... 64,941 58,068
-------- --------
$225,232 $215,346
======== ========
LIABILITIES AND EQUITY
Liabilities:
Future policy benefits...................................... $ 73,582 $ 72,701
Policyholder account balances............................... 45,901 46,494
Other policyholder funds.................................... 4,498 4,061
Policyholder dividends payable.............................. 974 947
Short-term debt............................................. 4,208 3,585
Long-term debt.............................................. 2,514 2,903
Current income taxes payable................................ 548 403
Deferred income taxes payable............................... -- 545
Other....................................................... 14,376 10,772
Separate account liabilities................................ 64,941 58,068
-------- --------
211,542 200,479
-------- --------
Commitments and contingencies (Note 9)
Equity:
Retained earnings........................................... 14,100 13,483
Accumulated other comprehensive income (loss)............... (410) 1,384
-------- --------
13,690 14,867
-------- --------
$225,232 $215,346
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 231
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
-----------------------------------------
NET FOREIGN MINIMUM
UNREALIZED CURRENCY PENSION
COMPREHENSIVE RETAINED INVESTMENT TRANSLATION LIABILITY
TOTAL INCOME (LOSS) EARNINGS GAINS (LOSSES) ADJUSTMENT ADJUSTMENT
----- ------------- -------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997....... $11,983 $10,937 $ 1,028 $ 18 $ --
Comprehensive income:
Net income..................... 1,203 $ 1,203 1,203
-------
Other comprehensive income:
Unrealized investment gains,
net of related offsets,
reclassification
adjustments and income
taxes...................... 870 870
Foreign currency translation
adjustments................ (49) (49)
-------
Other comprehensive income... 821 821
-------
Comprehensive income........... $ 2,024
=======
------- ------- ------- ----- ----
Balance at December 31, 1997..... 14,007 12,140 1,898 (31) --
Comprehensive income:
Net income..................... 1,343 $ 1,343 1,343
-------
Other comprehensive loss:
Unrealized investment losses,
net of related offsets,
reclassification
adjustments and income
taxes...................... (358) (358)
Foreign currency translation
adjustments................ (113) (113)
Minimum pension liability
adjustment................. (12) (12)
-------
Other comprehensive loss..... (483) (483)
-------
Comprehensive income........... $ 860
=======
------- ------- ------- ----- ----
Balance at December 31, 1998..... 14,867 13,483 1,540 (144) (12)
Comprehensive loss:
Net income..................... 617 $ 617 617
-------
Other comprehensive loss:
Unrealized investment losses,
net of related offsets,
reclassification
adjustments and income
taxes...................... (1,837) (1,837)
Foreign currency translation
adjustments................ 50 50
Minimum pension liability
adjustment................. (7) (7)
-------
Other comprehensive loss..... (1,794) (1,794)
-------
Comprehensive loss............. $(1,177)
=======
------- ------- ------- ----- ----
Balance at December 31, 1999..... $13,690 $14,100 $ (297) $ (94) $(19)
======= ======= ======= ===== ====
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 232
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 617 $ 1,343 $ 1,203
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expenses.................. 173 56 (36)
(Gains) losses from sales of investments and businesses,
net................................................... 137 (2,629) (1,018)
Change in undistributed income of real estate joint
ventures and other limited partnership interests...... (322) (91) 157
Interest credited to policyholder account balances...... 2,441 2,711 2,878
Universal life and investment-type product policy
fees.................................................. (1,438) (1,360) (1,418)
Change in accrued investment income..................... 269 (181) (215)
Change in premiums and other receivables................ (619) (2,681) (792)
Change in deferred policy acquisition costs, net........ (389) (188) (159)
Change in insurance related liabilities................. 2,248 1,481 2,364
Change in income taxes payable.......................... 22 251 (99)
Change in other liabilities............................. 857 2,390 (206)
Other, net.............................................. (131) (260) 213
-------- -------- --------
Net cash provided by operating activities................... 3,865 842 2,872
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities........................................ 73,120 57,857 75,346
Equity securities....................................... 760 3,085 1,821
Mortgage loans on real estate........................... 1,992 2,296 2,784
Real estate and real estate joint ventures.............. 1,062 1,122 2,046
Other limited partnership interests..................... 469 146 166
Purchases of:
Fixed maturities........................................ (72,253) (67,543) (76,603)
Equity securities....................................... (410) (854) (2,121)
Mortgage loans on real estate........................... (4,395) (2,610) (4,119)
Real estate and real estate joint ventures.............. (341) (423) (624)
Other limited partnership interests..................... (465) (723) (338)
Net change in short-term investments...................... (1,577) (761) 63
Net change in policy loans................................ 2 133 17
Purchase of businesses, net of cash received.............. (2,972) -- (430)
Proceeds from sales of businesses......................... -- 7,372 135
Net change in investment collateral....................... 2,692 3,769 --
Other, net................................................ (73) (183) 191
-------- -------- --------
Net cash provided by (used in) investing activities......... (2,389) 2,683 (1,666)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits................................................ 18,428 19,361 16,061
Withdrawals............................................. (20,650) (21,706) (18,831)
Short-term debt, net...................................... 623 (1,002) 1,265
Long-term debt issued..................................... 44 693 989
Long-term debt repaid..................................... (433) (481) (104)
-------- -------- --------
Net cash used in financing activities....................... (1,988) (3,135) (620)
-------- -------- --------
Change in cash and cash equivalents......................... (512) 390 586
Cash and cash equivalents, beginning of year................ 3,301 2,911 2,325
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 2,789 $ 3,301 $ 2,911
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................................. $ 388 $ 367 $ 422
======== ======== ========
Income taxes.............................................. $ 587 $ 579 $ 589
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 233
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Metropolitan Life Insurance Company ("MetLife") and its subsidiaries (the
"Company") is a leading provider of insurance and financial services to a broad
section of institutional and individual customers. The Company offers life
insurance, annuities and mutual funds to individuals and group insurance and
retirement and savings products and services to corporations and other
institutions.
PLAN OF REORGANIZATION
On September 28, 1999, the board of directors of MetLife adopted, pursuant
to the New York Insurance Law, a plan of reorganization, and subsequently
adopted amendments to the plan, pursuant to which MetLife proposes to convert
from a mutual life insurance company to a stock life insurance company and
become a wholly-owned subsidiary of MetLife, Inc. The plan was approved by
MetLife's voting policyholders on February 7, 2000. The plan will become
effective at such time as the New York Superintendent of Insurance
("Superintendent") approves it based on finding, among other things, that the
plan is fair and equitable to policyholders. The plan requires an initial public
offering of common stock and provides for other capital raising transactions on
the effective date of the plan.
On the date the plan of reorganization becomes effective, each
policyholder's membership interest will be extinguished and each eligible
policyholder will be entitled to receive, in exchange for that interest, trust
interests representing shares of common stock of MetLife, Inc. 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, when MetLife demutualizes,
MetLife's Canadian branch will make cash payments to holders of certain policies
transferred to Clarica Life Insurance Company ("Clarica Life") in connection
with the sale of a substantial portion of MetLife's Canadian operations in 1998.
See Note 9.
The plan of reorganization requires that MetLife establish and operate a
closed block for the benefit of holders of certain individual life insurance
policies of MetLife. Assets will be allocated to the closed block in an amount
that is expected to produce 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 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 these policies included 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 favorable than assumed in establishing the closed block, total dividends
paid to the closed block policyholders in the future may be greater than or less
than which 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 until the last policy in the closed block is no longer in
force.
F-12
<PAGE> 234
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accounting principles to account for the participating policies
included in the closed block will be those used prior to the date of the
demutualization. However, a policyholder dividend obligation will be established
for earnings that will be paid to policyholders as additional dividends in the
amounts described below, unless these earnings are offset by future unfavorable
experience in the closed block. Although all of the cash flows of the closed
block are for the benefit of closed block policyholders, the excess of closed
block liabilities over closed block assets at the effective date will represent
the estimated maximum future contributions from the closed block expected to be
reported in income as the contribution from the closed block after income taxes.
The contribution from the closed block will be 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
expected cumulative contribution will be recognized in income with the excess
recorded as a policyholder dividend obligation, because the excess of the actual
cumulative contribution from the closed block over the expected cumulative
contribution will be paid to closed block policyholders as additional
policyholder dividends unless offset by future unfavorable experience of the
closed block. If over such period, the actual cumulative contribution from the
closed block is less than the expected cumulative contribution from the closed
block, the actual contribution will be recognized in income. However, dividends
in the future may be changed, which would be intended to increase future actual
contribution until the actual contribution equal the expected cumulative
contribution.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"). The New York
State Insurance Department (the "Department") recognizes only statutory
accounting practices for determining and reporting the financial condition and
results of operations of an insurance company for determining solvency under the
New York Insurance Law. No consideration is given by the Department to financial
statements prepared in accordance with GAAP in making such determination.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The most significant estimates include those used
in determining deferred policy acquisition costs, investment allowances and the
liability for future policyholder benefits. Actual results could differ from
those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
MetLife and its subsidiaries, partnerships and joint ventures in which MetLife
has a majority voting interest or general partner interest with limited removal
rights by limited partners. All material intercompany accounts and transactions
have been eliminated.
The Company accounts for its investments in real estate joint ventures and
other limited partnership interests in which it does not have a controlling
interest, but more than a minimal interest, under the equity method of
accounting.
Minority interest related to consolidated entities included in other
liabilities was $245 and $274 at December 31, 1999 and 1998, respectively.
F-13
<PAGE> 235
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform with the 1999 presentation.
INVESTMENTS
The Company's fixed maturity and equity securities are classified as
available-for-sale and are reported at their estimated fair value. Unrealized
investment gains and losses on securities are recorded as a separate component
of other comprehensive income (loss), net of policyholder related amounts and
deferred income taxes. The cost of fixed maturity and equity securities is
adjusted for impairments in value deemed to be other than temporary. These
adjustments are recorded as realized losses on investments. Realized gains and
losses on sales of securities are determined on a specific identification basis.
All security transactions are recorded on a trade date basis.
Mortgage loans on real estate are stated at amortized cost, net of
valuation allowances. Valuation allowances are established for the excess
carrying value of the mortgage loan over its estimated fair value when it is
probable that, based upon current information and events, the Company will be
unable to collect all amounts due under the contractual terms of the loan
agreement. Valuation allowances are based upon the present value of expected
future cash flows discounted at the loan's original effective interest rate or
the collateral value if the loan is collateral dependent. Interest income earned
on impaired loans is accrued on the net carrying value amount of the loan based
on the loan's effective interest rate.
Real estate, including related improvements, is stated at cost less
accumulated depreciation. Depreciation is provided on a straight-line basis over
the estimated useful life of the asset (typically 20 to 40 years). Cost is
adjusted for impairment whenever events or changes in circumstances indicate the
carrying amount of the asset may not be recoverable. Impaired real estate is
written down to estimated fair value with the impairment loss being included in
realized losses on investments. Impairment losses are based upon the estimated
fair value of real estate, which is generally computed using the present value
of expected future cash flows from the real estate discounted at a rate
commensurate with the underlying risks. Real estate acquired in satisfaction of
debt is recorded at estimated fair value at the date of foreclosure. Valuation
allowances on real estate held-for-sale are computed using the lower of
depreciated cost or estimated fair value, net of disposition costs.
Policy loans are stated at unpaid principal balances.
Short-term investments are stated at amortized cost, which approximates
fair value.
DERIVATIVE INSTRUMENTS
The Company uses derivative instruments to manage market risk through one
of four principal risk management strategies: the hedging of invested assets,
liabilities, portfolios of assets or liabilities and anticipated transactions.
The Company's derivative strategy employs a variety of instruments including
financial futures, financial forwards, interest rate and foreign currency swaps,
floors, foreign exchange contracts, caps and options.
The Company's derivative program is monitored by senior management. The
Company's risk of loss is typically limited to the fair value of its derivative
instruments and not to the notional or contractual amounts of these derivatives.
Risk arises from changes in the fair value of the underlying instruments and,
with respect to over-the-counter transactions, from the possible inability of
counterparties to meet the terms of the contracts. The Company has strict
policies regarding the financial stability and credit standing of its major
counterparties.
F-14
<PAGE> 236
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's derivative instruments are designated as hedges and are
highly correlated to the underlying risk at contract inception. The Company
monitors the effectiveness of its hedges throughout the contract term using an
offset ratio of 80 to 125 percent as its minimum acceptable threshold for hedge
effectiveness. Derivative instruments that lose their effectiveness are marked
to market through net investment income.
Gains or losses on financial futures contracts entered into in anticipation
of investment transactions are deferred and, at the time of the ultimate
investment purchase or disposition, recorded as an adjustment to the basis of
the purchased assets or to the proceeds on disposition. Gains or losses on
financial futures used in asset risk management are deferred and amortized into
net investment income over the remaining term of the investment. Gains or losses
on financial futures used in portfolio risk management are deferred and
amortized into net investment income or policyholder benefits over the remaining
life of the hedged sector of the underlying portfolio.
Financial forward contracts that are entered into to purchase securities
are marked to fair value through other comprehensive income (loss), similar to
the accounting for the investment security. Such contracts are accounted for at
settlement by recording the purchase of the specified securities at the
contracted value. Gains or losses resulting from the termination of forward
contracts are recognized immediately as a component of net investment income.
Interest rate and certain foreign currency swaps involve the periodic
exchange of payments without the exchange of underlying principal or notional
amounts. Net receipts or payments are accrued and recognized over the term of
the swap agreement as an adjustment to net investment income or other expense.
Gains or losses resulting from swap terminations are amortized over the
remaining term of the underlying asset or liability. Gains and losses on swaps
and certain foreign forward exchange contracts entered into in anticipation of
investment transactions are deferred and, at the time of the ultimate investment
purchase or disposition, reflected as an adjustment to the basis of the
purchased assets or to the proceeds of disposition. In the event the asset or
liability underlying a swap is disposed of, the swap position is closed
immediately and any gain or loss is recorded as an adjustment to the proceeds
from disposition.
The Company periodically enters into collars, which consist of purchased
put and written call options, to lock in unrealized gains on equity securities.
Collars are marked to market through other comprehensive income (loss), similar
to the accounting for the underlying equity securities. Purchased interest rate
caps and floors are used to offset the risk of interest rate changes related to
insurance liabilities. Premiums paid on floors, caps and options are split into
two components, time value and intrinsic value. Time value is amortized over the
life of the applicable derivative instrument. The intrinsic value and any gains
or losses relating to these derivative instruments adjust the basis of the
underlying asset or liability and are recognized as a component of net
investment income over the term of the underlying asset or liability being
hedged as an adjustment to the yield.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-15
<PAGE> 237
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements, which are included in other
assets, are stated at cost, less accumulated depreciation and amortization.
Depreciation is determined using either the straight-line or
sum-of-the-years-digits method over the estimated useful lives of the assets.
Estimated lives range from 20 to 40 years for real estate and 5 to 15 years for
all other property and equipment. Accumulated depreciation of property and
equipment and accumulated amortization on leasehold improvements was $1,130 and
$1,098 at December 31, 1999 and 1998, respectively. Related depreciation and
amortization expense was $103, $116 and $103 for the years ended December 31,
1999, 1998 and 1997, respectively.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business that vary with, and are
primarily related to, the production of new business are deferred. Such costs,
which consist principally of commissions, agency and policy issue expenses, are
amortized with interest over the expected life of the contract for participating
traditional life, universal life and investment-type products. Generally,
deferred policy acquisition costs are amortized in proportion to the present
value of estimated gross margins or profits from investment, mortality, expense
margins and surrender charges. Interest rates are based on rates in effect at
the inception of the contracts. Actual gross margins or profits can vary from
management's estimates resulting in increases or decreases in the rate of
amortization. Management periodically updates these estimates and evaluates the
recoverability of deferred policy acquisition costs. When appropriate,
management revises its assumptions of the estimated gross margins or profits of
these contracts, and the cumulative amortization is re-estimated and adjusted by
a cumulative charge or credit to current operations.
Deferred policy acquisition costs for non-participating traditional life,
non-medical health and annuity policies with life contingencies are amortized in
proportion to anticipated premiums. Assumptions as to anticipated premiums are
made at the date of policy issuance and are consistently applied during the
lives of the contracts. Deviations from estimated experience are included in
operations when they occur. For these contracts, the amortization period is
typically the estimated life of the policy.
