<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number: 001-15787
METLIFE, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C>
Delaware 13-4075851
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
</TABLE>
One Madison Avenue
New York, New York 10010-3690
(212) 578-2211
(Address of principal executive offices, including zip code, and
Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
At August 10, 2000, 774,940,979 shares of the Registrant's Common Stock. $.01
par value per share, were outstanding.
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TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Interim Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2000 and 1999 3
Interim Condensed Consolidated Balance Sheets at June 30, 2000 (unaudited) and
December 31, 1999 4
Unaudited Interim Condensed Consolidated Statement of Stockholders' Equity for
the six months ended June 30, 2000 5
Unaudited Interim Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 6
Notes to Unaudited Interim Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 90
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 90
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 92
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 93
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 93
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2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METLIFE, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Proforma Six
Three Months Six Months Months Ended
Ended June 30, Ended June 30, June 30 (Note 4)
------------------- ---------------------- ----------------
2000 1999 2000 1999 2000
-------- -------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUES
Premiums $ 3,181 $ 2,870 $ 7,041 $ 5,786 $ 6,147
Universal life and investment-type product policy fees 448 312 917 651 917
Net investment income 2,281 2,496 5,065 4,806 4,434
Other revenues 694 575 1,359 1,048 1,370
Net realized investment losses (net of amounts allocable to other
accounts of $4, $6, $23, $40 and $12, respectively) (35) (81) (147) (155) (127)
Contribution from the closed block 1 - 1 - 25
-------- -------- --------- --------- ----------------
6,570 6,172 14,236 12,136 12,766
-------- -------- --------- --------- ----------------
EXPENSES
Policyholder benefits and claims (includes amounts
directly related to net realized investment
losses of $4, $12, $8, $16 and $8, respectively) 3,289 3,259 7,336 6,400 6,420
Interest credited to policyholder account balances 724 597 1,421 1,207 1,421
Policyholder dividends 137 402 605 784 226
Payments to former Canadian policyholders 327 - 327 - -
Other expenses (includes amounts directly related to
net realized investment losses of $-, $(6), $15, $24 and $4,
respectively) 1,901 2,001 3,880 3,421 3,713
-------- -------- --------- --------- ----------------
6,378 6,259 13,569 11,812 11,780
-------- -------- --------- --------- ----------------
Income (loss) before provision (benefit) for income taxes and
extraordinary item 192 (87) 667 324 986
Provision (benefit) for income taxes 178 (3) 376 171 343
-------- -------- --------- --------- ----------------
Income (loss) before extraordinary item 14 (84) 291 153 643
Extraordinary item - demutualization expense 129 36 170 44 -
-------- -------- --------- --------- ----------------
Net income (loss) $ (115) $ (120) $ 121 $ 109 $ 643
======== ======== ========= ========= ================
Net income after date of demutualization (Note 5) $ 341 $ 341
======== =========
Net income per share
Basic $ 0.44 $ 0.44 $ 0.82
======== ========= ================
Diluted $ 0.44 $ 0.44 $ 0.82
======== ========= ================
</TABLE>
See accompanying notes to unaudited interim condensed consolidated
financial statements.
3
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METLIFE, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(IN MILLIONS)
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<CAPTION>
2000 1999
-------------- ---------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value $ 83,618 $ 96,981
Equity securities, at fair value 2,133 2,006
Mortgage loans on real estate 16,405 19,739
Real estate and real estate joint ventures 5,619 5,649
Policy loans 4,179 5,598
Other limited partnership interests 1,559 1,331
Short-term investments 1,391 3,055
Other invested assets 2,122 1,501
-------------- ---------------
117,026 135,860
Cash and cash equivalents 3,187 2,789
Accrued investment income 1,424 1,725
Premiums and other receivables 8,317 6,681
Deferred policy acquisition costs 6,771 9,069
Deferred income taxes 695 603
Other 4,610 3,564
Closed block assets 39,089 -
Separate account assets 73,706 64,941
-------------- ---------------
$ 254,825 $ 225,232
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 41,373 $ 73,582
Policyholder account balances 53,605 45,901
Other policyholder funds 5,339 4,498
Policyholder dividends payable 283 974
Short-term debt 1,775 4,208
Long-term debt 2,833 2,514
Current income taxes payable 552 548
Other 16,942 14,376
Closed block liabilities 42,766 -
Separate account liabilities 73,706 64,941
-------------- ---------------
239,174 211,542
-------------- ---------------
Commitments and contingencies (Note 8)
Company-obligated mandatorily redeemable securities of subsidiary
trusts holding solely junior subordinated debentures of their Parents 1,084 -
-------------- ---------------
Stockholders' Equity:
Preferred stock, par value $.01 per share; 200,000,000 shares
authorized; none issued - -
Series A Junior Participating Preferred Stock - -
Common stock, par value $.01 per share; 3,000,000,000 shares
authorized; 786,203,472 shares issued 8 -
Additional paid-in capital 14,926 -
Retained earnings 341 14,100
Treasury stock, at cost; 11,262,493 shares (214) -
Accumulated other comprehensive loss (494) (410)
-------------- ---------------
14,567 13,690
-------------- ---------------
$ 254,825 $ 225,232
============== ===============
</TABLE>
See accompanying notes to unaudited interim condensed consolidated
financial statements.