Deferred policy acquisition costs related to internally replaced contracts
are expensed at date of replacement.
Deferred policy acquisition costs for property and casualty insurance
contracts, which are primarily comprised of commissions and certain underwriting
expenses, are deferred and amortized on a pro rata basis over the applicable
contract term or reinsurance treaty.
On September 28, 1999, the Company's Board of Directors adopted a plan of
reorganization. Consequently, in the fourth quarter of 1999, the Company was
able to commit to state insurance regulatory authorities that it would establish
investment sub-segments to further align investments with the traditional
individual life business of the Individual segment. As a result, future
dividends for the traditional individual life business will be determined based
on the results of the new investment sub-segments. Additionally, estimated
future gross margins used to determine amortization of deferred policy
acquisition costs and the amount of unrealized investment gains and losses
relating to these products are based on investments in the new sub-segments.
Using the investments in the sub-segments to determine estimated gross margins
and unrealized investment gains and losses increased 1999 amortization of
deferred policy acquisition costs by $56 (net of income taxes of $32) and
decreased other comprehensive loss in 1999 by $123 (net of income taxes of $70).
F-16
<PAGE> 238
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding deferred policy acquisition costs is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at January 1.................................. $ 6,538 $6,436 $7,227
Capitalized during the year........................... 1,160 1,025 1,000
------- ------ ------
Total............................................ 7,698 7,461 8,227
------- ------ ------
Amortization allocated to:
Net realized investment gains (losses).............. (46) 240 70
Unrealized investment gains (losses)................ (1,628) (216) 727
Other expenses...................................... 862 587 771
------- ------ ------
Total amortization............................... (812) 611 1,568
------- ------ ------
Dispositions and other................................ (18) (312) (223)
------- ------ ------
Balance at December 31................................ $ 8,492 $6,538 $6,436
======= ====== ======
</TABLE>
Amortization of deferred policy acquisition costs is allocated to (1)
realized investment gains and losses to provide consolidated statement of income
information regarding the impact of such gains and losses on the amount of the
amortization, (2) unrealized investment gains and losses to provide information
regarding the amount of deferred policy acquisition costs that would have been
amortized if such gains and losses had been realized and (3) other expenses to
provide amounts related to the gross margins or profits originating from
transactions other than investment gains and losses.
Realized investment gains and losses related to certain products have a
direct impact on the amortization of deferred policy acquisition costs.
Presenting realized investment gains and losses net of related amortization of
deferred policy acquisition costs provides information useful in evaluating the
operating performance of the Company. This presentation may not be comparable to
presentations made by other insurers.
INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired ("goodwill")
and other intangible assets, including the value of business acquired, are
included in other assets. Goodwill is amortized on a straight-line basis over a
period ranging from 10 to 30 years. The Company continually reviews goodwill to
assess recoverability from future operations using undiscounted cash flows.
Impairments are recognized in operating results if a permanent diminution in
value is deemed to have occurred. Other intangible assets are amortized over the
expected policy or contract duration in relation to the present value of
estimated gross profits from such policies and contracts.
F-17
<PAGE> 239
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GOODWILL OTHER INTANGIBLE ASSETS
-------------------- --------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31
Net Balance at January 1.............. $404 $359 $136 $1,006 $1,055 $ 767
Acquisitions.......................... 237 67 240 156 39 355
Amortization.......................... (30) (22) (17) (114) (88) (67)
---- ---- ---- ------ ------ ------
Net Balance at December 31............ $611 $404 $359 $1,048 $1,006 $1,055
==== ==== ==== ====== ====== ======
DECEMBER 31
Accumulated amortization.............. $118 $ 88 $ 392 $ 278
==== ==== ====== ======
</TABLE>
FUTURE POLICY BENEFITS AND POLICYHOLDER ACCOUNT BALANCES
Future policy benefit liabilities for participating traditional life
insurance policies are equal to the aggregate of (a) net level premium reserves
for death and endowment policy benefits (calculated based upon the nonforfeiture
interest rate, ranging from 3% to 10%, and mortality rates guaranteed in
calculating the cash surrender values described in such contracts), (b) the
liability for terminal dividends and (c) premium deficiency reserves, which are
established when the liabilities for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for expected
future policy benefits and expenses after deferred policy acquisition costs are
written off.
Future policy benefit liabilities for traditional annuities are equal to
accumulated contractholder fund balances during the accumulation period and the
present value of expected future payments after annuitization. Interest rates
used in establishing such liabilities range from 3% to 8%. Future policy benefit
liabilities for non-medical health insurance are calculated using the net level
premium method and assumptions as to future morbidity, withdrawals and interest,
which provide a margin for adverse deviation. Interest rates used in
establishing such liabilities range from 3% to 10%. Future policy benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest. Interest rates used in establishing such liabilities range from 3% to
10%.
Policyholder account balances for universal life and investment-type
contracts are equal to the policy account values, which consist of an
accumulation of gross premium payments plus credited interest, ranging from 2%
to 17%, less expenses, mortality charges and withdrawals.
The liability for unpaid claims and claim expenses for property and
casualty insurance represents the amount estimated for claims that have been
reported but not settled and claims incurred but not reported. Liabilities for
unpaid claims are estimated based upon the Company's historical experience and
other actuarial assumptions that consider the effects of current developments,
anticipated trends and risk management programs. Revisions of these estimates
are included in operations in the year such refinements are made.
RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS
Premiums related to traditional life and annuity policies with life
contingencies are recognized as revenues when due. Benefits and expenses are
provided against such revenues to recognize profits over the estimated lives of
the policies. When premiums are due over a significantly shorter period than the
period over which benefits are provided, any excess profit is deferred and
recognized into operations in a constant relationship to insurance in-force or,
for annuities, the amount of expected future policy benefit payments.
F-18
<PAGE> 240
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Premiums related to non-medical health contracts are recognized on a pro
rata basis over the applicable contract term.
Premiums related to universal life and investment-type products are
credited to policyholder account balances. Revenues from such contracts consist
of amounts assessed against policyholder account balances for mortality, policy
administration and surrender charges. Amounts that are charged to operations
include interest credited and benefit claims incurred in excess of related
policyholder account balances.
Premiums related to property and casualty contracts are recognized as
revenue on a pro rata basis over the applicable contract term. Unearned premiums
are included in other liabilities.
DIVIDENDS TO POLICYHOLDERS
Dividends to policyholders are determined annually by the board of
directors. The aggregate amount of policyholders' dividends is related to actual
interest, mortality, morbidity and expense experience for the year, as well as
management's judgment as to the appropriate level of statutory surplus to be
retained by MetLife and its insurance subsidiaries.
DIVIDEND RESTRICTIONS
MetLife, when it converts from a mutual life insurance company to a stock
life insurance company, may be restricted as to the amounts it may pay as
dividends to MetLife, Inc. Under the New York Insurance Law, the Superintendent
has broad discretion to determine whether the financial condition of a stock
life insurance company would support the payment of dividends to its
shareholders. The Department has established informal guidelines for the
Superintendent's determinations which focus upon, among other things, the
overall financial condition and profitability of the insurer under statutory
accounting practices.
PARTICIPATING BUSINESS
Participating business represented approximately 19% and 21% of the
Company's life insurance in-force, and 84% and 81% of the number of life
insurance policies in-force, at December 31, 1999 and 1998, respectively.
Participating policies represented approximately 42% and 44%, 39% and 40%, and
41% and 41% of gross and net life insurance premiums for the years ended
December 31, 1999, 1998 and 1997, respectively.
INCOME TAXES
MetLife and its includable life insurance and non-life insurance
subsidiaries file a consolidated U.S. federal income tax return in accordance
with the provisions of the Internal Revenue Code, as amended (the "Code"). Under
the Code, the amount of federal income tax expense incurred by mutual life
insurance companies includes an equity tax calculated based upon a prescribed
formula that incorporates a differential earnings rate between stock and mutual
life insurance companies. MetLife will not be subject to the equity tax when it
converts to a stock life insurance company. The future tax consequences of
temporary differences between financial reporting and tax bases of assets and
liabilities are measured at the balance sheet dates and are recorded as deferred
income tax assets and liabilities.
REINSURANCE
The Company has reinsured certain of its life insurance and property and
casualty insurance contracts with other insurance companies under various
agreements. Amounts due from
F-19
<PAGE> 241
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reinsurers are estimated based upon assumptions consistent with those used in
establishing the liabilities related to the underlying reinsured contracts.
Policy and contract liabilities are reported gross of reinsurance credits.
Deferred policy acquisition costs are reduced by amounts recovered under
reinsurance contracts. Amounts received from reinsurers for policy
administration are reported in other revenues.
SEPARATE ACCOUNTS
Separate accounts are established in conformity with insurance laws and are
generally not chargeable with liabilities that arise from any other business of
the Company. Separate account assets are subject to general account claims only
to the extent the value of such assets exceeds the separate account liabilities.
Investments (stated at estimated fair value) and liabilities of the separate
accounts are reported separately as assets and liabilities. Deposits to separate
accounts, investment income and realized and unrealized gains and losses on the
investments of the separate accounts accrue directly to contractholders and,
accordingly, are not reflected in the Company's consolidated statements of
income and cash flows. Mortality, policy administration and surrender charges to
all separate accounts are included in revenues. See Note 6.
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of foreign operations are translated at the exchange
rates in effect at each year-end and income and expense accounts are translated
at the average rates of exchange prevailing during the year. The local
currencies of foreign operations are the functional currencies unless the local
economy is highly inflationary. Translation adjustments are charged or credited
directly to other comprehensive income (loss). Gains and losses from foreign
currency transactions are reported in other expenses and were insignificant for
all years presented.
EXTRAORDINARY ITEM -- DEMUTUALIZATION EXPENSE
The accompanying consolidated statements of income include extraordinary
charges of $225 (net of income taxes of $35) and $4 (net of income taxes of $2)
for the years ended December 31, 1999 and 1998, respectively, related to costs
associated with the demutualization.
APPLICATION OF ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1999, the Company adopted Statement of Position
("SOP") 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"). SOP
98-5 broadly defines start-up activities. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. Adoption of SOP
98-5 did not have a material effect on the Company's consolidated financial
statements.
Effective January 1, 1999, the Company adopted SOP 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1").
SOP 98-1 provides guidance for determining when an entity should capitalize or
expense external and internal costs of computer software developed or obtained
for internal use. Adoption of the provisions of SOP 98-1 had the effect of
increasing other assets by $82 at December 31, 1999.
Effective January 1, 1999, the Company adopted SOP 97-3, Accounting for
Insurance and Other Enterprises for Insurance Related Assessments ("SOP 97-3").
SOP 97-3 provides guidance on accounting by insurance and other enterprises for
assessments related to insurance activities including recognition, measurement
and disclosure of guaranty fund and other insurance related
F-20
<PAGE> 242
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assessments. Adoption of SOP 97-3 did not have a material effect on the
Company's consolidated financial statements.
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("SFAS 125") which were
deferred by SFAS 127, Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125. The deferred provisions provide accounting and reporting
standards related to repurchase agreements, dollar rolls, securities lending and
similar transactions. Adoption of the provisions had the effect of increasing
assets and liabilities by $3,769 at December 31, 1998 and increasing other
revenues and other expenses by $266 for the year ended December 31, 1998.
During 1997, the Company changed to the retrospective interest method of
accounting for investment income on structured notes in accordance with Emerging
Issues Task Force Consensus No. 96-12, Recognition of Interest Income and
Balance Sheet Classification of Structured Notes. This accounting change
increased 1997 net investment income by $175, which included an immaterial
amount related to prior years.
In June 1999, the Financial Accounting Standards Board 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 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 October 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-7, Accounting for Insurance
and Reinsurance Contracts That Do Not Transfer Insurance Risk ("SOP 98-7"). SOP
98-7 provides guidance on the method of accounting for insurance and reinsurance
contracts that do not transfer insurance risk, defined in the SOP as the deposit
method. SOP 98-7 classifies insurance and reinsurance contracts for which the
deposit method is appropriate into those that 1) transfer only significant
timing risk, 2) transfer only significant underwriting risk, 3) transfer neither
significant timing or underwriting risk and 4) have an indeterminate risk. The
Company is required to adopt SOP 98-7 as of January 1, 2000. Adoption of SOP
98-7 is not expected to have a material effect on the Company's consolidated
financial statements.
F-21
<PAGE> 243
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENTS
The components of net investment income were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed maturities.................................... $ 6,766 $ 6,563 $ 6,445
Equity securities................................... 40 78 50
Mortgage loans on real estate....................... 1,479 1,572 1,684
Real estate and real estate joint ventures.......... 1,426 1,529 1,718
Policy loans........................................ 340 387 368
Other limited partnership interests................. 199 196 302
Cash, cash equivalents and short-term investments... 173 187 169
Other............................................... 501 841 368
------- ------- -------
10,924 11,353 11,104
Less: Investment expenses........................... 1,108 1,125 1,613
------- ------- -------
$ 9,816 $10,228 $ 9,491
======= ======= =======
</TABLE>
Net realized investment gains (losses), including changes in valuation
allowances, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed maturities........................................ $(538) $ 573 $ 118
Equity securities....................................... 99 994 224
Mortgage loans on real estate........................... 28 23 56
Real estate and real estate joint ventures.............. 265 424 446
Other limited partnership interests..................... 33 13 12
Sales of businesses..................................... -- 531 139
Other................................................... (24) 71 23
----- ------ ------
(137) 2,629 1,018
Amounts allocable to:
Future policy benefit loss recognition................ -- (272) (126)
Deferred policy acquisition costs..................... 46 (240) (70)
Participating contracts............................... 21 (96) (35)
----- ------ ------
$ (70) $2,021 $ 787
===== ====== ======
</TABLE>
Realized investment gains (losses) have been reduced by (1) additions to
future policy benefits resulting from the need to establish additional
liabilities due to the recognition of investment gains, (2) deferred policy
acquisition cost amortization to the extent that such amortization results from
realized investment gains and losses, and (3) additions to participating
contractholder accounts when amounts equal to such investment gains and losses
are credited to the contractholders' accounts. This presentation may not be
comparable to presentations made by other insurers.
F-22
<PAGE> 244
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net unrealized investment gains (losses), included in
accumulated other comprehensive income (loss), were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed maturities.................................... $(1,828) $ 4,809 $ 4,766
Equity securities................................... 875 832 1,605
Other invested assets............................... 165 154 294
------- ------- -------
(788) 5,795 6,665
------- ------- -------
Amounts allocable to:
Future policy benefit loss recognition............ (249) (2,248) (2,189)
Deferred policy acquisition costs................. 697 (931) (1,147)
Participating contracts........................... (118) (212) (312)
Deferred income taxes............................... 161 (864) (1,119)
------- ------- -------
491 (4,255) (4,767)
------- ------- -------
$ (297) $ 1,540 $ 1,898
======= ======= =======
</TABLE>
The changes in net unrealized investment gains (losses) were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at January 1.................................. $ 1,540 $1,898 $1,028
Unrealized investment gains (losses) during the
year................................................ (6,583) (870) 3,402
Unrealized investment (gains) losses relating to:
Future policy benefit loss recognition.............. 1,999 (59) (970)
Deferred policy acquisition costs................... 1,628 216 (727)
Participating contracts............................. 94 100 (303)
Deferred income taxes................................. 1,025 255 (532)
------- ------ ------
Balance at December 31................................ $ (297) $1,540 $1,898
======= ====== ======
Net change in unrealized investment gains (losses).... $(1,837) $ (358) $ 870
======= ====== ======
</TABLE>
F-23
<PAGE> 245
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Fixed maturities and equity securities at December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
COST OR GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- ---- ---- ----------
<S> <C> <C> <C> <C>
Fixed Maturities:
Bonds:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies.......... $ 5,990 $ 456 $ 147 $ 6,299
States and political subdivisions.... 1,583 4 45 1,542
Foreign governments.................. 4,090 210 94 4,206
Corporate............................ 47,505 585 1,913 46,177
Mortgage and asset-backed
securities......................... 27,396 112 847 26,661
Other................................ 12,235 313 462 12,086
------- ------ ------ -------
98,799 1,680 3,508 96,971
Redeemable preferred stocks............. 10 -- -- 10
------- ------ ------ -------
$98,809 $1,680 $3,508 $96,981
======= ====== ====== =======
Equity Securities:
Common stocks........................... $ 980 $ 921 $ 35 $ 1,866
Nonredeemable preferred stocks.......... 151 -- 11 140
------- ------ ------ -------
$ 1,131 $ 921 $ 46 $ 2,006
======= ====== ====== =======
</TABLE>
Fixed maturities and equity securities at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
COST OR GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- ---- ---- ----------
<S> <C> <C> <C> <C>
Fixed Maturities:
Bonds:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies.......... $ 6,640 $1,117 $ 10 $ 7,747
States and political subdivisions.... 597 26 -- 623
Foreign governments.................. 3,435 254 88 3,601
Corporate............................ 46,377 2,471 260 48,588
Mortgage and asset-backed
securities......................... 26,456 569 46 26,979
Other................................ 12,438 1,069 293 13,214
------- ------ ---- --------
95,943 5,506 697 100,752
Redeemable preferred stocks............. 15 -- -- 15
------- ------ ---- --------
$95,958 $5,506 $697 $100,767
======= ====== ==== ========
Equity Securities:
Common stocks........................... $ 1,286 $ 923 $ 77 $ 2,132
Nonredeemable preferred stocks.......... 222 4 18 208
------- ------ ---- --------
$ 1,508 $ 927 $ 95 $ 2,340
======= ====== ==== ========
</TABLE>
F-24
<PAGE> 246
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company held foreign currency derivatives with notional amounts of
$4,002 and $716 to hedge the exchange rate risk associated with foreign bonds at
December 31, 1999 and 1998, respectively. The Company also held options with
fair values of $(11) to hedge the market value of common stocks at December 31,
1998.