4
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METLIFE, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN MILLIONS)
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Additional Treasury
Common Paid-in Retained Stock
Stock Capital Earnings at Cost
------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 $ - $ - $ 14,100 $ -
Policy credits and cash payments to eligible policyholders (2,958)
Common stock issued in demutualization 5 10,917 (10,922)
Initial public offering of common stock 2 3,152
Private placement of common stock 1 854
Unit offering 3
Treasury stock acquired (214)
Comprehensive income:
Net loss before date of demutualization (220)
Net income after date of demutualization 341
Other comprehensive loss:
Unrealized investment losses, net of related
offsets, reclassification adjustments and
income taxes
Foreign currency translation adjustments
Other comprehensive loss
Comprehensive income
-------- ----------- ------------ ------------
Balance at June 30, 2000 $ 8 $14,926 $341 $(214)
======== =========== ============ ============
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Accumulated Other Comprehensive Loss
--------------------------------------------
Net Foreign Minimum
Unrealized Currency Pension
Investment Translation Liability
Losses Adjustment Adjustment Total
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 $(297) $(94) $(19) $13,690
Policy credits and cash payments to eligible policyholders (2,958)
Common stock issued in demutualization -
Initial public offering of common stock 3,154
Private placement of common stock 855
Unit offering 3
Treasury stock acquired (214)
Comprehensive income:
Net loss before date of demutualization (220)
Net income after date of demutualization 341
Other comprehensive loss:
Unrealized investment losses, net of related
offsets, reclassification adjustments and
income taxes (92) (92)
Foreign currency translation adjustments 8 8
------------
Other comprehensive loss (84)
------------
Comprehensive income 37
------------
---------- ------------ ---------- ------------
Balance at June 30, 2000 $(389) $(86) $(19) $14,567
========== ============ ========== =============
</TABLE>
See accompanying notes to unaudited interim condensed consolidated
financial statements.
5
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METLIFE, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(IN MILLIONS)
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<CAPTION>
2000 1999
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,900 $ 1,280
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities 21,476 39,728
Equity securities 389 456
Mortgage loans on real estate 998 761
Real estate and real estate joint ventures 344 482
Other limited partnership interests 263 273
Purchases of:
Fixed maturities (25,258) (40,588)
Equity securities (377) (172)
Mortgage loans on real estate (833) (2,190)
Real estate and real estate joint ventures (186) (170)
Other limited partnership interests (338) (193)
Net change in short-term investments 1,785 616
Net change in policy loans (98) 87
Purchase of business, net of cash received (419) -
Proceeds from sales of businesses 107 -
Net change in investment collateral 1,015 505
Other, net (387) (72)
----------- ------------
Net cash used in investing activities (1,519) (477)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued 4,009 -
Treasury stock acquired (214) -
Net proceeds from issuance of company-obligated mandatorily
redeemable securities of subsidiary trust holding solely
junior subordinated debentures of its Parent 969 -
Cash payments to eligible policyholders (2,550) -
Policyholder account balances:
Deposits 14,769 10,268
Withdrawals (14,636) (11,509)
Net change in short-term debt (2,436) (1,058)
Long-term debt issued 119 165
Long-term debt repaid (13) (181)
----------- ------------
Net cash provided by (used in) financing activities 17 (2,315)
----------- ------------
Change in cash and cash equivalents 398 (1,512)
Cash and cash equivalents, beginning of period 2,789 3,301
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,187 $ 1,789
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 238 $ 196
=========== ============
Income taxes $ 235 $ 170
=========== ============
Non-cash transactions during the period:
Policy credits to eligible policyholders $ 408 $ -
=========== ============
Business acquisitions - assets $ 23,686 $ -
=========== ============
Business acquisitions - liabilities $ 22,406 $ -
=========== ============
</TABLE>
See accompanying notes to unaudited interim condensed consolidated
financial statements.
6
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METLIFE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
MetLife, Inc. and its subsidiaries (the "Company") is a leading provider of
insurance and financial services to a broad section of institutional and
individual customers. The Company offers life insurance, annuities and mutual
funds to individuals and group insurance, reinsurance and retirement and savings
products and services to corporations and other institutions.
On April 7, 2000, Metropolitan Life Insurance Company ("Metropolitan Life")
converted from a mutual life insurance company to a stock life insurance company
and became a wholly-owned subsidiary of MetLife, Inc. ("MetLife"), a Delaware
corporation. The conversion was pursuant to an order by the New York
Superintendent of Insurance ("Superintendent") approving Metropolitan Life's
plan of reorganization (the "plan") as amended.
On the date of demutualization, each policyholder's membership interest in
Metropolitan Life was extinguished and each eligible policyholder received, in
exchange for that interest, trust interests representing shares of common stock
of MetLife to be held in a trust, cash or an adjustment to their policy values
in the form of policy credits, as provided in the plan. In addition,
Metropolitan Life's Canadian branch made cash payments to holders of certain
policies transferred to Clarica Life Insurance Company in connection with the
sale of a substantial portion of Metropolitan Life's Canadian operations in
1998.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America. These condensed consolidated financial statements
reflect all adjustments (which include only normal recurring adjustments)
necessary to present fairly the consolidated financial position of the Company
and its consolidated results of operations and cash flows for the periods
presented. Interim results are not necessarily indicative of full year
performance. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto for the year ended December 31, 1999 included in MetLife's
Registration Statement on Form S-1 (registration no. 333-91517) filed with the
Securities and Exchange Commission.
7
<PAGE> 8
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of MetLife and its subsidiaries, partnerships and joint ventures in
which the Company has a majority voting interest or general partner interest
with limited removal rights from limited partners. All material intercompany
accounts and transactions have been eliminated.
EXTRAORDINARY ITEM - DEMUTUALIZATION EXPENSE
The accompanying condensed consolidated statements of operations include
extraordinary charges of $129 (net of income tax benefit of $46) and $36 (net of
income tax benefit of $8) for the three months ended June 30, 2000 and 1999,
respectively, and $170 (net of income tax benefit of $60) and $44 (net of income
tax benefit of $10) for the six months ended June 30, 2000 and 1999,
respectively, related to costs associated with the demutualization.
FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary, at the
end of each successive interim period to reflect the current estimate of the
annual effective tax rate. Income tax expense for the three months and six
months ended June 30, 2000 reflect the effect of surplus tax for the period
prior to demutualization and the non-deductible payment to the former Canadian
policyholders.
CLOSED BLOCK
On the date of demutualization, Metropolitan Life established a closed block
for the benefit of holders of certain individual life insurance policies of
Metropolitan Life. Assets have been allocated to the closed block in an amount
that has been determined to produce cash flows which, together with anticipated
revenues from the policies included in the closed block, are reasonably expected
to be sufficient to support obligations and liabilities relating to these
policies, including, but not limited to, provisions for the payment of claims
and certain expenses and taxes, and to provide for the continuation of
policyholder dividend scales in effect for 1999, if the experience underlying
such dividend scales continues, and for appropriate adjustments in such scales
if the experience changes. The closed block assets, the cash flows generated by
the closed block assets and the anticipated revenues from the policies in the
closed block will benefit only the holders of the policies in the closed block.
To the extent that, over time, cash flows from the assets allocated to the
closed block and claims and other experience related to the closed block are, in
the aggregate, more or less favorable than what was assumed when the closed
block was established, total dividends paid to closed block policyholders in the
future may be greater than or less than the total dividends that would have been
paid to these policyholders if the policyholder dividend scales in effect for
1999 had been continued. Any cash flows in excess of amounts assumed will be
available for distribution over time to closed block policyholders and will not
be available to stockholders. The closed block will continue in
8
<PAGE> 9
effect as long as any policy in the closed block remains in force. The expected
life of the closed block is over 100 years.
The Company uses the same accounting principles to account for the
participating policies included in the closed block as it used prior to the date
of demutualization. However, the Company establishes a policyholder dividend
obligation for earnings that will be paid to policyholders as additional
dividends in the amounts described below. The excess of closed block liabilities
over closed block assets at the effective date of the demutualization represents
the estimated maximum future contributions from the closed block expected to
result from operations attributed to the closed block after income taxes.
Contributions from the closed block are recognized in income over the period the
policies and contracts in the closed block remain in force. Management believes
that over time the actual cumulative contributions from the closed block will
approximately equal the expected cumulative contributions due to the effect of
dividend changes. If, over the period the closed block remains in existence, the
actual cumulative contribution from the closed block is greater than the
expected cumulative contribution from the closed block, the Company will
recognize only the expected cumulative contribution in income with the excess
recorded as a policyholder dividend obligation, because it 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, the
Company will recognize only the actual contribution in income. However, the
Company may change dividends in the future, which would be intended to increase
future actual contributions until the actual cumulative contributions equal the
expected cumulative contributions.
The results of operations of the closed block are presented as a single line
item in the Company's condensed consolidated statements of operations entitled,
"Contribution from the closed block". In addition, all assets and liabilities
allocated to the closed block are reported in the Company's condensed
consolidated balance sheets separately under the captions "Closed block assets"
and "Closed block liabilities", respectively. Prior to the establishment of the
closed block the assets, liabilities, revenues and expenses of the closed block
were reported in various line items in the Company's condensed consolidated
financial statements. Accordingly, certain line items in the Company's condensed
consolidated financial statements subsequent to the establishment of the closed
block reflect material reductions in reported amounts, as compared to periods
prior to the establishment of the closed block, while having no effect on
stockholders' equity or net income (loss).
The pre-tax contribution from the closed block includes only those revenues,
benefit payments, dividends, premium taxes, administrative and investment
expenses considered in funding the closed block and deferred policy acquisition
costs incurred prior to the date of demutualization, applicable to policies
included in the closed block. Income tax expenses applicable to the closed block
are allocated to the closed block and are reflected as a component of the
provision (benefit) for income taxes.
9
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APPLICATION OF ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2000, the Company adopted Statement of Position ("SOP")
98-7, Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk ("SOP 98-7"). SOP 98-7 provides guidance on the method of
accounting for insurance and reinsurance contracts that do not transfer
insurance risk, defined in the SOP as the deposit method. SOP 98-7 classifies
insurance and reinsurance contracts for which the deposit method is appropriate
into those that 1) transfer only significant timing risk, 2) transfer only
significant underwriting risk, 3) transfer neither significant timing or
underwriting risk and 4) have an indeterminate risk. Adoption of SOP 98-7 did
not have a material effect on the Company's condensed consolidated financial
statements.
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an Amendment of FASB
Statement No. 133 ("SFAS 138"). In June 1999, the FASB also issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133
("SFAS 137"). SFAS 137 defers the provisions of Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133") until January 1, 2001. SFAS 133, as amended by SFAS 138,
requires, among other things, that all derivatives be recognized in the
consolidated balance sheets as either assets or liabilities and measured at fair
value. The corresponding derivative gains and losses should be reported based
upon the hedge relationship, if such a relationship exists. Changes in the fair
value of derivatives that are not designated as hedges or that do not meet the
hedge accounting criteria in SFAS 133 are required to be reported in income. The
Company is in the process of quantifying the impact of SFAS 133 on its
consolidated financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 as of January 1, 2001. The Company is
in the process of quantifying the impact, if any, of the requirements of SAB
101.
2. INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS
On the date of demutualization, MetLife conducted an initial public offering
of 202,000,000 shares and concurrent private placements of 60,000,000 shares of
its common stock at an initial public offering price of $14.25 per share. The
shares of common stock issued in the offerings are in addition to 493,903,472
shares of common stock of MetLife distributed to the Metropolitan Life
policyholder trust for the benefit of policyholders of Metropolitan Life in
connection with the demutualization. On April 10, 2000, MetLife issued
30,300,000 additional shares of common stock as a result of the exercise of
over-allotment options granted to underwriters in the initial public offering.
10
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On June 27, 2000, MetLife's Board of Directors authorized the repurchase of
up to $1 billion of MetLife's outstanding common stock, over an unspecified
period of time. Under this authorization, MetLife may purchase the stock from
the Metropolitan Life policyholder trust, in the open market, and in private
transactions.
In April 2000, MetLife Capital Trust I, a wholly owned business trust,
issued 20,125,000 8.00% equity security units ("units"). Each unit contains a
purchase contract under which the holder agrees to purchase, for $50.00, shares
of common stock of MetLife on May 15, 2003 and a capital security, with a stated
liquidation amount of $50.00. The number of shares to be purchased at such date
will be determined based on the average trading price of MetLife common stock.
The proceeds from the sale of the units were used to acquire $1,006 8.00%
debentures of MetLife ("MetLife debentures"). The capital securities represent
undivided beneficial ownership interests in MetLife Capital Trust I's assets,
which consist solely of the MetLife debentures. These securities are pledged to
collateralize the obligations of the unit holder under the related purchase
contracts. Holders of the capital securities are entitled to receive cumulative
cash distributions accruing from April 7, 2000 and payable quarterly in arrears
commencing August 15, 2000 at an annual rate of 8.00%. MetLife irrevocably
guarantees, on a senior and unsecured basis, the payment in full of
distributions on the capital securities and the stated liquidation amount of the
capital securities, in each case to the extent of available trust funds. Holders
of the capital securities generally have no voting rights.
The MetLife debentures bear interest at an annual rate of 8.00% of the
principal amount, payable quarterly in arrears commencing August 15, 2000 and
mature on May 15, 2005. These debentures are unsecured. Because MetLife is a
holding company, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation, reorganization or otherwise, is
subject to the prior claims of creditors of the subsidiary, except to the extent
MetLife may be recognized as a creditor of that subsidiary. Accordingly,
MetLife's obligations under the debentures are effectively subordinated to all
existing and future liabilities of its subsidiaries.
In connection with the contribution to Metropolitan Life of the net proceeds
from the initial public offering, the private placements and the unit offering,
Metropolitan Life issued to MetLife a $1,006 8.00% mandatorily convertible
note due 2005 having the same interest and payment terms as set forth in the
debentures of MetLife issued to MetLife Capital Trust I. The principal amount of
the capital note is mandatorily convertible into common stock of Metropolitan
Life upon maturity or acceleration of the capital note and without any further
action by MetLife or Metropolitan Life. In addition, the capital note provides
that Metropolitan Life may not make any payment of principal or interest on the
capital note so long as specified payment restrictions exist and have not been
waived by the Superintendent. Payment restrictions would exist if Metropolitan
Life fails to exceed certain thresholds relative to the level of its statutory
risk-based capital or the amount of its outstanding capital notes, surplus notes
or similar obligations. At June 30, 2000, Metropolitan Life's statutory total
adjusted capital exceeded these limitations.
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3. CLOSED BLOCK
The closed block was established on the effective date of demutualization.
Amounts reported at April 7, 2000 and for the period after demutualization are
as of April 1, 2000 and for the period beginning on April 1, 2000 (the effect of
transactions from April 1, 2000 through April 6, 2000 are not considered
material). Certain amounts reported for the closed block are based on estimates
and assumptions that management believes are reasonable. Revisions to such
estimates will be recorded in the period of change. Pro forma amounts are as if
the closed block had been established on January 1, 2000.
Closed block revenues and expenses were as follows:
<TABLE>
<CAPTION>
Pro Forma Pro Forma
January 1, 2000 April 7, 2000 Six Months
through through Ended
April 6, 2000 June 30, 2000 June 30, 2000
----------------- --------------- ----------------
REVENUES
<S> <C> <C> <C>
Premiums $ 894 $ 936 $ 1,830
Net investment income and other revenues 620 626 1,246
Net realized investment losses (net of amounts allocable
to other accounts of $11, $(6) and $5, respectively) (20) (20) (40)
----------------- --------------- ----------------
1,494 1,542 3,036
----------------- --------------- ----------------
EXPENSES
Policyholder benefits and claims (includes amounts
directly related to net realized investment
losses of $-, $(7) and $(7), respectively) 916 918 1,834
Policyholder dividends 379 376 755
Policholder dividend obligation - 27 27
Other expenses (includes amounts directly related to net realized
investment losses of $11, $1 and $12, respectively) 175 220 395
----------------- --------------- ----------------
1,470 1,541 3,011
----------------- --------------- ----------------
Contribution from the closed block $ 24 $ 1 $ 25
================= =============== ================
</TABLE>
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Closed block assets and liabilities at June 30, 2000 and April 7, 2000 were as
follows:
<TABLE>
<CAPTION>
June 30, April 7,
2000 2000
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value $ 23,961 $ 23,939
Equity securities, at fair value 24 -
Mortgage loans on real estate 5,026 4,744
Policy loans 3,776 3,762
Short-term investments 98 167
Other invested assets 428 325
---------- ----------
33,313 32,937
Cash and cash equivalents 1,005 643
Accrued investment income 518 538
Premiums and other receivables 242 250
Deferred policy acquisition costs 4,011 4,011
Other - 22
---------- ----------
Total closed block assets $ 39,089 $ 38,401
========== ==========
LIABILITIES
Future policy benefits $ 38,835 38,662
Other policyholder funds 313 321
Policyholder dividends payable 767 747
Current income tax payable 61 46
Other 2,790 2,331
---------- ----------
Total closed block liabilities $ 42,766 $ 42,107
========== ==========
</TABLE>
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4. PRO FORMA INFORMATION
The pro forma information for the six months ended June 30, 2000 is provided
for informational purposes only and does not necessarily indicate the
consolidated results of operations had the demutualization been consummated on
January 1, 2000. The pro forma information also does not project or forecast the
consolidated results of operations for any future period.