At December 31, 1999, fixed maturities held by the Company that were below
investment grade or not rated by an independent rating agency had an estimated
fair value of $8,813. At December 31, 1999, non-income producing fixed
maturities were insignificant.
The amortized cost and estimated fair value of bonds at December 31, 1999,
by contractual maturity date, are shown below:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less............................... $ 3,180 $ 3,217
Due after one year through five years................. 18,152 18,061
Due after five years through ten years................ 23,755 23,114
Due after ten years................................... 26,316 25,918
------- -------
71,403 70,310
Mortgage and asset-backed securities.................. 27,396 26,661
------- -------
$98,799 $96,971
======= =======
</TABLE>
Fixed maturities not due at a single maturity date have been included in
the above table in the year of final maturity. Actual maturities may differ from
contractual maturities due to the exercise of prepayment options.
Sales of securities were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Securities classified as available-for-sale:
Proceeds.......................................... $59,852 $46,913 $69,275
Gross realized gains.............................. $ 605 $ 2,053 $ 965
Gross realized losses............................. $ 911 $ 486 $ 627
Fixed maturities classified as held-to-maturity:
Proceeds.......................................... $ -- $ -- $ 352
Gross realized gains.............................. $ -- $ -- $ 5
Gross realized losses............................. $ -- $ -- $ 1
</TABLE>
Gross realized losses above exclude writedowns recorded during 1999 for
permanently impaired available-for-sale securities of $133.
During 1997, fixed maturities with an amortized cost of $11,682 were
transferred from held-to-maturity to available-for-sale. Other comprehensive
income at the date of reclassification was increased by $198 excluding the
effects of deferred income taxes and policyholder related amounts.
Excluding investments in U.S. governments and agencies, the Company is not
exposed to any significant concentration of credit risk in its fixed maturities
portfolio.
F-25
<PAGE> 247
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SECURITIES LENDING PROGRAM
The Company participates in securities lending programs whereby large
blocks of securities, which are returnable to the Company on short notice and
included in investments, are loaned to third parties, primarily major brokerage
firms. The Company requires a minimum of 102% of the fair value of the loaned
securities to be separately maintained as collateral for the loans. Securities
with a cost or amortized cost of $6,458 and $4,005 and estimated fair value of
$6,391 and $4,552 were on loan under the program at December 31, 1999 and 1998,
respectively. The Company was liable for cash collateral under its control of
$6,461 and $3,769 at December 31, 1999 and 1998, respectively. This liability is
included in other liabilities. Security collateral on deposit from securities
borrowers is returnable to them on short notice and is not reflected in the
consolidated financial statements.
STATUTORY DEPOSITS
The Company had investment assets on deposit with regulatory agencies of
$476 and $466 at December 31, 1999 and 1998, respectively.
MORTGAGE LOANS ON REAL ESTATE
Mortgage loans were categorized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1999 1998
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
Commercial mortgage loans.................. $14,931 75% $12,503 74%
Agricultural mortgage loans................ 4,816 24% 4,256 25%
Residential mortgage loans................. 82 1% 241 1%
------- --- ------- ---
19,829 100% 17,000 100%
=== ===
Less: Valuation allowances................. 90 173
------- -------
$19,739 $16,827
======= =======
</TABLE>
Mortgage loans on real estate are collateralized by properties primarily
located throughout the United States. At December 31, 1999, approximately 16%,
8% and 8% of the properties were located in California, New York and Florida,
respectively. Generally, the Company (as the lender) requires that a minimum of
one-fourth of the purchase price of the underlying real estate be paid by the
borrower.
Certain of the Company's real estate joint ventures have mortgage loans
with the Company. The carrying values of such mortgages were $547 and $606 at
December 31, 1999 and 1998, respectively.
F-26
<PAGE> 248
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in mortgage loan valuation allowances were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at January 1................................. $ 173 $ 289 $ 469
Additions............................................ 40 40 61
Deductions for writedowns and dispositions........... (123) (130) (241)
Deductions for disposition of affiliates............. -- (26) --
----- ----- -----
Balance at December 31............................... $ 90 $ 173 $ 289
===== ===== =====
</TABLE>
A portion of the Company's mortgage loans on real estate was impaired and
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1999 1998
---- ----
<S> <C> <C>
Impaired mortgage loans with valuation allowances.......... $540 $ 823
Impaired mortgage loans without valuation allowances....... 437 375
---- ------
977 1,198
Less: Valuation allowances................................. 83 149
---- ------
$894 $1,049
==== ======
</TABLE>
The average investment in impaired mortgage loans on real estate was
$1,134, $1,282 and $1,680 for the years ended December 31, 1999, 1998 and 1997,
respectively. Interest income on impaired mortgages was $101, $109 and $110 for
the years ended December 31, 1999, 1998 and 1997, respectively.
The investment in restructured mortgage loans on real estate was $980 and
$1,140 at December 31, 1999 and 1998, respectively. Interest income of $80, $74
and $91 was recognized on restructured loans for the years ended December 31,
1999, 1998 and 1997, respectively. Gross interest income that would have been
recorded in accordance with the original terms of such loans amounted to $92,
$87 and $116 for the years ended December 31, 1999, 1998 and 1997, respectively.
Mortgage loans on real estate with scheduled payments of 60 days (90 days
for agriculture mortgages) or more past due or in foreclosure had an amortized
cost of $44 and $65 at December 31, 1999 and 1998, respectively.
F-27
<PAGE> 249
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REAL ESTATE AND REAL ESTATE JOINT VENTURES
Real estate and real estate joint ventures consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
---- ----
<S> <C> <C>
Real estate and real estate joint ventures
held-for-investment....................................... $5,440 $6,301
Impairments................................................. (289) (408)
------ ------
5,151 5,893
------ ------
Real estate and real estate joint ventures held-for-sale.... 719 546
Impairments................................................. (187) (119)
Valuation allowance......................................... (34) (33)
------ ------
498 394
------ ------
$5,649 $6,287
====== ======
</TABLE>
Accumulated depreciation on real estate was $2,235 and $2,065 at December
31, 1999 and 1998, respectively. Related depreciation expense was $247, $282 and
$338 for the years ended December 31, 1999, 1998 and 1997, respectively.
Real estate and real estate joint ventures were categorized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1999 1998
----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
Office........................................ $3,846 68% $4,265 68%
Retail........................................ 587 10% 640 10%
Apartments.................................... 474 8% 418 7%
Land.......................................... 258 5% 313 5%
Agriculture................................... 96 2% 195 3%
Other......................................... 388 7% 456 7%
------ --- ------ ---
$5,649 100% $6,287 100%
====== === ====== ===
</TABLE>
The Company's real estate holdings are primarily located throughout the
United States. At December 31, 1999, approximately 25%, 24% and 10% of the
Company's real estate holdings were located in New York, California and Texas,
respectively.
Changes in real estate and real estate joint ventures held-for-sale
valuation allowance were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at January 1....................................... $ 33 $110 $ 661
Additions charged (credited) to operations................. 36 (5) (76)
Deductions for writedowns and dispositions................. (35) (72) (475)
---- ---- -----
Balance at December 31..................................... $ 34 $ 33 $ 110
==== ==== =====
</TABLE>
Investment income related to impaired real estate and real estate joint
ventures held-for-investment was $61, $105 and $28 for the years ended December
31, 1999, 1998 and 1997, respectively. Investment income related to real estate
and real estate joint ventures held-for-sale
F-28
<PAGE> 250
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was $14, $3 and $11 for the years ended December 31, 1999, 1998 and 1997,
respectively. The carrying value of non-income producing real estate and real
estate joint ventures was $22 and $1 at December 31, 1999 and 1998,
respectively.
The Company owned real estate acquired in satisfaction of debt of $47 and
$154 at December 31, 1999 and 1998, respectively.
Real estate of $37, $69 and $151 was acquired in satisfaction of debt
during the years ended December 31, 1999, 1998 and 1997, respectively.
LEVERAGED LEASES
Leveraged leases, included in other invested assets, consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
---- ----
<S> <C> <C>
Investment............................................... $1,016 $1,067
Estimated residual values................................ 559 607
------ ------
1,575 1,674
Unearned income.......................................... (417) (471)
------ ------
$1,158 $1,203
====== ======
</TABLE>
The investment amounts set forth above are generally due in monthly
installments. The payment periods generally range from four to 15 years, but in
certain circumstances are as long as 30 years. Average yields range from 7% to
12%. These receivables are generally collateralized by the related property.
3. DERIVATIVE INSTRUMENTS
The table below provides a summary of the carrying value, notional amount
and current market or fair value of derivative financial instruments (other than
equity options) held at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------ ------------------------------------------
CURRENT MARKET CURRENT MARKET
OR FAIR VALUE OR FAIR VALUE
CARRYING NOTIONAL -------------------- CARRYING NOTIONAL --------------------
VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES
-------- -------- ------ ----------- -------- -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial futures.................. $ 27 $ 3,140 $37 $ 10 $ 3 $ 2,190 $ 8 $ 6
Foreign exchange contracts......... -- -- -- -- -- 136 -- 2
Interest rate swaps................ (32) 1,316 11 40 (9) 1,621 17 50
Foreign currency swaps............. -- 4,002 26 103 (1) 580 3 62
Caps............................... 1 12,376 3 -- -- 8,391 -- --
---- ------- --- ---- --- ------- --- ----
Total contractual commitments...... $ (4) $20,834 $77 $153 $(7) $12,918 $28 $120
==== ======= === ==== === ======= === ====
</TABLE>
F-29
<PAGE> 251
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of the notional amounts by derivative
type and strategy at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 TERMINATIONS/ DECEMBER 31, 1999
NOTIONAL AMOUNT ADDITIONS MATURITIES NOTIONAL AMOUNT
----------------- --------- ------------- -----------------
<S> <C> <C> <C> <C>
BY DERIVATIVE TYPE
Financial futures................... $ 2,190 $18,259 $17,309 $ 3,140
Foreign exchange contracts.......... 136 702 838 --
Interest rate swaps................. 1,621 429 734 1,316
Foreign currency swaps.............. 580 3,501 79 4,002
Caps................................ 8,391 5,860 1,875 12,376
------- ------- ------- -------
Total contractual commitments....... $12,918 $28,751 $20,835 $20,834
======= ======= ======= =======
BY STRATEGY
Liability hedging................... $ 8,741 $ 5,865 $ 2,035 $12,571
Invested asset hedging.............. 864 4,288 937 4,215
Portfolio hedging................... 2,830 13,920 14,729 2,021
Anticipated transaction hedging..... 483 4,678 3,134 2,027
------- ------- ------- -------
Total contractual commitments....... $12,918 $28,751 $20,835 $20,834
======= ======= ======= =======
</TABLE>
The following table presents the notional amounts of derivative financial
instruments by maturity at December 31, 1999:
<TABLE>
<CAPTION>
REMAINING LIFE
-------------------------------------------------------------------
ONE YEAR AFTER ONE YEAR AFTER FIVE YEARS
OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS TOTAL
-------- ------------------ ----------------- --------------- -----
<S> <C> <C> <C> <C> <C>
Financial futures......... $3,140 $ -- $ -- $ -- $ 3,140
Interest rate swaps....... 833 483 -- -- 1,316
Foreign currency swaps.... 7 3,371 503 121 4,002
Caps...................... 3,426 8,930 20 -- 12,376
------ ------- ---- ---- -------
Total contractual
commitments............. $7,406 $12,784 $523 $121 $20,834
====== ======= ==== ==== =======
</TABLE>
In addition to the derivative instruments above, the Company uses equity
option contracts as invested asset hedges. There were ninety-two thousand equity
option contracts outstanding with a carrying value of $(11) and a market value
of $(11) at December 31, 1998.
4. FAIR VALUE INFORMATION
The estimated fair values of financial instruments have been determined by
using available market information and the valuation methodologies described
below. Considerable judgment is often required in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented herein may
not necessarily be indicative of amounts that could be realized in a current
market exchange. The use of different assumptions or valuation methodologies may
have a material effect on the estimated fair value amounts.
F-30
<PAGE> 252
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts related to the Company's financial instruments were as follows:
<TABLE>
<CAPTION>
NOTIONAL CARRYING ESTIMATED
DECEMBER 31, 1999 AMOUNT VALUE FAIR VALUE
- ----------------- -------- -------- ----------
<S> <C> <C> <C>
Assets:
Fixed maturities.................................. $96,981 $96,981
Equity securities................................. 2,006 2,006
Mortgage loans on real estate..................... 19,739 19,452
Policy loans...................................... 5,598 5,618
Short-term investments............................ 3,055 3,055
Cash and cash equivalents......................... 2,789 2,789
Mortgage loan commitments......................... $465 -- (7)
Liabilities:
Policyholder account balances..................... 37,170 36,893
Short-term debt................................... 4,208 4,208
Long-term debt.................................... 2,514 2,466
Investment collateral............................. 6,451 6,451
</TABLE>
<TABLE>
<CAPTION>
NOTIONAL CARRYING ESTIMATED
DECEMBER 31, 1998 AMOUNT VALUE FAIR VALUE
- ----------------- -------- -------- ----------
<S> <C> <C> <C>
Assets:
Fixed maturities................................. $100,767 $100,767
Equity securities................................ 2,340 2,340
Mortgage loans on real estate.................... 16,827 17,793
Policy loans..................................... 5,600 6,143
Short-term investments........................... 1,369 1,369
Cash and cash equivalents........................ 3,301 3,301
Mortgage loan commitments........................ $472 -- 14
Liabilities:
Policyholder account balances.................... 37,448 37,664
Short-term debt.................................. 3,585 3,585
Long-term debt................................... 2,903 3,006
Investment collateral............................ 3,769 3,769
</TABLE>
The methods and assumptions used to estimate the fair values of financial
instruments are summarized as follows:
FIXED MATURITIES AND EQUITY SECURITIES
The fair value of fixed maturities and equity securities are based upon
quotations published by applicable stock exchanges or received from other
reliable sources. For securities in which the market values were not readily
available, fair values were estimated using quoted market prices of comparable
investments.
MORTGAGE LOANS ON REAL ESTATE AND MORTGAGE LOAN COMMITMENTS
Fair values for mortgage loans on real estate are estimated by discounting
expected future cash flows, using current interest rates for similar loans with
similar credit risk. For mortgage loan commitments, the estimated fair value is
the net premium or discount of the commitments.
F-31
<PAGE> 253
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POLICY LOANS
Fair values for policy loans are estimated by discounting expected future
cash flows using U.S. treasury rates to approximate interest rates and the
Company's past experiences to project patterns of loan accrual and repayment
characteristics.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The carrying values for cash and cash equivalents and short-term
investments approximated fair market values due to the short-term maturities of
these instruments.
POLICYHOLDER ACCOUNT BALANCES
The fair value of policyholder account balances are estimated by
discounting expected future cash flows, based on interest rates currently being
offered for similar contracts with maturities consistent with those remaining
for the agreements being valued.
SHORT-TERM AND LONG-TERM DEBT AND INVESTMENT COLLATERAL
The fair values of short-term and long-term debt and investment collateral
are determined by discounting expected future cash flows, using risk rates
currently available for debt with similar terms and remaining maturities.
DERIVATIVE INSTRUMENTS
The fair value of derivative instruments, including financial futures,
financial forwards, interest rate and foreign currency swaps, floors, foreign
exchange contracts, caps and options are based upon quotations obtained from
dealers or other reliable sources. See Note 3 for derivative fair value
disclosures.
5. EMPLOYEE BENEFIT PLANS
PENSION BENEFIT AND OTHER BENEFIT PLANS
The Company is both the sponsor and administrator of defined benefit
pension plans covering all eligible employees and sales representatives of
MetLife and certain of its subsidiaries. Retirement benefits are based upon
years of credited service and final average earnings history.
The Company also provides certain postemployment benefits and certain
postretirement health care and life insurance benefits for retired employees
through insurance contracts. Substantially all of the Company's employees may,
in accordance with the plans applicable to the
F-32
<PAGE> 254
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
postretirement benefits, become eligible for these benefits if they attain
retirement age, with sufficient service, while working for the Company.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
PENSION BENEFITS OTHER BENEFITS
---------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in projected benefit obligation:
Projected benefit obligation at beginning of year.... $3,920 $3,573 $1,708 $1,763
Service cost....................................... 100 90 28 31
Interest cost...................................... 271 257 107 114
Actuarial (gains) losses........................... (260) 212 (281) (74)
Divestitures, curtailments and terminations........ (22) 24 10 (13)
Change in benefits................................. -- 12 -- --
Benefits paid........................................ (272) (248) (89) (113)
------ ------ ------ ------
Projected benefit obligation at end of year.......... 3,737 3,920 1,483 1,708
------ ------ ------ ------
Change in plan assets:
Contract value of plan assets at beginning of year... 4,403 4,056 1,123 1,004
Actuarial return on plan assets.................... 575 680 141 171
Employer contribution.............................. 20 15 24 61
Benefits paid...................................... (272) (248) (89) (113)
Other payments..................................... -- (100) -- --
------ ------ ------ ------
Contract value of plan assets at end of year......... 4,726 4,403 1,199 1,123
------ ------ ------ ------
Over (under) funded.................................. 989 483 (284) (585)
------ ------ ------ ------
Unrecognized net asset at transition................. (66) (98) -- --
Unrecognized net actuarial gains..................... (564) (78) (487) (322)
Unrecognized prior service cost...................... 127 145 (2) (2)
------ ------ ------ ------
Prepaid (accrued) benefit cost....................... $ 486 $ 452 $ (773) $ (909)
====== ====== ====== ======
Qualified plan prepaid pension cost.................. $ 632 $ 568 $ -- $ --
Non-qualified plan accrued pension cost.............. (146) (116) -- --
------ ------ ------ ------
Prepaid benefit cost................................. $ 486 $ 452 $ -- $ --
====== ====== ====== ======
</TABLE>
The aggregate projected benefit obligation and aggregate contract value of
plan assets for the pension plans were as follows:
<TABLE>
<CAPTION>
NON-QUALIFIED
QUALIFIED PLAN PLAN TOTAL
---------------- -------------- ----------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Aggregate projected benefit
obligation...................... $3,482 $3,697 $ 255 $ 223 $3,737 $3,920
Aggregate contract value of plan
assets (principally Company
contracts)...................... 4,726 4,403 -- -- 4,726 4,403
------ ------ ----- ----- ------ ------
Over (under) funded............... $1,244 $ 706 $(255) $(223) $ 989 $ 483
====== ====== ===== ===== ====== ======
</TABLE>
F-33
<PAGE> 255
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assumptions used in determining the aggregate projected benefit
obligation and aggregate contract value for the pension and other benefits were
as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average assumptions at
December 31,
Discount rate....................... 6.25% - 7.75% 6.5% - 7.25% 6% - 7.75% 7%
Expected rate of return on plan
assets............................ 8% - 10.5% 8.5% - 10.5% 6% - 9% 7.25% - 9%
Rate of compensation increase....... 4.5% - 8.5% 4.5% - 8.5% N/A N/A
</TABLE>
The assumed health care cost trend rates used in measuring the accumulated
nonpension postretirement benefit obligation were 6.5% for pre-Medicare eligible
claims and 6% for Medicare eligible claims in both 1999 and 1998.
Assumed health care cost trend rates may have a significant effect on the
amounts reported for health care plans. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
ONE PERCENT ONE PERCENT
INCREASE DECREASE
----------- -----------
<S> <C> <C>
Effect on total of service and interest cost components.... $ 14 $ 11
Effect of accumulated postretirement benefit obligation.... $134 $111
</TABLE>
The components of periodic benefit costs were as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
--------------------- ------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost............................... $ 100 $ 90 $ 74 $ 28 $ 31 $ 30
Interest cost.............................. 271 257 247 107 114 122
Expected return on plan assets............. (363) (337) (324) (89) (79) (66)
Amortization of prior actuarial gains...... (6) (11) (5) (11) (13) (4)
Curtailment (credit) cost.................. (17) (10) -- 10 4 --
----- ----- ----- ---- ---- ----
Net periodic benefit cost (credit)......... $ (15) $ (11) $ (8) $ 45 $ 57 $ 82
===== ===== ===== ==== ==== ====
</TABLE>
SAVINGS AND INVESTMENT PLANS
The Company sponsors savings and investment plans for substantially all
employees under which the Company matches a portion of employee contributions.
The Company contributed $45, $43 and $44 for the years ended December 31, 1999,
1998 and 1997, respectively.
6. SEPARATE ACCOUNTS
Separate accounts reflect two categories of risk assumption: non-guaranteed
separate accounts totaling $47,618 and $39,490 at December 31, 1999 and 1998,
respectively, for which the policyholder assumes the investment risk, and
guaranteed separate accounts totaling $17,323 and $18,578 at December 31, 1999
and 1998, respectively, for which MetLife contractually guarantees either a
minimum return or account value to the policyholder.
F-34
<PAGE> 256
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fees charged to the separate accounts by the Company (including mortality
charges, policy administration fees and surrender charges) are reflected in the
Company's revenues as universal life and investment-type product policy fees and
totaled $485, $413 and $287 for the years ended December 31, 1999, 1998 and
1997, respectively. Guaranteed separate accounts consisted primarily of Met
Managed Guaranteed Interest Contracts and participating close out contracts. The
average interest rates credited on these contracts were 6.5% and 7% at December
31, 1999 and 1998, respectively. The assets that support these liabilities were
comprised of $16,874 and $16,639 in fixed maturities at December 31, 1999 and
1998, respectively. The portfolios are segregated from other investments and are
managed to minimize liquidity and interest rate risk. In order to minimize the
risk of disintermediation associated with early withdrawals, these investment
products carry a graded surrender charge as well as a market value adjustment.
7. DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
---- ----
<S> <C> <C>
MetLife:
6.300% surplus notes due 2003.......................... $ 397 $ 397
7.000% surplus notes due 2005.......................... 249 249
7.700% surplus notes due 2015.......................... 198 198
7.450% surplus notes due 2023.......................... 296 296
7.785% surplus notes due 2024.......................... 148 148
7.800% surplus notes due 2025.......................... 248 248
Other.................................................... 130 207
------ ------
1,666 1,743
------ ------
Investment related:
Floating rate debt, interest based on LIBOR............ -- 212
Exchangeable debt, interest rates ranging from 4.90% to
5.80%, due 2001 and 2002............................ 369 371
------ ------
369 583
------ ------
Total MetLife............................................ 2,035 2,326
------ ------
Nvest:
7.060% senior notes due 2003........................... 110 110
7.290% senior notes due 2007........................... 160 160
------ ------
270 270
------ ------
Other Affiliated Companies:
Fixed rate notes, interest rates ranging from 6.96% to
8.51%, maturity dates ranging from 2000 to 2008..... 170 179
Other.................................................. 39 128
------ ------
209 307
------ ------
Total long-term debt..................................... 2,514 2,903
Total short-term debt.................................... 4,208 3,585
------ ------
$6,722 $6,488
====== ======
</TABLE>
F-35
<PAGE> 257
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Short-term debt consisted of commercial paper with a weighted average
interest rate of 6.05% and 5.31% and a weighted average maturity of 74 and 44
days at December 31, 1999 and 1998, respectively.
The Company maintains unsecured credit facilities aggregating $7,000
(five-year facility of $1,000 expiring in April 2003; 364-day facility of $1,000
expiring in April 2000; 364-day facility of $5,000 expiring in September 2000).
Both $1,000 facilities bear interest at LIBOR plus 20 basis points. The $5,000
facility bears interest at various rates under specified borrowing scenarios.
The facilities can be used for general corporate purposes and also provide
backup for the Company's commercial paper program. At December 31, 1999, there
were no outstanding borrowings under any of the facilities.
Payments of interest and principal on the surplus notes, subordinated to
all other indebtedness, may be made only with the prior approval of the
Superintendent. Subject to the prior approval of the Superintendent, the 7.45%
surplus notes may be redeemed, in whole or in part, at the election of the
Company at any time on or after November 1, 2003.
Each issue of investment related debt is payable in cash or by delivery of
an underlying security owned by the Company. The amount payable at maturity of
the debt is greater than the principal of the debt if the market value of the
underlying security appreciates above certain levels at the date of debt
repayment as compared to the market value of the underlying security at the date
of debt issuance.
The aggregate maturities of long-term debt are $93 in 2000, $194 in 2001,
$210 in 2002, $415 in 2003, $126 in 2004 and $1,477 thereafter.
Interest expense related to the Company's outstanding indebtedness was
$358, $333 and $344 for the years ended December 31, 1999, 1998 and 1997,
respectively.
8. ACQUISITIONS AND DISPOSITIONS
In 1999 and 1997, respectively, the Company acquired assets of $4,832 and
$3,777 and assumed liabilities of $1,860 and $3,347 through the acquisition of
certain insurance and non-insurance operations. The aggregate purchase prices
were allocated to the assets and liabilities acquired based on their estimated
fair values.
During 1998, the Company sold MetLife Capital Holdings, Inc. (a commercial
financing company) and a substantial portion of its Canadian and Mexican
insurance operations, which resulted in a realized investment gain of $531.
During 1997, the Company sold its United Kingdom insurance operations, which
resulted in a realized investment gain of $139. Such sales caused a reduction in
assets of $10,663 and $4,342 and liabilities of $3,691 and $4,207 in 1998 and
1997, respectively.
See Note 16 for information regarding the Company's acquisition of
GenAmerica Corporation.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is currently a defendant in approximately 500 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".
F-36
<PAGE> 258
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The settlement class includes most of the owners of
permanent life insurance policies and annuity contracts or certificates issued
pursuant to individual sales in the United States by Metropolitan Life Insurance
Company, Metropolitan Insurance and Annuity Company or Metropolitan Tower Life
Insurance Company between January 1, 1982 and December 31, 1997. This 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 for sales by the
defendant insurers during the class period, effectively resolving all pending
class actions against these insurers. The defendants are in the process of
having these claims dismissed.
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 Insurance Company, 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. Over 400 of the approximately
500 lawsuits noted above are brought by individuals who elected to exclude
themselves from the settlement.
The settlement provides three forms of relief. General relief, in the form
of free death benefits, is provided automatically to class members who did not
exclude themselves from the settlement or who did not elect the claim evaluation
procedures set forth in the settlement. The claim evaluation procedures permit a
class member to have a claim evaluated by a third party under procedures set
forth in the settlement. Claim awards made under the claim evaluation procedures
will be in the form of policy adjustments, free death benefits or, in some
instances, cash payments. In addition, class members who have or had an
ownership interest in specified policies will also automatically receive
deferred acquisition cost tax relief in the form of free death benefits. The
settlement fixes the aggregate amounts that are available under each form of
relief.
The Company 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. The Company believes that the cost 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. The Company
has not yet made a claim under those reinsurance agreements and, although there
is a risk that the carriers will refuse coverage for all or part of the claim,
the Company believes this is very unlikely to occur. The Company 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.
The class action settlement does not resolve nine purported or certified
class actions currently pending against New England Mutual Life Insurance
Company with which the Company merged in 1996. Eight of those actions have been
consolidated as a multidistrict proceeding for pre-trial purposes in the United
States District Court in Massachusetts. That Court certified a mandatory class
as to those claims. Following an appeal of that certification, the United States
F-37
<PAGE> 259
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Court of Appeals remanded the case to the District Court for further
consideration. The Company is negotiating a settlement with class counsel.
The class action settlement also does not resolve three putative sales
practices class action lawsuits which have been brought against General American
Life Insurance Company. These lawsuits have been consolidated in a single
proceeding in the United States District Court for the Eastern District of
Missouri. General American Life Insurance Company and counsel for plaintiffs
have negotiated a settlement in principle of this consolidated proceeding.
General American Life Insurance Company has not reached agreement with
plaintiffs' counsel on the attorneys' fees to be paid. However, negotiations are
ongoing.
In addition, the class action settlement does not resolve two putative
class actions involving sales practices claims filed against Metropolitan Life
Insurance Company in Canada. The class action settlement also does not resolve a
certified class action with conditionally certified subclasses against
Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity Company,
Metropolitan Tower Life Insurance Company and various individual defendants
alleging improper sales abroad. That lawsuit is pending in a New York federal
court.
In the past, the Company has resolved some individual sales practices
claims through settlement, dispositive motion or, in a few instances, 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.
Regulatory authorities in a small number of states, including both
insurance departments and one state attorney general, as well as the National
Association of Securities Dealers, Inc., have ongoing investigations or
inquiries relating to the Company's sales of individual life insurance policies
or annuities, including investigations of alleged improper replacement
transactions and alleged improper sales of insurance with inaccurate or
inadequate disclosures as to the period for which premiums would be payable.
Over the past several years, the Company has resolved a number of investigations
by other regulatory authorities for monetary payments and certain other relief,
and may continue to do so in the future.
MetLife 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. MetLife 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 MetLife's employees
during the period from the 1920s through approximately the 1950s and alleging
that MetLife 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 MetLife have included
negligence, intentional tort claims and conspiracy claims concerning the health
risks associated with asbestos. While MetLife 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. MetLife
intends to continue to exercise its best judgment regarding settlement or
defense of such cases. The number of such cases that may be brought or the
aggregate amount of any liability that MetLife 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 MetLife's primary,
umbrella and first level excess liability insurance carriers. MetLife is
presently in litigation with several of its excess
F-38
<PAGE> 260
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. MetLife has appealed. There can be no assurances regarding the outcome
of this litigation or the amount and timing of recoveries, if any, from these
excess liability insurers. MetLife's asbestos-related litigation with these
insurers should have no effect on recoveries under the excess insurance policies
described below.
The Company has recorded, in other expenses, charges of $499 ($317
after-tax), $1,895 ($1,203 after-tax) and $300 ($190 after-tax) for the years
ended December 31, 1999, 1998 and 1997, respectively, for sales practices claims
and claims for personal injuries caused by exposure to asbestos or
asbestos-containing products. The 1999 charge was principally related to the
settlement of the multidistrict litigation proceeding involving alleged improper
sales practices, accruals for sales practices claims not covered by the
settlement and other legal costs. The 1998 charge was comprised of $925 and $970
for sales practices claims and asbestos-related claims, respectively. The
Company recorded the charges for sales practices claims based on preliminary
settlement discussions and the settlement history of other insurers.
Prior to the fourth quarter of 1998, the Company established a liability
for asbestos-related claims based on settlement costs for claims that the
Company had settled, estimates of settlement costs for claims pending against
the Company and an estimate of settlement costs for unasserted claims. The
amount for unasserted claims was based on management's estimate of unasserted
claims that would be probable of assertion. A liability is not established for
claims which management believes are only reasonably possible of assertion.