The pro forma earnings information gives effect to the demutualization and
other related events as if they occurred on January 1, 2000. Accordingly, pro
forma earnings reflect the following adjustments:
- The elimination of surplus tax of $30, since Metropolitan Life will no
longer be subject to such tax as a stock life insurance company;
- The elimination of interest of $9 (net of income taxes of $5) related to
the repayment of $900 of short-term debt incurred in connection with
Metropolitan Life's acquisition of GenAmerica for the period January 1,
2000 through April 6, 2000;
- The elimination of cash payments of $327 made by Metropolitan Life's
Canadian branch to certain holders of policies included in its Canadian
business sold to Clarica Life Insurance Company in 1998;
- A charge to other expenses for minority interest of $20 on the capital
securities at a rate of 8.00% and the accretion of the discount of $2 on
the carrying value of the Company-obligated mandatorily redeemable
securities of subsidiary trusts holding solely debentures of their
Parents as well as the related income tax effect of $8;
- The elimination of demutualization expenses of $170 (net of income taxes
of $60) which were assumed to have been incurred prior to January 1,
2000; and
- The establishment of the closed block (See Note 3 for pro forma amounts
of revenues and expenses).
5. EARNINGS AFTER DATE OF DEMUTUALIZATION AND EARNINGS PER SHARE
Net income after the date of demutualization is based on the results of
operations for the period beginning on April 1, 2000, adjusted to eliminate the
payments to the former Canadian policyholders and costs of demutualization
recorded in April 2000 which are applicable to the period prior to
demutualization.
14
<PAGE> 15
The following presents a reconciliation of the weighted average shares used
in calculating basic earnings per share to those used in calculating diluted
earnings per share.
<TABLE>
<CAPTION>
April 7, 2000 through Pro Forma Six Months
June 30, 2000 Ended June 30, 2000
------------------------------------------- -------------------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
---------- -------------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Amounts for basic earnings per share $ 341 777,884,057 $ 0.44 $ 643 782,043,765 $ 0.82
========== ============= ============ =============
Incremental shares from conversion of
forward purchase contracts 2,256,016 1,128,008
-------------- --------------
Amounts for diluted earnings per share $ 341 780,140,073 $ 0.44 $ 643 783,171,773 $ 0.82
========== ============== ============= ============ ============== =============
</TABLE>
Earnings per share amounts, on a basic and diluted basis, have been
calculated based upon the weighted average common shares outstanding or deemed
to be outstanding only for the period after the date of demutualization. Pro
forma earnings per share amounts are presented as if the transactions discussed
in Notes 2 and 4 had occurred on January 1, 2000.
Basic earnings per share is computed based on the weighted average number of
shares outstanding during the period. Diluted earnings per share include the
dilutive effect of forward purchase contracts, using the treasury stock method.
Under the treasury stock method, exercise of the forward purchase contracts is
assumed with the proceeds used to purchase common stock at the average market
price for the period. The difference between the number of shares assumed issued
and number of shares assumed purchased represents the dilutive shares.
6. ACQUISITIONS AND DISPOSITIONS
GENAMERICA
On January 6, 2000, Metropolitan Life completed its acquisition of
GenAmerica Corporation ("GenAmerica") for $1.2 billion plus costs of the
acquisition. GenAmerica is a holding company which includes General American
Life Insurance Company, 48.3% of the outstanding shares of Reinsurance Group of
America ("RGA") common stock, a provider of reinsurance, and 61.0% of the
outstanding shares of Conning Corporation ("Conning") common stock, an asset
manager. Metropolitan Life owned 9.6% of the outstanding shares of RGA common
stock prior to the completion of the GenAmerica acquisition. On the date of the
acquisition, Metropolitan Life's ownership percentage of the outstanding shares
of RGA common stock was 57.9%.
In connection with the acquisition of GenAmerica, Metropolitan Life obtained
GenAmerica Capital I, a wholly-owned subsidiary trust of GenAmerica. In June
1997, GenAmerica Capital I issued $125 of 8.525% capital securities. GenAmerica
has fully and conditionally guaranteed, on a subordinated basis, the obligation
of the trust under the capital securities and is obligated to mandatorily redeem
the securities on June 30, 2027. GenAmerica may prepay the securities at any
time after June 30, 2007.
15
<PAGE> 16
In April 2000, Metropolitan Life acquired the outstanding shares of Conning
common stock not already owned by Metropolitan Life for $73.