Based on this process, the accrual for asbestos-related claims at December 31,
1997 was $386. Potential liabilities for asbestos-related claims are not easily
quantified, due to the nature of the allegations against the Company, which are
not related to the business of manufacturing, producing, distributing or selling
asbestos or asbestos-containing products, adding to the uncertainty as to the
number of claims that may be brought against the Company.
During 1998, the Company decided to pursue the purchase of excess insurance
to limit its exposure to asbestos-related claims. In connection with the
negotiations with the casualty insurers to obtain this insurance, the Company
obtained information that caused management to reassess the accruals for
asbestos-related claims. This information included:
- Information from the insurers regarding the asbestos-related claims
experience of other insureds, which indicated that the number of claims
that were probable of assertion against the Company in the future was
significantly greater than it had assumed in its accruals. The number of
claims brought against the Company is generally a reflection of the
number of asbestos-related claims brought against asbestos defendants
generally and the percentage of those claims in which the Company is
included as a defendant. The information provided to the Company relating
to other insureds indicated that the Company had been included as a
defendant for a significant percentage of total asbestos-related claims
and that it may be included in a larger percentage of claims in the
future, because of greater awareness of asbestos litigation generally by
potential plaintiffs and plaintiffs' lawyers and because of the
bankruptcy and reorganization or the exhaustion of insurance coverage of
other asbestos defendants; and that, although volatile, there was an
upward trend in the number of total claims brought against asbestos
defendants.
- Information derived from actuarial calculations the Company made in the
fourth quarter of 1998 in connection with these negotiations, which
helped to frame, define and quantify this liability. These calculations
were made using, among other things, current information regarding the
Company's claims and settlement experience (which reflected the
F-39
<PAGE> 261
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's decision to resolve an increased number of these claims by
settlement), recent and historic claims and settlement experience of
selected other companies and information obtained from the insurers.
Based on this information, the Company concluded that certain claims that
previously were considered as only reasonably possible of assertion were now
probable of assertion, increasing the number of assumed claims to approximately
three times the number assumed in prior periods. As a result of this
reassessment, the Company increased its liability for asbestos-related claims to
$1,278 at December 31, 1998.
During 1998, the Company paid $1,407 of premiums for excess of loss
reinsurance agreements and excess insurance policies, consisting of $529 for the
excess of loss reinsurance agreements for sales practices claims and excess
mortality losses and $878 for the excess insurance policies for asbestos-related
claims.
The Company obtained the excess of loss reinsurance agreements to provide
reinsurance with respect to sales practices claims made on or prior to December
31, 1999 and for certain mortality losses in 1999. These reinsurance agreements
have a maximum aggregate limit of $650, with a maximum sublimit of $550 for
losses for sales practices claims. This coverage is in excess of an aggregate
self-insured retention of $385 with respect to sales practices claims and $506,
plus the Company's statutory policy reserves released upon the death of
insureds, with respect to life mortality losses. At December 31, 1999, the
subject losses under the reinsurance agreements due to sales practices claims
and related counsel fees from the time the Company entered into the reinsurance
agreements did not exceed that self-insured retention. The maximum sublimit of
$550 for sales practices claims was within a range of losses that management
believed were reasonably possible at December 31, 1998. Each excess of loss
reinsurance agreement for sales practices claims and mortality losses contains
an experience fund, which provides for payments to the Company at the
commutation date if experience is favorable at such date. The Company accounts
for the aggregate excess of loss reinsurance agreements as reinsurance; however,
if deposit accounting were applied, the effect on the Company's consolidated
financial statements in 1998, 1999 and 2000 would not be significant.
Under reinsurance accounting, the excess of the liability recorded for
sales practices losses recoverable under the agreements of $550 over the premium
paid of $529 results in a deferred gain of $21 which is being amortized into
income over the settlement period from January 1999 through April 2000. Under
deposit accounting, the premium would be recorded as an other asset rather than
as an expense, and the reinsurance loss recoverable and the deferred gain would
not have been recorded. Because the agreements also contain an experience fund
which increases with the passage of time, the increase in the experience fund in
1999 and 2000 under deposit accounting would be recognized as interest income in
an amount approximately equal to the deferred gain that will be amortized into
income under reinsurance accounting.
The excess insurance policies for asbestos-related claims provide for
recovery of losses up to $1,500, which is in excess of a $400 self-insured
retention ($878 of which was recorded as a recoverable at December 31, 1999 and
1998). The asbestos-related policies are also subject to annual and per-claim
sublimits. Amounts are recoverable under the policies annually with respect to
claims paid during the prior calendar year. Although amounts paid in any given
year that are recoverable under the policies will be reflected as a reduction in
the Company's operating cash flows for that year, management believes that the
payments will not have a material adverse effect on the Company's liquidity.
Each asbestos-related policy contains an experience fund and a reference fund
that provides for payments to the Company at the commutation date if experience
under the policy to such date has been favorable, or pro rata reductions from
time to
F-40
<PAGE> 262
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
time in the loss reimbursements to the Company if the cumulative return on the
reference fund is less than the return specified in the experience fund.
A purported class action suit involving policyholders in 32 states has been
filed in a Rhode Island state court against MetLife's subsidiary, Metropolitan
Property and Casualty Insurance Company, with respect to claims by policyholders
for the alleged diminished value of automobiles after accident-related repairs.
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 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 Metropolitan
Casualty Insurance Company 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 vigorously defend themselves
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 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. At a mediation, the action brought by
the United States and Puerto Rico was conditionally settled, provided that the
governments have access to additional sums from a fund contributed to by oil
companies to help remediate oil spills. The Company can provide no assurance
that this action will be settled in this manner.
Three putative class actions have been filed by Conning Corporation
shareholders alleging that the Company's announced offer to purchase the
publicly-held Conning shares is inadequate and constitutes a breach of fiduciary
duty (see Note 16). The Company believes the actions are without merit, and
expects that they will not materially affect its offer to purchase the shares.
A civil complaint challenging the fairness of the plan of reorganization
and the adequacy and accuracy of the disclosures to policyholders regarding the
plan has been filed in New York Supreme Court for Kings County on behalf of an
alleged class consisting of the policyholders of MetLife who should have
membership benefits in MetLife and were and are eligible to receive notice, vote
and receive consideration in the demutualization. The complaint seeks to enjoin
or rescind the plan and seeks other relief. The defendants named in the
complaint are MetLife and the individual members of its board of directors and
MetLife, Inc. MetLife believes that the allegations made in the complaint are
wholly without merit, and intends to vigorously contest the complaint.
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
F-41
<PAGE> 263
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
TRANSFERRED CANADIAN POLICIES
In July 1998, MetLife sold a substantial portion of its Canadian operations
to Clarica Life. As part of that sale, a large block of policies in effect with
MetLife in Canada were transferred to Clarica Life, and the holders of the
transferred Canadian policies became policyholders of Clarica Life. Those
transferred policyholders are no longer policyholders of MetLife and, therefore,
are not entitled to compensation under the plan of reorganization. However, as a
result of a commitment made in connection with obtaining Canadian regulatory
approval of that sale, if MetLife demutualizes, its Canadian branch will make
cash payments to those who are, or are deemed to be, holders of those
transferred Canadian policies. The payments, which will be recorded in other
expenses in the same period as the effective date of the plan, will be
determined in a manner that is consistent with the treatment of, and fair and
equitable to, eligible policyholders of MetLife. The amount of the payment is
dependent upon the initial public offering price of common stock to be issued on
the effective date of the plan of demutualization.
YEAR 2000
The Year 2000 issue was the result of the widespread use of computer
programs written using two digits (rather than four) to define the applicable
year. Such programming was a common industry practice designed to avoid the
significant costs associated with additional mainframe capacity necessary to
accommodate a four-digit field. As a result, any of the Company's computer
systems that have time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in major system failures
or miscalculations. The Company has conducted a comprehensive review of its
computer systems to identify the systems that could be affected by the Year 2000
issue and has implemented a plan to resolve the issue. There can be no
assurances that the Year 2000 plan of the Company or that of its vendors or
third parties have resolved all Year 2000 issues. Further, there can be no
assurance that there will not be any future system failure or that such failure,
if any, will not have a material impact on the operations of the Company.
LEASES
In accordance with industry practice, certain of the Company's income from
lease agreements with retail tenants is contingent upon the level of the
tenants' sales revenues. Additionally, the Company, as lessee, has entered into
various lease and sublease agreements
F-42
<PAGE> 264
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for office space, data processing and other equipment. Future minimum rental and
subrental income and minimum gross rental payments relating to these lease
agreements were as follows:
<TABLE>
<CAPTION>
GROSS
RENTAL SUBLEASE RENTAL
INCOME INCOME PAYMENTS
------ -------- --------
<S> <C> <C> <C>
2000......................................... $ 817 $13 $156
2001......................................... 740 12 135
2002......................................... 689 11 111
2003......................................... 612 9 90
2004......................................... 542 9 69
Thereafter................................... 2,032 27 299
</TABLE>
10. INCOME TAXES
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................... $643 $668 $370
State and local........................................... 24 60 10
Foreign................................................... 4 99 26
---- ---- ----
671 827 406
---- ---- ----
Deferred:
Federal................................................... (78) (25) 28
State and local........................................... 2 (8) 9
Foreign................................................... (2) (54) 25
---- ---- ----
(78) (87) 62
---- ---- ----
Provision for income taxes.................................. $593 $740 $468
==== ==== ====
</TABLE>
Reconciliations of the income tax provision at the U.S. statutory rate to
the provision for income taxes as reported were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax provision at U.S. statutory rate........................ $502 $730 $585
Tax effect of:
Tax exempt investment income.............................. (39) (40) (30)
Surplus tax............................................... 125 18 (40)
State and local income taxes.............................. 18 31 15
Tax credits............................................... (5) (25) (15)
Prior year taxes.......................................... (31) 4 (2)
Sale of businesses........................................ -- (19) (41)
Other, net................................................ 23 41 (4)
---- ---- ----
Provision for income taxes.................................. $593 $740 $468
==== ==== ====
</TABLE>
F-43
<PAGE> 265
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes represent the tax effect of the differences between
the book and tax basis of assets and liabilities. Net deferred income tax assets
and liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
---- ----
<S> <C> <C>
Deferred income tax assets:
Policyholder liabilities and receivables............... $3,042 $3,108
Net operating losses................................... 72 22
Net unrealized investment losses....................... 161 --
Employee benefits...................................... 192 174
Litigation related..................................... 468 312
Other.................................................. 242 158
------ ------
4,177 3,774
Less: Valuation allowance.............................. 72 21
------ ------
4,105 3,753
------ ------
Deferred income tax liabilities:
Investments............................................ 1,472 1,529
Deferred policy acquisition costs...................... 1,967 1,887
Net unrealized investment gains........................ -- 864
Other.................................................. 63 18
------ ------
3,502 4,298
------ ------
Net deferred income tax asset (liability)................ $ 603 $ (545)
====== ======
</TABLE>
Foreign net operating loss carryforwards generated deferred income tax
benefits of $72 and $21 at December 31, 1999 and 1998, respectively. The Company
has recorded a valuation allowance related to these tax benefits. The valuation
allowance reflects management's assessment, based on available information, that
it is more likely than not that the deferred income tax asset for foreign net
operating loss carryforwards will not be realized. The benefit will be
recognized when management believes that it is more likely than not that the
portion of the deferred income tax asset is realizable.
The Company has been audited by the Internal Revenue Service for the years
through and including 1993. The Company is being audited for the years 1994,
1995 and 1996. The Company believes that any adjustments that might be required
for open years will not have a material effect on the Company's consolidated
financial statements.
11. REINSURANCE
The Company assumes and cedes insurance with other insurance companies. The
Company continually evaluates the financial condition of its reinsurers and
monitors concentration of credit risk in an effort to minimize its exposure to
significant losses from reinsurer insolvencies. The Company is contingently
liable with respect to ceded reinsurance should any reinsurer be unable to meet
its obligations under these agreements. The amounts in the consolidated
statements of income are presented net of reinsurance ceded.
The Company's life insurance operations participate in reinsurance in order
to limit losses, minimize exposure to large risks and to provide additional
capacity for future growth. During
F-44
<PAGE> 266
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998, the Company began reinsuring, under yearly renewal term policies, 90
percent of the mortality risk on universal life policies issued after 1983. The
Company also reinsures 90 percent of the mortality risk on term life insurance
policies issued after 1995 under yearly renewal term policies and coinsures 100
percent of the mortality risk in excess of $25 and $35 on single and joint
survivorship policies, respectively.
During 1997, the Company obtained a 100 percent coinsurance policy to
provide coverage for contractual payments generated by certain portions of the
Company's non-life contingency long-term guaranteed interest contracts and
structured settlement lump sum contracts issued during the periods 1991 through
1993. The policy was amended in 1998 to include structured settlement lump sum
payments issued during the period 1983 through 1990, 1994 and 1995. Reinsurance
recoverables under the contract, which has been accounted for as a financing
transaction, were $1,372 and $1,374 at December 31, 1999 and 1998, respectively.
See Note 9 for information regarding certain excess of loss reinsurance
agreements providing coverage for risks associated primarily with sales
practices claims.
The Company has exposure to catastrophes, which are an inherent risk of the
property and casualty insurance business and could contribute to material
fluctuations in the Company's results of operations. The Company uses excess of
loss and quota share reinsurance arrangements to limit its maximum loss, provide
greater diversification of risk and minimize exposure to larger risks. The
Company's reinsurance program is designed to limit a catastrophe loss to no more
than 10% of the Auto & Home segment's statutory surplus.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Direct premiums..................................... $13,249 $12,763 $12,728
Reinsurance assumed................................. 484 409 360
Reinsurance ceded................................... (1,645) (1,669) (1,810)
------- ------- -------
Net premiums........................................ $12,088 $11,503 $11,278
======= ======= =======
Reinsurance recoveries netted against policyholder
benefits.......................................... $ 1,626 $ 1,744 $ 1,648
======= ======= =======
</TABLE>
The effects of reinsurance with GenAmerica Corporation ("GenAmerica") were
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Premiums ceded to GenAmerica.............................. $108 $113 $61
==== ==== ===
Reinsurance recoveries from GenAmerica netted against
policyholder benefits................................... $ 74 $ 28 $24
==== ==== ===
</TABLE>
Reinsurance recoverables, included in other receivables, were $2,898 and
$3,134 at December 31, 1999 and 1998, respectively, of which $5 and $5,
respectively, were recoverable from GenAmerica. Reinsurance and ceded
commissions payables, included in other liabilities, were $148 and $105 at
December 31, 1999 and 1998, respectively.
F-45
<PAGE> 267
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following provides an analysis of the activity in the liability for
benefits relating to property and casualty and group accident and non-medical
health policies and contracts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at January 1................................ $ 3,320 $ 3,655 $ 3,345
Reinsurance recoverables.......................... (233) (229) (215)
------- ------- -------
Net balance at January 1............................ 3,087 3,426 3,130
------- ------- -------
Acquisition of business............................. 204 -- --
------- ------- -------
Incurred related to:
Current year...................................... 3,129 2,726 2,855
Prior years....................................... (16) (245) 88
------- ------- -------
3,113 2,481 2,943
------- ------- -------
Paid related to:
Current year...................................... (2,128) (1,967) (1,832)
Prior years....................................... (759) (853) (815)
------- ------- -------
(2,887) (2,820) (2,647)
------- ------- -------
Balance at December 31.............................. 3,517 3,087 3,426
Add: Reinsurance recoverables..................... 272 233 229
------- ------- -------
Balance at December 31.............................. $ 3,789 $ 3,320 $ 3,655
======= ======= =======
</TABLE>
12. OTHER EXPENSES
Other expenses were comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Compensation........................................ $ 2,590 $ 2,478 $ 2,078
Commissions......................................... 937 902 766
Interest and debt issue costs....................... 405 379 453
Amortization of policy acquisition costs (excludes
amortization of $(46), $240 and $70, respectively,
related to realized investment gains and
(losses))......................................... 862 587 771
Capitalization of policy acquisition costs.......... (1,160) (1,025) (1,000)
Rent, net of sublease income........................ 239 155 179
Minority interest................................... 55 67 56
Restructuring charge................................ -- 81 --
Other............................................... 2,827 4,395 2,468
------- ------- -------
$ 6,755 $ 8,019 $ 5,771
======= ======= =======
</TABLE>
During 1998, the Company recorded charges of $81 to restructure
headquarters operations and consolidate certain agencies and other operations.
These costs have been fully paid at December 31, 1999.
F-46
<PAGE> 268
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. STATUTORY FINANCIAL INFORMATION
The reconciliations of MetLife's statutory surplus and net change in
statutory surplus, determined in accordance with accounting practices prescribed
or permitted by insurance regulatory authorities, with equity and net income
determined in conformity with generally accepted accounting principles were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Statutory surplus........................................... $ 7,630 $ 7,388
GAAP adjustments for:
Future policy benefits and policyholder account
balances............................................... (4,167) (6,830)
Deferred policy acquisition costs......................... 8,381 6,560
Deferred income taxes..................................... 886 (190)
Valuation of investments.................................. (2,102) 3,981
Statutory asset valuation reserves........................ 3,189 3,381
Statutory interest maintenance reserves................... 1,114 1,486
Surplus notes............................................. (1,602) (1,595)
Other, net................................................ 361 686
------- -------
Equity...................................................... $13,690 $14,867
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net change in statutory surplus......................... $ 242 $ 10 $ 227
GAAP adjustments for:
Future policy benefits and policyholder account
balances........................................... 556 127 (38)
Deferred policy acquisition costs..................... 379 224 149
Deferred income taxes................................. 154 234 62
Valuation of investments.............................. 473 1,158 (387)
Statutory asset valuation reserves.................... (226) (461) 1,136
Statutory interest maintenance reserves............... (368) 312 53
Other, net............................................ (593) (261) 1
----- ------ ------
Net income.............................................. $ 617 $1,343 $1,203
===== ====== ======
</TABLE>
F-47
<PAGE> 269
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. OTHER COMPREHENSIVE INCOME (LOSS)
The following table sets forth the reclassification adjustments required
for the years ended December 31, 1999, 1998 and 1997 to avoid double-counting in
other comprehensive income (loss) items that are included as part of net income
for the current year that have been reported as a part of other comprehensive
income (loss) in the current or prior year:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Holding (losses) gains on investments arising during the
year...................................................... $(6,314) $ 1,493 $ 4,257
Income tax effect of holding gains or losses................ 2,262 (617) (1,615)
Transfer of securities from held-to-maturity to
available-for-sale:
Holding gains on investments.............................. -- -- 198
Income tax effect......................................... -- -- (75)
Reclassification adjustments:
Realized holding (gains) losses included in current year
net income............................................. 38 (2,013) (844)
Amortization of premium and discount on investments....... (307) (350) (209)
Realized holding (losses) gains allocated to other
policyholder amounts................................... (67) 608 231
Income tax effect......................................... 120 729 312
Allocation of holding losses (gains) on investments relating
to other policyholder amounts............................. 3,788 (351) (2,231)
Income tax effect of allocation of holding gains and losses
to other policyholder amounts............................. (1,357) 143 846
------- ------- -------
Net unrealized investment (losses) gains.................... (1,837) (358) 870
------- ------- -------
Foreign currency translation adjustments arising during the
year...................................................... 50 (115) (46)
Reclassification adjustment for sale of investment in
foreign operation......................................... -- 2 (3)
------- ------- -------
Foreign currency translation adjustment..................... 50 (113) (49)
------- ------- -------
Minimum pension liability adjustment........................ (7) (12) --
------- ------- -------
Other comprehensive income (loss)........................... $(1,794) $ (483) $ 821
======= ======= =======
</TABLE>
15. BUSINESS SEGMENT INFORMATION
The Company provides insurance and financial services to customers in the
United States, Canada, Central America, South America, Europe and Asia. The
Company's business is divided into six segments: Individual, Institutional, Auto
& Home, International, Asset Management and Corporate. These segments are
managed separately because they either provide different products and services,
require different strategies or have different technology requirements.
Individual offers a wide variety of individual insurance and investment
products, including life insurance, annuities and mutual funds. Institutional
offers a broad range of group insurance and retirement and savings products and
services, including group life insurance, non-medical health insurance such as
short and long-term disability, long-term care and dental insurance and other
insurance products and services. Auto & Home provides insurance coverages
including private passenger automobile, homeowners and personal excess liability
insurance. International provides life insurance, accident and health insurance,
annuities and retirement and savings
F-48
<PAGE> 270
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
products to both individuals and groups, and auto and homeowners coverage to
individuals. Asset Management provides a broad variety of asset management
products and services to individuals and institutions such as mutual funds for
savings and retirement needs, commercial real estate advisory and management
services, and institutional and retail investment management. Through its
Corporate segment, the Company reports items that are not allocated to any of
the business segments.
Set forth in the tables below is certain financial information with respect
to the Company's operating segments for the years ended December 31, 1999, 1998
and 1997. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies, except for the
method of capital allocation. The Company allocates capital to each segment
based upon an internal capital allocation system that allows the Company to more
effectively manage its capital. The Company has divested operations that did not
meet targeted rates of return, including its commercial leasing business
(Corporate segment) and substantial portions of its Canadian operations
(International segment), and insurance operations in the United Kingdom
(International segment). The Company evaluates the performance of each operating
segment based upon income or loss from operations before provision for income
taxes and non-recurring items (e.g. items of unusual or infrequent nature). The
Company allocates non-recurring items (primarily consisting of sales practices
claims and claims for personal injuries caused by exposure to asbestos or
asbestos-containing products) and prior to its sale in 1998, the results of
MetLife Capital Holdings, Inc. to the Corporate segment.
<TABLE>
<CAPTION>
AUTO
AT OR FOR THE YEAR ENDED & ASSET CONSOLIDATION/
DECEMBER 31, 1999 INDIVIDUAL INSTITUTIONAL HOME INTERNATIONAL MANAGEMENT CORPORATE ELIMINATION TOTAL
- ------------------------ ---------- ------------- ---- ------------- ---------- --------- -------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums................ $ 4,289 $ 5,525 $1,751 $ 523 $ -- $ -- $ -- $ 12,088
Universal life and
investment-type
product policy fees... 888 502 -- 48 -- -- -- 1,438
Net investment income... 5,346 3,755 103 206 80 605 (279) 9,816
Other revenues.......... 558 629 21 12 803 59 72 2,154
Net realized investment
gains (losses)........ (14) (31) 1 1 -- (41) 14 (70)
Policyholder benefits
and claims............ 4,625 6,712 1,301 463 -- -- 4 13,105
Interest credited to
policyholder account
balances.............. 1,359 1,030 -- 52 -- -- -- 2,441
Policyholder
dividends............. 1,509 159 -- 22 -- -- -- 1,690
Other expenses.......... 2,719 1,589 514 248 795 1,031 (141) 6,755
Income (loss) before
provision for income
taxes and
extraordinary item.... 855 890 61 5 88 (408) (56) 1,435
Income (loss) after
provision for income
taxes before
extraordinary item.... 555 567 56 21 51 (358) (50) 842
Total assets............ 109,401 88,127 4,443 4,381 1,036 19,834 (1,990) 225,232
Deferred policy
acquisition costs..... 8,049 106 93 244 -- -- -- 8,492
Separate account
assets................ 28,828 35,236 -- 877 -- -- -- 64,941
Policyholder
liabilities........... 72,956 47,781 2,318 2,187 -- 6 (293) 124,955
Separate account
liabilities........... 28,828 35,236 -- 877 -- -- -- 64,941
</TABLE>
F-49
<PAGE> 271
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AUTO
AT OR FOR THE YEAR ENDED & ASSET CONSOLIDATION/
DECEMBER 31, 1998 INDIVIDUAL INSTITUTIONAL HOME INTERNATIONAL MANAGEMENT CORPORATE ELIMINATION TOTAL
- ------------------------ ---------- ------------- ---- ------------- ---------- --------- -------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums................ $ 4,323 $ 5,159 $1,403 $ 618 $ -- $ -- $ -- $ 11,503
Universal life and
investment-type
product policy fees... 817 475 -- 68 -- -- -- 1,360
Net investment income... 5,480 3,885 81 343 75 682 (318) 10,228
Other revenues.......... 474 575 36 33 817 111 (52) 1,994
Net realized investment
gains................. 659 557 122 117 -- 679 (113) 2,021
Policyholder benefits
and claims............ 4,606 6,416 1,029 597 -- (10) -- 12,638
Interest credited to
policyholder account
balances.............. 1,423 1,199 -- 89 -- -- -- 2,711
Policyholder
dividends............. 1,445 142 -- 64 -- -- -- 1,651
Other expenses.......... 2,577 1,613 386 352 799 2,601 (309) 8,019
Income (loss) before
provision for income
taxes and
extraordinary item.... 1,702 1,281 227 77 93 (1,119) (174) 2,087
Income (loss) after
provision for income
taxes before
extraordinary item.... 1,069 846 161 56 49 (691) (143) 1,347
Total assets............ 103,614 88,741 2,763 3,432 1,164 20,852 (5,220) 215,346
Deferred policy
acquisition costs..... 6,194 82 57 205 -- -- -- 6,538
Separate account
assets................ 23,013 35,029 -- 26 -- -- -- 58,068
Policyholder
liabilities........... 71,571 49,406 1,477 2,043 -- 1 (295) 124,203
Separate account
liabilities........... 23,013 35,029 -- 26 -- -- -- 58,068
</TABLE>
<TABLE>
<CAPTION>
AUTO
AT OR FOR THE YEAR ENDED & ASSET CONSOLIDATION/
DECEMBER 31, 1997 INDIVIDUAL INSTITUTIONAL HOME INTERNATIONAL MANAGEMENT CORPORATE ELIMINATION TOTAL
- ------------------------ ---------- ------------- ---- ------------- ---------- --------- -------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums................. $ 4,327 $ 4,689 $1,354 $ 908 $ -- $ -- $ -- $ 11,278
Universal life and
investment-type product
policy fees............ 855 426 -- 137 -- -- -- 1,418
Net investment income.... 4,754 3,754 71 504 78 700 (370) 9,491
Other revenues........... 338 357 25 54 682 19 16 1,491
Net realized investment
gains.................. 356 45 9 142 -- 326 (91) 787
Policyholder benefits and
claims................. 4,597 5,934 1,003 869 -- -- -- 12,403
Interest credited to
policyholder account
balances............... 1,422 1,319 -- 137 -- -- -- 2,878
Policyholder dividends... 1,340 305 -- 97 -- -- -- 1,742
Other expenses........... 2,394 1,178 351 497 679 966 (294) 5,771
Income before provision
for income taxes....... 877 535 105 145 81 79 (151) 1,671
Income after provision
for income taxes....... 599 339 74 126 45 163 (143) 1,203
Total assets............. 95,323 83,473 2,542 7,412 1,136 18,641 (5,745) 202,782
Deferred policy
acquisition costs...... 5,912 40 56 428 -- -- -- 6,436
Separate account assets.. 17,345 30,473 -- 520 -- -- -- 48,338
Policyholder
liabilities............ 70,686 49,547 1,509 5,615 -- 1 -- 127,358
Separate account
liabilities............ 17,345 30,473 -- 520 -- -- -- 48,338
</TABLE>
F-50
<PAGE> 272
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $48, $49 and $45 for
the years ended December 31, 1999, 1998 and 1997, respectively. The investment
in Nvest was $196, $252 and $216 at December 31, 1999, 1998 and 1997,
respectively.
Net investment income and net realized investment gains are based upon the
actual results of each segment's specifically identifiable asset portfolio.
Other costs and operating costs were allocated to each of the segments based
upon: (1) a review of the nature of such costs, (2) time studies analyzing the
amount of employee compensation costs incurred by each segment, and (3) cost
estimates included in the Company's product pricing.
The consolidation/elimination column includes the elimination of all
intersegment amounts and the Individual segment's ownership interest in Nvest.
The principal component of the intersegment amounts related to intersegment
loans, which bore interest at rates commensurate with related borrowings.
Revenues derived from any customer did not exceed 10% of consolidated
revenues. Revenues from U.S. operations were $24,637, $25,643 and $22,664 for
the years ended December 31, 1999, 1998 and 1997, respectively, which
represented 97%, 96% and 93%, respectively, of consolidated revenues.
16. SUBSEQUENT EVENTS
On January 6, 2000, the Company acquired GenAmerica for $1.2 billion. In
connection with this acquisition, the Company incurred $900 of short-term debt.
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 provider of reinsurance, and 61.0% of the outstanding shares of
Conning Corporation common stock, an asset manager. On January 18, 2000, the
Company announced that it had proposed to acquire all of the outstanding shares
of Conning common stock not already owned by it for $10.50 per share in cash, or
approximately $55. At December 31, 1999, the Company owned 9.6% of the
outstanding shares of RGA common stock which were acquired on November 24, 1999
for $125. Subsequent to the GenAmerica acquisition, the Company owned 57.9% of
the outstanding shares of RGA common stock. Total assets, revenues and net loss
of GenAmerica were $23,594, $3,916 and $(174), respectively, at or for the year
ended December 31, 1999.
As part of the acquisition agreement, in September 1999 the Company assumed
$5,752 of General American Life funding agreements and received cash of $1,926
and investment assets with a market value of $3,826. In October 1999, as part of
the assumption arrangement, the holders of General American Life funding
agreements aggregating $5,136 elected to have the Company redeem the funding
agreements for cash. General American Life agreed to pay the Company a fee of
$120 in connection with the assumption of the funding agreements. The fee will
be considered as part of the purchase price to be allocated to the fair value of
assets and liabilities acquired. The Company also agreed to make a capital
contribution of $120 to General American Life after the completion of the
acquisition.
At the date of the acquisition agreement, the Company and GenAmerica were
parties to a number of reinsurance agreements. In addition, as part of the
acquisition, the Company entered into agreements effective as of July 25, 1999,
which coinsured new and certain existing business of General American Life and
some of its affiliates. See Note 11.
F-51
<PAGE> 273
ANNEX
A
<TABLE>
<S> <C>
[PRICEWATERHOUSECOOPERS LOGO]
PRICEWATERHOUSECOOPERS LLP
600 Lee Road
Wayne PA 19087
Telephone (610) 993 3864
Direct Fax (610) 993 3900
</TABLE>
November 16, 1999
The Board of Directors
The Metropolitan Life Insurance Company
One Madison Avenue
New York, NY 10010-3690
Re: Plan of Reorganization of the Metropolitan Life Insurance Company
(MetLife), dated, September 28, 1999 as amended and restated on November
16, 1999
STATEMENT OF ACTUARIAL OPINION
QUALIFICATIONS
I, Kenneth M. Beck, a Principal with the firm of PricewaterhouseCoopers LLP
(PwC) and a member of the American Academy of Actuaries, am qualified under the
Academy's Qualification Standards to render the opinions set forth herein. This
opinion is provided pursuant to the Engagement Letter between PwC and MetLife
dated January 1, 1998. MetLife's Plan of Reorganization is carried out under
Section 7312 of the New York Insurance Law. This opinion is not a legal opinion
regarding the Plan, and does not address the overall fairness of the Plan.
Rather, it reflects the application of actuarial concepts and standards of
practice to the requirements set forth in Section 7312.
RELIANCE
I and other PwC staff acting under my direction received from MetLife extensive
information concerning MetLife's past and present financial experience and the
characteristics of its policies. In all cases, we were provided with the
information we required. We relied on the accuracy and completeness of the data
and assumptions supplied by MetLife and did not independently verify that
information. Where possible, the information was reviewed for general
reasonableness and in certain circumstances the data was reconfirmed with
MetLife.
Certain information was provided to me under the direction of MetLife's
Executive Vice President and Chief Actuary, Judy Weiss, F.S.A., M.A.A.A.
Information included:
a) expected future cash flows from assets held by MetLife; and
b) MetLife's experience underlying its 1999 dividend scales.
I relied on the completeness and accuracy of the data provided by Ms. Weiss.
My opinion depends upon the substantial accuracy of the information described
above that was provided by MetLife (the "MetLife Data").
PROCESS
In all cases, I and other PwC staff acting under my direction either derived the
results on which my opinions rest or reviewed derivations carried out by MetLife
employees.