As part of the GenAmerica acquisition, General American Life Insurance
Company paid Metropolitan Life a fee of $120 in connection with the assumption
of certain funding agreements. The fee has been considered as part of the
purchase price of GenAmerica. In connection with this transaction, Metropolitan
Life made a capital contribution of $120 to General American Life after the
completion of the acquisition.
The Company's total revenues, income (loss) before extraordinary items and
net income (loss) for the three months and six months ended June 30, 1999 on
both an historical and pro forma basis as if the acquisition of GenAmerica had
occurred on January 1, 1999 were as follows:
For the three months ended June 30, 1999
<TABLE>
<CAPTION>
Income (Loss) Before Net Income
Total Revenues Extraordinary Item (Loss)
---------------- ---------------------- ------------
<S> <C> <C> <C>
Historical $ 6,172 $ (84) $ (120)
Pro forma $ 7,304 $ (66) $ (106)
</TABLE>
For the six months ended June 30, 1999
<TABLE>
<CAPTION>
Income Before
Total Revenues Extraordinary Item Net Income
---------------- -------------------- ------------
<S> <C> <C> <C>
Historical $ 12,136 $ 153 $ 109
Pro forma $ 14,185 $ 178 $ 130
</TABLE>
NVEST
On June 16, 2000, the Company announced that its affiliates, Nvest, L.P. and
Nvest Companies, L.P., have entered into a definitive agreement to be acquired
by CDC Asset Management, an affiliate of Caisse des Depots Group. The Company
owns 48% of the outstanding units of the Nvest entities.
CDC Asset Management will pay $40 per unit for Nvest, L.P. and Nvest
Companies, L.P., subject to a possible price adjustment and other conditions set
forth in the agreement. Based on the $40 per unit price, the Company would
receive $858 upon the closing of this transaction. This transaction, which will
result in a gain, is expected to be completed in the fourth quarter of 2000.
Total assets of the Nvest entities were approximately $871 at June 30, 2000.
Total revenues and net income (net of minority interest) applicable to the Nvest
entities were
16
<PAGE> 17
approximately $159 and $11, respectively, for the three months ended June 30,
2000, and $318 and $21, respectively, for the six months ended June 30, 2000.
7. NET REALIZED INVESTMENT LOSSES
Net realized investment losses, including changes in valuation allowances,
for the three months and six months ended June 30, 2000 and 1999 were as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ------------------------
2000 1999 2000 1999
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Fixed maturities $ (71) $ (171) $ (240) $ (276)
Equity securities 11 (9) 79 (37)
Mortgage loans on real estate 4 (6) 6 4
Real estate and real estate joint ventures 14 105 27 166
Other limited partnership interests (7) 22 (3) 27
Sales of businesses 3 - 3 -
Other 7 (28) (42) (79)
--------- --------- ----------- ----------
(39) (87) (170) (195)
Amounts allocable to:
Deferred policy acquisition costs - (6) 15 24
Participating pension contracts 4 12 8 16
--------- --------- ----------- ----------
$ (35) $ (81) $ (147) $ (155)
========= ========= =========== ==========
</TABLE>
Realized investment losses have been reduced by (1) deferred policy
acquisition cost adjustments to the extent that such adjustments result from
realized investment gains and losses and (2) adjustments to participating
contractholder accounts when amounts equal to such investment gains and losses
are credited to or deducted from the contractholders' accounts. This
presentation may not be comparable to presentations made by other insurers.
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
Metropolitan Life is currently a defendant in approximately 550 lawsuits
raising allegations of improper marketing and sales of individual life insurance
policies or annuities. These lawsuits are generally referred to as "sales
practices claims".
On December 28, 1999, after a fairness hearing, the United States District
Court for the Western District of Pennsylvania approved a class action
settlement resolving a multidistrict litigation proceeding involving alleged
sales practices claims. No appeal was taken, and the settlement is final. The
settlement class includes most of the owners of permanent life insurance
policies and annuity contracts or certificates issued pursuant to individual
sales in the United States by Metropolitan Life, Metropolitan Insurance and
Annuity Company or Metropolitan Tower Life Insurance Company between January 1,
17
<PAGE> 18
1982 and December 31, 1997. The class includes owners of approximately six
million in-force or terminated insurance policies and approximately one million
in-force or terminated annuity contracts or certificates.
In addition to dismissing the consolidated class actions, the District
Court's order also bars sales practices claims by class action members for sales
by the defendant insurers during the class period, effectively resolving all
pending class actions against these insurers.
Under the terms of the order, only those class members who exclude
themselves from the settlement may continue an existing, or start a new, sales
practices lawsuit against Metropolitan Life, Metropolitan Insurance and Annuity
Company or Metropolitan Tower Life Insurance Company for sales that occurred
during the class period. Approximately 20,000 class members elected to exclude
themselves from the settlement.
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.
Metropolitan Life expects that the total cost of the settlement will be
approximately $957. This amount is equal to the amount of the increase in
liabilities for the death benefits and policy adjustments and the present value
of expected cash payments to be provided to included class members, as well as
attorneys' fees and expenses and estimated other administrative costs, but does
not include the cost of litigation with policyholders who are excluded from the
settlement. Metropolitan Life believes that the cost to it of the settlement
will be substantially covered by available reinsurance and the provisions made
in its consolidated financial statements, and thus will not have a material
adverse effect on its business, results of operations or financial position.
Metropolitan Life has not yet made a recovery under those reinsurance agreements
and, although there is a risk that the carriers will refuse coverage for all or
part of the claim, Metropolitan Life believes this is very unlikely to occur.
Metropolitan Life believes it has made adequate provision in its consolidated
financial statements for all probable losses for sales practices claims,
including litigation costs involving policyholders who are excluded from the
settlement.
The class action settlement does not resolve nine purported or certified
class actions currently pending against New England Mutual Life Insurance
Company ("New England") 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 of
18
<PAGE> 19
Massachusetts. The 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. New England
has agreed to a settlement with class counsel. The District Court has granted
preliminary approval, and a fairness hearing is scheduled for October 2000.
The Metropolitan Life 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 of this consolidated proceeding. General
American Life Insurance Company has not reached agreement with plaintiffs'
counsel on the attorneys' fees to be paid, and the District Court will decide
that issue.
In addition, the class action settlement does not resolve two putative class
actions involving sales practices claims filed against Metropolitan Life in
Canada. A certified class action with conditionally certified subclasses against
Metropolitan Life, Metropolitan Insurance and Annuity Company, Metropolitan
Tower Life Insurance Company and various individual defendants alleging improper
sales abroad is pending in a New York federal court and settlement discussions
are continuing.
In the past, some individual sales practices claims have been resolved
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.
See Note 9 of Notes to Consolidated Financial Statements for the year ended
December 31, 1999 included in MetLife's Registration Statement on Form S-1
(registration number 333-91517) filed with the Securities and Exchange
Commission for information regarding reinsurance contracts related to sales
practices claims.
Regulatory authorities in a small number of states, 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 Metropolitan Life's or the New England'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, Metropolitan Life 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.
Metropolitan Life is also a defendant in numerous lawsuits seeking
compensatory and punitive damages for personal injuries allegedly caused by
exposure to asbestos or asbestos-containing products. Metropolitan Life has
never engaged in the business of
19
<PAGE> 20
manufacturing, producing, distributing or selling asbestos or
asbestos-containing products. Rather, these lawsuits, currently numbering in the
thousands, have principally been based upon allegations relating to certain
research, publication and other activities of one or more of Metropolitan Life's
employees during the period from the 1920's through approximately the 1950's and
alleging that Metropolitan Life learned or should have learned of certain health
risks posed by asbestos and, among other things, improperly publicized or failed
to disclose those health risks. Legal theories asserted against Metropolitan
Life have included negligence, intentional tort claims and conspiracy claims
concerning the health risks associated with asbestos. While Metropolitan Life
believes it has meritorious defenses to these claims, and has not suffered any
adverse judgments in respect of these claims, most of the cases have been
resolved by settlements. Metropolitan Life intends to continue to exercise its
best judgment regarding settlement or defense of such cases. The number of such
cases that may be brought or the aggregate amount of any liability that
Metropolitan Life may ultimately incur is uncertain.
Significant portions of amounts paid in settlement of such cases have been
funded with proceeds from a previously resolved dispute with Metropolitan Life's
primary, umbrella and first level excess liability insurance carriers.
Metropolitan Life is presently in litigation with several of its excess
liability insurers regarding amounts payable under its policies with respect to
coverage for these claims. The trial court has granted summary judgment to these
insurers. Metropolitan Life has appealed. There can be no assurances regarding
the outcome of this litigation or the amount and timing of recoveries, if any,
from these excess liability insurers. Metropolitan Life's asbestos-related
litigation with these insurers should have no effect on its recoveries under
excess insurance policies that were obtained in 1998 for asbestos-related
claims.
See Note 9 of Notes to Consolidated Financial Statements for the year ended
December 31, 1999 included in MetLife, Inc.'s Registration Statement on Form S-1
(registration number 333-91517) filed with the Securities and Exchange
Commission for information regarding insurance policies obtained in 1998 related
to asbestos-related claims.
A purported class action suit involving policyholders in 32 states has been
filed in a Rhode Island state court against a Metropolitan Life subsidiary,
Metropolitan Property and Casualty Insurance Company, with respect to claims by
policyholders for the alleged diminished value of automobiles after
accident-related repairs. The trial court recently denied a motion by
Metropolitan Property and Casualty Insurance Company for summary judgment. A
similar "diminished value" allegation was made recently in a Texas Deceptive
Trade Practices Act letter and lawsuit which involve a Metropolitan Property and
Casualty Insurance Company policyholder. A purported class action has been filed
against Metropolitan Property and Casualty Insurance Company and its subsidiary,
Metropolitan Casualty Insurance Company, in Florida by a policyholder alleging
breach of contract and unfair trade practices with respect to allowing the use
of parts not made by the original manufacturer to repair damaged automobiles.
These suits are in the early stages of litigation and Metropolitan Property and
Casualty Insurance Company and
20
<PAGE> 21
Metropolitan Casualty Insurance Company intend to defend themselves vigorously
against these suits. Similar suits have been filed against several other
personal lines property and casualty insurers.
The United States, the Commonwealth of Puerto Rico and various hotels and
individuals have sued MetLife Capital Corporation, a former subsidiary of the
Company, seeking damages for clean up costs, natural resource damages, personal
injuries and lost profits and taxes based upon, among other things, a release of
oil from a barge which was being towed by the M/V Emily S. In connection with
the sale of MetLife Capital, the Company acquired MetLife Capital's potential
liability with respect to the M/V Emily S lawsuit. MetLife Capital had entered
into a sale and leaseback financing arrangement with respect to the M/V Emily S.