A-1
<PAGE> 274
Board of Directors Page 2
MetLife Actuarial Opinion November 16, 1999
- --------------------------------------------------------------------------------
OPINION #1
In my opinion, the plan for allocation of consideration to Eligible
Policyholders (as defined in the Plan) as set forth in Article VII of the Plan
of Reorganization is fair and equitable to MetLife policyholders as required by
Section 7312 of the New York Insurance Law.
DISCUSSION
The distribution described in Article VII of the Plan takes into account the
ratio of the positive sum of the estimated past and future contributions to
MetLife surplus, if any, of each participating Policy and Contract owned by each
Eligible Policyholder to the total of all such positive sums.
Most of the consideration to be distributed to policyholders is allocated on
this basis. Under Section 7312 of the New York Insurance Law, there is no
specific guidance given for the allocation of consideration in a "Method Four"
reorganization, but policyholder contributions are specifically identified as an
acceptable approach to allocation of consideration under other methods of
reorganization within this section of the law. In addition, the contribution
method is recognized in the actuarial literature as an appropriate method. I
therefore find that the use of "actuarial contribution" as the principal basis
underlying the allocation of consideration is fair and equitable.
The distribution to policyholders also takes into account, to a lesser extent,
the fact that policyholders have intangible membership rights that are
independent of their actuarial contributions. Each Eligible Policyholder
(participating or non-participating) is, under the Plan, allocated a fixed
number of shares of common stock without regard to the contribution of that
policyholder or of the class or classes in which policies held by the
policyholder happen to reside. Under the Plan, the percentage of the total
consideration that is allocated in this manner is significantly less than that
allocated in proportion to positive contributions, which is appropriate as well
as consistent with the approach used in previous demutualizations.
OPINION #2
The Closed Block is described in Article VIII of the MetLife Plan of
Reorganization (the "Plan"). In my opinion:
1. The objective of the Closed Block as being for the exclusive benefit of the
policies included therein for policyholder dividend purposes only as set
forth in Article VIII of the Plan is consistent with Section 7312 of the New
York Insurance Law.
2. The operations of the Closed Block as set forth in Article VIII of the Plan
and described in the Closed Block Memorandum, including the determination of
the required initial funding and the manner in which cash flows are charged
and credited to the Closed Block, are consistent with the objectives of the
Closed Block.
3. MetLife's assets (Closed Block funding) set aside as of December 31, 1998
(including subsequent adjustments as provided for in the Closed Block
Memorandum), to establish the Closed Block, as set forth in Article VIII of
the Plan (including the Closed Block Memorandum), are adequate because they
are expected to produce cash flows which, together with anticipated revenues
from the Closed Block Business, is reasonably expected to be sufficient to
support the Closed Block Business including, but not limited to, provisions
for payment of claims and certain expenses and taxes, and to provide for
continuation of dividend scales payable in 1999, if the experience underlying
such scales continues.
A-2
<PAGE> 275
Board of Directors Page 3
MetLife Actuarial Opinion November 16, 1999
- --------------------------------------------------------------------------------
4. The Plan is consistent with the objective of the Closed Block as it provides
a vehicle for MetLife's management to make appropriate adjustments to future
dividend scales, where necessary, if the underlying experience changes from
the experience underlying such dividend scales.
DISCUSSION
As to (1) above, Section 7312 of the New York Insurance Law provides for a
Mutual Life Insurance Company to convert to a Stock Life Insurance Company using
one of four "methods" as outlined in the law. MetLife is converting to a stock
company using Method Four. Method Four within Section 7312 does not contain
specific language that addresses the establishment of a Closed Block. Methods
One and Two of Section 7312 both contain language that address the establishment
of a Closed Block. The establishment of a Closed Block by MetLife, as set forth
in Article VIII of the Plan, is consistent with (a) the objectives and
guidelines contained in Methods One and Two of Section 7312, (b) with prior
demutualizations of mutual life insurance companies domiciled in New York and,
(c) current Actuarial Standards of Practice.
As to (2) above, my opinion is based on my findings that those matters are
consistent with the objective of the Closed Block. I have specifically
considered that the cash flow items to be charged against or credited to the
Closed Block as set forth in Article VIII of the Plan (including the Closed
Block Memorandum), have been incorporated on a consistent basis in the
determination of the Closed Block funding amount.
As to (3) above, the Closed Block was funded as of January 1, 1999 (including a
planned final adjustment after the Effective Date of the conversion), based on a
projection as of that date. The opinion above rests in part on that projection,
which extends over the future life of all policies assigned to the Closed Block.
That projection, which is based on the experience underlying the 1999 Dividend
Scale and on the cash flows expected from assets allocable to the Closed Block,
indicates that the assets, together with anticipated revenues from the Closed
Block Business, are reasonably expected to be sufficient to provide for the
continuation of that scale if the experience is unchanged.
As to (4) above, the criteria set forth in Article VIII of the Plan for
modifying the dividend scales if the experience changes (from that underlying
the 1999 Dividend Scale) are such that, if followed, the Closed Block
policyholders will be treated in a manner consistent with the contribution
principle for dividend determination. The operation of the Closed Block as set
forth in Article VIII is consistent with actuarial practices as described in
Actuarial Standard of Practice #15.
Sincerely,
/s/ Kenneth M. Beck
Kenneth M. Beck, F.S.A., M.A.A.A.
Principal for PricewaterhouseCoopers LLP
KMB/eam
Sincerely,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
A-3
<PAGE> 276
[MetLife Logo]
<PAGE> 277
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[MetLife SNOOPY LOGO]
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
SUBJECT TO COMPLETION. DATED APRIL 4, 2000.
179,000,000 SHARES
[METLIFE LOGO]
COMMON STOCK
------------------------
This is an initial public offering of shares of common stock of MetLife,
Inc. The offering is being made in connection with the reorganization of
Metropolitan Life Insurance Company from a mutual life insurance company to a
stock life insurance company in a process known as a demutualization.
26,850,000 shares of common stock are initially being offered outside the
United States and Canada by the international underwriters and 152,150,000
shares are initially being concurrently offered in the United States and Canada
by the U.S. underwriters. The offering price and underwriting discount for both
offerings are identical.
In addition to these shares, in connection with the demutualization we will
issue 493,476,118 shares of our common stock to a trust for the benefit of
policyholders of Metropolitan Life Insurance Company. In addition, we will issue
concurrently with the closing of this offering up to 73,000,000 shares of our
common stock in the aggregate to Banco Santander Central Hispano, S.A. and
Credit Suisse Group or their respective affiliates in private placements at a
price per share equal to the initial public offering price.
Prior to this offering, there has been no public market for our common
stock. We anticipate that the initial public offering price per share will be
between $13.00 and $15.00. Our common stock has been approved for listing on the
New York Stock Exchange under the symbol "MET", subject to official notice of
issuance.
Concurrently with this offering, we and a trust we own are offering
20,000,000 % equity security units for an aggregate offering of $1 billion,
plus up to an additional $150 million if the underwriters' options to purchase
additional units are exercised in full, by means of a separate prospectus. Each
unit consists of (a) a contract to purchase shares of our common stock and (b) a
% capital security of MetLife Capital Trust I, a Delaware business trust
wholly-owned by us.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 19.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to MetLife, Inc. ................ $ $
</TABLE>
To the extent that the underwriters sell more than 179,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
26,850,000 shares from us at the initial public offering price less the
underwriting discount.
Delivery of the shares of common stock will be made on or about
, 2000.
None of the Securities and Exchange Commission, any state securities
commission, the New York Superintendent of Insurance or any other regulatory
body has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Joint Bookrunners
CREDIT SUISSE FIRST BOSTON GOLDMAN SACHS INTERNATIONAL
BANK OF AMERICA INTERNATIONAL LIMITED
DONALDSON, LUFKIN AND JENRETTE
LEHMAN BROTHERS
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY INTERNATIONAL
<TABLE>
<S> <C> <C>
CREDIT LYONNAIS SECURITIES FOX-PITT, KELTON J.P. MORGAN SECURITIES LTD.
SANTANDER CENTRAL HISPANO INVESTMENT WARBURG DILLON READ
</TABLE>
Prospectus dated , 2000.
<PAGE> 278
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of common stock registered hereby,
all of which expenses, except for the SEC registration fee, the New York Stock
Exchange listing fee and the NASD filing fee, are estimates:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- ------
<S> <C>
SEC registration fee........................................ $ 1,810,781
New York Stock Exchange listing fee and expenses............ 2,013,900
NASD filing fee............................................. 30,500
Blue Sky fees and expenses (including legal fees)........... 5,000
Printing and engraving expenses............................. 3,800,000
Legal fees and expenses (other than Blue Sky)............... 1,600,000
Accounting fees and expenses................................ 1,250,000
Transfer Agent and Registrar's fees......................... 6,200,000
Miscellaneous............................................... 39,819
-----------
TOTAL............................................. $16,750,000
===========
</TABLE>
- ---------------
* To be furnished by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our directors and officers may be indemnified against liabilities, fines,
penalties and claims imposed upon or asserted against them as provided in the
Delaware General Corporation Law and our Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws. Such indemnification covers all
costs and expenses incurred by a director or officer in his capacity as such.
The Board of Directors, by a majority vote of a quorum of disinterested
directors or, under certain circumstances, independent counsel appointed by the
Board of Directors, must determine that the director or officer seeking
indemnification was not guilty of willful misconduct or a knowing violation of
the criminal law. In addition, the Delaware General Corporation Law and our
Amended and Restated Certificate of Incorporation may, under certain
circumstances, eliminate the liability of directors and officers in a
stockholder or derivative proceeding.
If the person involved is not a director or officer of MetLife, Inc., the
Board of Directors may cause MetLife, Inc. to indemnify, to the same extent
allowed for our directors and officers, such person who was or is a party to a
proceeding by reason of the fact that he is or was our employee or agent, or is
or was serving at our request as director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise.
We have in force and effect policies insuring our directors and officers
against losses which they or any of them will become legally obligated to pay by
reason of any actual or alleged error or misstatement or misleading statement or
act or omission or neglect or breach of duty by the directors and officers in
the discharge of their duties, individually or collectively, or any matter
claimed against them solely by reason of their being directors or officers. Such
coverage is limited by the specific terms and provisions of the insurance
policies.
Pursuant to the underwriting agreements, in the forms filed as exhibits to
this Registration Statement, the underwriters will agree to indemnify directors
and officers of MetLife, Inc. and
II-1
<PAGE> 279
persons controlling MetLife, Inc., within the meaning of the Securities Act of
1933, as amended (the "Act"), against certain liabilities that might arise out
of or are based upon certain information furnished to us by any such
underwriter.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Upon the effective date of the plan of reorganization, MetLife, Inc. will
distribute approximately 493,476,118 shares of common stock to the MetLife
Policyholder Trust for the benefit of eligible policyholders in the
demutualization. Exemption from registration under the Act for such distribution
will be claimed under Section 3(a)(10) of the Act based on the New York
Superintendent of Insurance's approval of the plan of reorganization. Banco
Santander Central Hispano, S.A. and Credit Suisse Group have agreed that they or
their respective affiliates will purchase from us in the aggregate not less than
14,900,000 shares nor more than 73,000,000 shares of our common stock in private
placements exempt from the registration requirements under the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. See Exhibit Index following the signature pages to this
amendment to the Registration Statement.
(b) Financial Statement Schedules.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ II-3
Schedule I -- Summary of Investments -- Other Than
Investments In Affiliates at December 31, 1999............ II-4
Schedule III -- Supplementary Insurance Information for the
years ended December 31, 1999, 1998 and 1997.............. II-5
Schedule IV -- Reinsurance for the years ended December 31,
1999, 1998 and 1997....................................... II-6
</TABLE>
II-2
<PAGE> 280
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Policyholders of
Metropolitan Life Insurance Company:
We have audited the consolidated financial statements of Metropolitan Life
Insurance Company and subsidiaries (the "Company") as of December 31, 1999 and
1998, and the related consolidated statements of income, equity and cash flows
for each of the three years in the period ended December 31, 1999, and have
issued our report thereon dated February 7, 2000; such consolidated financial
statements and report are included in the Prospectus which is a part of this
Registration Statement of MetLife, Inc. on Form S-1. Our audits also included
the consolidated financial statement schedules of the Company, listed in Item
16(b). These consolidated financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such consolidated financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
New York, New York
February 7, 2000
II-3
<PAGE> 281
METROPOLITAN LIFE INSURANCE COMPANY
SCHEDULE I
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN AFFILIATES
AT DECEMBER 31, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
AMOUNT AT
ESTIMATED WHICH SHOWN ON
TYPE OF INVESTMENT COST (A) FAIR VALUE BALANCE SHEET
- ------------------ -------- ---------- --------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government and government agencies
and authorities............................... $ 5,990 $6,299 $ 6,299
States, municipalities and political
subdivisions.................................. 1,583 1,542 1,542
Foreign governments............................. 4,090 4,206 4,206
Public utilities................................ 6,798 6,602 6,602
Convertibles and bonds with warrants attached... -- -- --
All other corporate bonds....................... 40,707 39,575 39,575
Mortgage and asset-backed securities............... 27,396 26,661 26,661
International...................................... 12,235 12,086 12,086
Redeemable preferred stocks........................ 10 10 10
-------- ------ --------
Total fixed maturities.......................... 98,809 96,981 96,981
Equity securities:
Common stocks:
Public utilities................................ 7 13 13
Banks, trust and insurance companies............ 132 331 331
Industrial, miscellaneous and all other......... 841 1,522 1,522
Nonredeemable preferred stocks..................... 151 140 140
-------- ------ --------
Total equity securities......................... 1,131 2,006 2,006
Mortgage loans on real estate........................ 19,829 19,452 19,739
Policy loans......................................... 5,598 5,618 5,598
Real estate and real estate joint ventures........... 5,602 -- 5,602
Real estate acquired in satisfaction of debt......... 47 -- 47
Limited partnership interests........................ 1,331 -- 1,331
Short-term investments............................... 3,055 3,055 3,055
Other invested assets................................ 1,501 -- 1,501
-------- ------ --------
TOTAL INVESTMENTS............................... $136,903 $135,860
======== ====== ========
</TABLE>
- ---------------
(A) Cost for fixed maturities and mortgage loans on real estate represents
original cost, reduced by repayments and writedowns and adjusted for
amortization of premiums or accretion of discount; for equity securities,
cost represents original cost; for real estate, cost represents original
cost reduced by writedowns and adjusted for depreciation; for real estate
joint ventures and limited partnership interests, cost represents original
cost adjusted for equity in earnings and distributions and reduced for
writedowns.
II-4
<PAGE> 282
METROPOLITAN LIFE INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
DEFERRED POLICY FUTURE POLICY POLICYHOLDER POLICYHOLDER
ACQUISITION BENEFITS AND OTHER ACCOUNT DIVIDENDS UNEARNED
SEGMENT COSTS POLICYHOLDER FUNDS BALANCES PAYABLE REVENUE
- ------- --------------- --------------------- ----------------- ------------------- ---------
<S> <C> <C> <C> <C> <C>
1999
Individual................. $8,049 $44,962 $27,280 $714 $799
Institutional.............. 106 29,895 17,627 259 6
Auto & Home................ 93 2,318 -- -- --
International.............. 244 1,192 994 1 15
Asset Management........... -- -- -- -- --
Corporate.................. -- 6 -- -- --
Consolidation/Elimination... -- (293) -- -- --
------ ------- ------- ---- ----
$8,492 $78,080 $45,901 $974 $820
====== ======= ======= ==== ====
1998
Individual................. $6,194 $43,775 $27,109 $687 $749
Institutional.............. 82 30,905 18,253 248 5
Auto & Home................ 57 1,477 -- -- --
International.............. 205 899 1,132 12 8
Asset Management........... -- -- -- -- --
Corporate.................. -- 1 -- -- --
Consolidation/Elimination... -- (295) -- -- --
------ ------- ------- ---- ----
$6,538 $76,762 $46,494 $947 $762
====== ======= ======= ==== ====
1997
Individual................. $5,912 $42,836 $27,222 $628 $562
Institutional.............. 40 30,039 19,167 341 4
Auto & Home................ 56 1,509 -- -- --
International.............. 428 3,461 2,154 -- 3
Asset Management........... -- -- -- -- --
Corporate.................. -- 1 -- -- --
Consolidation/Elimination... -- -- -- -- --
------ ------- ------- ---- ----
$6,436 $77,846 $48,543 $969 $569
====== ======= ======= ==== ====
<CAPTION>
PREMIUM REVENUE
SEGMENT AND POLICY CHARGES
- ------- ------------------
<S> <C>
1999
Individual................. $ 5,177
Institutional.............. 6,027
Auto & Home................ 1,751
International.............. 571
Asset Management........... --
Corporate.................. --
Consolidation/Elimination.. --
-------
$13,526
=======
1998
Individual................. $ 5,140
Institutional.............. 5,634
Auto & Home................ 1,403
International.............. 686
Asset Management........... --
Corporate.................. --
Consolidation/Elimination.. --
-------
$12,863
=======
1997
Individual................. $ 5,182
Institutional.............. 5,115
Auto & Home................ 1,354
International.............. 1,045
Asset Management........... --
Corporate.................. --
Consolidation/Elimination.. --
-------
$12,696
=======
</TABLE>
<TABLE>
<CAPTION>
AMORTIZATION OF
AMORTIZATION OF DEFERRED POLICY
DEFERRED POLICY ACQUISITION COSTS
ACQUISITION COSTS CHARGED AGAINST NET OTHER
INVESTMENT POLICYHOLDER BENEFITS CHARGED TO REALIZED INVESTMENT OPERATING
SEGMENT INCOME, NET AND INTEREST CREDITED OTHER EXPENSES GAINS (LOSSES) EXPENSES
- ------- --------------- --------------------- ----------------- ------------------- ---------
<S> <C> <C> <C> <C> <C>
1999
Individual................. $ 5,346 $ 5,984 $613 $ (46) $3,616
Institutional.............. 3,755 7,742 17 -- 1,730
Auto & Home................ 103 1,301 213 -- 301
International.............. 206 515 19 -- 251
Asset Management........... 80 -- -- -- 795
Corporate.................. 605 -- -- -- 1,031
Consolidation/Elimination... (279) 4 -- -- (141)
------- ------- ---- ----- ------
$ 9,816 $15,546 $862 $ (46) $7,583
======= ======= ==== ===== ======
1998
Individual................. $ 5,480 $ 6,029 $364 $ 240 $3,657
Institutional.............. 3,885 7,615 9 -- 1,747
Auto & Home................ 81 1,029 166 -- 220
International.............. 343 686 48 -- 368
Asset Management........... 75 -- -- -- 799
Corporate.................. 682 (10) -- -- 2,601
Consolidation/Elimination... (318) -- -- -- (309)
------- ------- ---- ----- ------
$10,228 $15,349 $587 $ 240 $9,083
======= ======= ==== ===== ======
1997
Individual................. $ 4,754 $ 6,019 $546 $ 61 $3,166
Institutional.............. 3,754 7,253 3 -- 1,502
Auto & Home................ 71 1,003 166 -- 185
International.............. 504 1,006 56 9 538
Asset Management........... 78 -- -- -- 679
Corporate.................. 700 -- -- -- 966
Consolidation/Elimination... (370) -- -- -- (294)
------- ------- ---- ----- ------
$ 9,491 $15,281 $771 $ 70 $6,742
======= ======= ==== ===== ======
<CAPTION>
PREMIUMS WRITTEN
SEGMENT (EXCLUDING LIFE)
- ------- ------------------
<S> <C>
1999
Individual................. $ N/A
Institutional.............. N/A
Auto & Home................ 2,109
International.............. 64
Asset Management........... N/A
Corporate.................. N/A
Consolidation/Elimination.. N/A
------
$2,173
======
1998
Individual................. $ N/A
Institutional.............. N/A
Auto & Home................ 1,422
International.............. 44
Asset Management........... N/A
Corporate.................. N/A
Consolidation/Elimination.. N/A
------
$1,466
======
1997
Individual................. $ N/A
Institutional.............. N/A
Auto & Home................ 1,359
International.............. 12
Asset Management........... N/A
Corporate.................. N/A
Consolidation/Elimination.. N/A
------
$1,371
======
</TABLE>
II-5
<PAGE> 283
METROPOLITAN LIFE INSURANCE COMPANY
SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1999
Life insurance in force..................... $1,743,945 $217,358 $12,168 $1,538,755 0.8%
========== ======== ======= ========== ====
INSURANCE PREMIUMS
Life insurance.......................... $ 9,503 $ 1,269 $ 217 $ 8,451 2.6%
Accident and health insurance........... 2,102 323 48 1,827 2.6%
Property and casualty insurance......... 1,644 53 219 1,810 12.1%
---------- -------- ------- ---------- ----
TOTAL INSURANCE PREMIUMS............. $ 13,249 $ 1,645 $ 484 $ 12,088 4.0%
========== ======== ======= ========== ====
FOR THE YEAR ENDED
DECEMBER 31, 1998
Life insurance in force..................... $1,652,179 $167,941 $11,435 $1,495,673 0.8%
========== ======== ======= ========== ====
INSURANCE PREMIUMS
Life insurance.......................... $ 9,572 $ 1,281 $ 313 $ 8,604 3.6%
Accident and health insurance........... 1,718 301 53 1,470 3.6%
Property and casualty insurance......... 1,473 87 43 1,429 3.0%
---------- -------- ------- ---------- ----
TOTAL INSURANCE PREMIUMS............. $ 12,763 $ 1,669 $ 409 $ 11,503 3.6%
========== ======== ======= ========== ====
FOR THE YEAR ENDED
DECEMBER 31, 1997
Life insurance in force..................... $1,699,690 $ 49,452 $17,748 $1,667,986 1.1%
========== ======== ======= ========== ====
INSURANCE PREMIUMS
Life insurance.......................... $ 9,556 $ 1,210 $ 227 $ 8,573 2.6%
Accident and health insurance........... 1,753 497 83 1,339 6.2%
Property and casualty insurance......... 1,419 103 50 1,366 3.7%
---------- -------- ------- ---------- ----
TOTAL INSURANCE PREMIUMS............. $ 12,728 $ 1,810 $ 360 $ 11,278 3.2%
========== ======== ======= ========== ====
</TABLE>
II-6
<PAGE> 284
All schedules, other than those listed above, are omitted because the
information is not required or because the information is included in the
Consolidated Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) To provide to the underwriters at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended ("Act") may be permitted to directors,
officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-7
<PAGE> 285
SIGNATURES
Pursuant to the requirements of the Act, the registrant has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in New York, New York on April 4, 2000.
MetLife, Inc.
By: /s/ ROBERT H. BENMOSCHE
------------------------------------
Name: Robert H. Benmosche
Title: Chairman, President and
Chief Executive Officer
II-8
<PAGE> 286
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the registration statement of MetLife, Inc. has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman, President, Chief Executive April 4, 2000
- --------------------------------------------- Officer and Director
Robert H. Benmosche
* Director April 4, 2000
- ---------------------------------------------
Curtis H. Barnette
* Vice-Chairman, Chief Investment April 4, 2000
- --------------------------------------------- Officer and Director
Gerald Clark
* Director April 4, 2000
- ---------------------------------------------
Joan Ganz Cooney
* Director April 4, 2000
- ---------------------------------------------
Burton A. Dole, Jr.
* Director April 4, 2000
- ---------------------------------------------
James R. Houghton
* Director April 4, 2000
- ---------------------------------------------
Harry P. Kamen
* Director April 4, 2000
- ---------------------------------------------
Helene L. Kaplan
* Director April 4, 2000
- ---------------------------------------------
Charles M. Leighton
* Director April 4, 2000
- ---------------------------------------------
Allen E. Murray
* Vice-Chairman, Chief Financial Officer April 4, 2000
- --------------------------------------------- and Director
Stewart G. Nagler
* Director April 4, 2000
- ---------------------------------------------
John J. Phelan, Jr.
</TABLE>
II-9
<PAGE> 287
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director April 4, 2000
- ---------------------------------------------
Hugh B. Price
* Director April 4, 2000
- ---------------------------------------------
Robert G. Schwartz
* Director April 4, 2000
- ---------------------------------------------
Ruth J. Simmons
* Director April 4, 2000
- ---------------------------------------------
William C. Steere, Jr.
By /s/ ROBERT H. BENMOSCHE
- --------------------------------------------
Attorney-in-fact
</TABLE>
II-10
<PAGE> 288
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1 Form of Underwriting Agreements (U.S. and International
versions)+
2.1 Plan of Reorganization+
2.2 Amendment to Plan of Reorganization dated as of March 9,
2000+
3.1 Form of Amended and Restated Certificate of Incorporation of
MetLife, Inc.+
3.2 Form of Amended and Restated By-Laws of MetLife, Inc.+
4.1 Form of Certificate for Common Stock, par value $0.01 per
share+
5.1 Opinion of Debevoise & Plimpton+
10.1 MetLife Deferred Compensation Plan 2000 for Senior Officers+
10.2 MetLife Deferred Compensation Plan 2000 for Officers+
10.3 Form of Employment Continuation Agreement with Messrs.
Benmosche, Nagler and Clark+
10.4 Form of Employment Continuation Agreement with Mr. Henrikson
and other executive officers+
10.5 Employment Continuation Agreement with Mr. Benson+
10.6 Form of Stockholder Rights Agreement+
10.7 MetLife, Inc. 2000 Stock Incentive Plan as amended and
restated March 28, 2000+
10.8 MetLife, Inc. 2000 Directors Stock Plan as amended and
restated March 28, 2000+
10.9 Amended and Restated Employment Continuation Agreement with
Ms. Rein+
10.10 Employment Continuation Agreement between Ms. Rein and
Metropolitan Property and Casualty Insurance Company,
dated March 3, 2000+
10.11 Employment Agreement between New England Life Insurance
Company and James M. Benson, dated June 16, 1997+
10.12 Policyholder Trust Agreement+
10.13 Restatement of the Excess Asbestos Indemnity Insurance
Policy, dated as of December 31, 1998, between Stockwood
Reinsurance Company, Ltd. and Metropolitan Life Insurance
Company+
10.14 Restatement of the Excess Asbestos Indemnity Insurance
Policy, dated as of December 31, 1998, between European
Reinsurance Corporation of America and Metropolitan Life
Insurance Company+
10.15 Restatement of the Aggregate Excess of Loss Reinsurance
Agreement, dated as of December 31, 1998, between
Stockwood Reinsurance Company, Ltd. and Metropolitan Life
Insurance Company+
10.16 Restatement of the Excess Asbestos Indemnity Insurance
Policy, dated as of December 31, 1998, between Granite
State Insurance Company and Metropolitan Life Insurance
Company+
10.17 Restatement of the Aggregate Excess of Loss Reinsurance
Agreement, dated as of December 31, 1998, between American
International Life Assurance Company of New York and
Metropolitan Life Insurance Company+
10.18 Five-Year Credit Agreement, dated as of April 27, 1998, and
as amended as of April 26, 1999, among Metropolitan Life
Insurance Company, MetLife Funding, Inc. and the other
parties signatory thereto+
10.19 364-Day Credit Agreement, dated as of April 27, 1998, as
amended and restated as of April 26, 1999, among
Metropolitan Life Insurance Company, MetLife Funding, Inc.
and the other parties signatory thereto+
10.20 364-Day Credit Agreement, dated as of September 29, 1999,
among Metropolitan Life Insurance Company, MetLife
Funding, Inc. and the other parties signatory thereto+
10.21 Stipulation of Settlement, as amended, relating to
Metropolitan Life Insurance Company Sales Practices
Litigation+
</TABLE>
<PAGE> 289
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.22 Consulting Agreement with Harry P. Kamen, effective July 1,
1999+
10.23 Consulting Agreement with Harry P. Kamen, effective July 1,
1998+
10.24 Metropolitan Life Insurance Company Long Term Performance
Compensation Plan (for performance periods starting on or
after January 1, 2000)+
10.25 Metropolitan Life Insurance Company Long Term Performance
Compensation Plan (for performance periods starting on or
after January 1, 1999)+
10.26 Metropolitan Life Insurance Company Long Term Performance
Compensation Plan (for performance periods starting on or
after January 1, 1998)+
10.27 Metropolitan Life Insurance Company Long Term Performance
Compensation Plan (for performance periods starting on or
after January 1, 1997)+
10.28 Metropolitan Life Insurance Company Annual Variable
Incentive Plan (for performance periods starting on or
after January 1, 2000)+
10.29 The New Metropolitan Life Auxiliary Retirement Benefits
Plan, as amended and restated, effective January 1, 1996+
10.30 The New Metropolitan Life Supplemental Auxiliary Retirement
Benefits Plan, effective January 1, 1996, and Amendment
thereto+
10.31 Metropolitan Life Auxiliary Savings and Investment Plan,
restated effective through August 15, 1998+
10.32 Metropolitan Life Supplemental Auxiliary Savings and
Investment Plan (as amended and restated as of September
1, 1998) and Amendment thereto+
10.33 Supplemental Auxiliary Savings and Investment Plan of
Participating Metropolitan Affiliates, effective January
1, 1996+
10.34 Metropolitan Life Supplemental Retirement Benefits Plan and
Amendment thereto, effective January 1, 1995+
10.35 New England Financial Annual Variable Incentive Plan (for
performance periods starting on or after January 1, 2000)+
10.36 New England Financial Long Term Performance Compensation
Plan (for performance periods starting on or after January
1, 2000)+
10.37 New England Life Insurance Company Select Employees
Supplemental 401(k) Plan, as amended and restated
effective January 1, 2000+
10.38 New England Life Insurance Company Supplemental Retirement
Plan, as amended and restated effective January 1, 2000+
10.39 The New England Life Insurance Company Select Employees
Supplemental Retirement Plan, as amended and restated
effective January 1, 2000+
10.40 The New England Life Insurance Company Senior Executive
Nonqualified Elective Deferral Plan, effective January 1,
1998+
10.41 New England Financial Long Term Performance Compensation
Plan (for each of the three-year performance periods
commencing on January 1, 1997, 1998 and 1999,
respectively)+
10.42 The New England Short-Term Incentive Plan (for performance
periods starting on or after January 1, 1999)+
10.43 Metropolitan Life Insurance Company Annual Variable
Incentive Plan (for performance periods starting on or
after January 1, 1999)+
10.44 Form of Capital Note+
10.45 1993 Fiscal Agency Agreement between Metropolitan Life
Insurance Company and The Chase Manhattan Bank, N.A. dated
as of November 1, 1993+
10.46 1995 Fiscal Agency Agreement between Metropolitan Life
Insurance Company and The Chase Manhattan Bank, N.A. dated
as of November 13, 1995+
10.47 Fiscal Agency Agreement between New England Mutual Life
Insurance Company and The First National Bank of Boston
dated as of February 10, 1994+
10.48 Fiscal Agency Agreement between General American Life
Insurance Company and The Bank of New York dated as of
January 24, 1994+
</TABLE>
<PAGE> 290
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.49 Amended and Restated Trust Agreement among GenAmerica
Corporation and Wilmington Trust Company, David L. Herzog,
John W. Hayden and Christopher A. Martin dated as of June
6, 1997+
10.50 Employment Continuation Agreement with Ms. Weber+
10.51 Form of Stock Purchase Agreement among MetLife, Inc.,
Metropolitan Life Insurance Company, Credit Suisse Group
or its affiliates and Banco Santander, Central Hispano
S.A. or its affiliates+
21.1 Subsidiaries of the Registrant+
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of PricewaterhouseCoopers LLP+
23.3 Consent of Debevoise & Plimpton (included in Exhibit 5.1)+
24.1 Powers of Attorney+
27.1 Financial Data Schedule+
</TABLE>
- ---------------
+ Previously filed.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Policyholders of
Metropolitan Life Insurance Company:
We consent to the use in this Amendment No. 4 to Registration Statement No.
333-91517 of our reports dated February 7, 2000 and February 11, 2000, relating
to the consolidated financial statements of Metropolitan Life Insurance Company
and subsidiaries and the balance sheet of MetLife, Inc. appearing in the
Prospectus, which is part of such Registration Statement, and of our report
dated February 7, 2000 relating to the consolidated financial statement
schedules of Metropolitan Life Insurance Company and subsidiaries appearing
elsewhere in such Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
New York, New York
April 3, 2000