The plaintiffs have taken the position that MetLife 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.
Metropolitan Life has completed a tender offer to purchase the shares of
Conning Corporation that it had not already owned. After Metropolitan Life had
announced its intention to make a tender offer, three putative class actions
were filed by Conning shareholders alleging that the prospective offer was
inadequate and constituted a breach of fiduciary duty. The parties to the
litigation have reached an agreement in principle providing for a settlement of
the actions.
Several lawsuits have been brought challenging the fairness of Metropolitan
Life's plan of reorganization and the adequacy and accuracy of Metropolitan
Life's disclosure to policyholders regarding the plan. These actions name as
defendants some or all of Metropolitan Life, MetLife, the individual directors,
the New York State Superintendent of Insurance and MetLife's underwriters for
the initial public offering, Goldman Sachs & Company and Credit Suisse First
Boston. Five purported class actions pending in the Supreme Court of the State
of New York for New York County have been consolidated within the commercial
part. There remains a separate purported class action in state court in New York
County and another in Kings County. The plaintiffs in the state court class
actions seek injunctive, declaratory and compensatory relief, as well as an
accounting. Some of the plaintiffs in the above described actions have also
brought a proceeding under Article 78 of New York's Civil Practice Law and Rules
challenging the Opinion and Decision of the New York Superintendent of Insurance
that approved the plan. In this action, petitioners seek to vacate the
Superintendent's Opinion and Decision and enjoin him from granting final
approval of the plan. Three purported class actions were filed in the United
States District Court for the Eastern District of New York claiming violation of
the Securities Act of 1933. The plaintiffs in these actions claim that the
Policyholder Information Booklets relating to the plan failed to disclose
certain material facts and seek rescission and compensatory damages. These three
federal cases have been consolidated, and the
21
<PAGE> 22
defendants have moved to dismiss the complaints. On August 3, 2000, a purported
class action was filed in the United States District Court for the Southern
District of New York seeking damages from MetLife for alleged violations of
various provisions of the Constitution of the United States in connection with
the plan of reorganization. Metropolitan Life, MetLife and the individual
defendants believe they have meritorious defenses to the plaintiffs' claims and
intend to contest vigorously all of the plaintiffs' claims in these actions.
Two lawsuits were filed in July 2000 against Metropolitan Life alleging
racial discrimination against African-Americans in the marketing, sale, and
administration of inexpensive life insurance policies, including "industrial"
life insurance policies, sold by Metropolitan Life decades ago. The first
lawsuit was filed in the United States District Court for the Southern District
of New York and the second was filed in the United States District Court for the
Eastern District of Louisiana. The plaintiffs in these purported class actions
seek unspecified compensatory damages, punitive damages, reformation, imposition
of a constructive trust, a declaration that the alleged practices are
discriminatory and illegal, injunctive relief requiring Metropolitan Life to
discontinue the alleged discriminatory practices and adjust policy values, and
other relief. Metropolitan Life believes it has meritorious defenses to the
plaintiffs' claims and intends to contest vigorously all of the plaintiffs'
claims in these actions.
Insurance Departments in a number of states recently have initiated
inquiries about possible race-based underwriting of life insurance. These
inquiries generally have been directed to all life insurers licensed in the
respective states, including Metropolitan Life and certain of its subsidiaries.
Various litigation, claims and assessments against the Company, in addition
to those discussed above and those otherwise provided for in the Company's
consolidated financial statements, have arisen in the course of the Company's
business, including, but not limited to, in connection with its activities as an
insurer, employer, investor, investment advisor and taxpayer. Further, state
insurance regulatory authorities and other Federal and state authorities
regularly make inquiries and conduct investigations concerning the Company's
compliance with applicable insurance and other laws and regulations.
In some of the matters referred to above, very large and/or indeterminate
amounts, including punitive and treble damages, are sought. While it is not
feasible to predict or determine the ultimate outcome of all pending
investigations and legal proceedings or provide reasonable ranges of potential
losses, it is the opinion of the Company's management that their outcomes, after
consideration of available insurance and reinsurance and the provisions made in
the Company's consolidated financial statements, are not likely to have a
material adverse effect on the Company's consolidated financial position.
However, given the large and/or indeterminate amounts sought in certain of these
matters and the inherent unpredictability of litigation, it is possible that an
adverse outcome in certain matters could, from time to time, have a material
adverse effect on the Company's operating results or cash flows in particular
quarterly or annual periods.
22
<PAGE> 23
9. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months and six months ended June
30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
-------------------------------- --------------------------------
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) before date of demutualization $ (456) $ (120) $ (220) $ 109
Net income after date of demutualization 341 - 341 -
Accumulated other comprehensive loss:
Unrealized investment losses, net of related
offsets, reclassification adjustments and
income taxes (181) (541) (92) (1,077)
Foreign currency translation adjustments 7 (1) 8 27
--------------- --------------- --------------- ---------------
Accumulated other comprehensive loss: (174) (542) (84) (1,050)
--------------- --------------- --------------- ---------------
Comprehensive income (loss) $ (289) $ (662) $ 37 $ (941)
=============== =============== =============== ===============
</TABLE>
10. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Auto
&
For the three months ended June 30, 2000 Individual Institutional Home International Reinsurance
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums $ 1,135 $ 1,784 $ 656 $ 173 $ 370
Universal life and investment-type
product policy fees 301 136 - 11 -
Net investment income 1,598 954 47 63 95
Other revenues 190 172 5 2 9
Net realized investment gains (losses) (18) (25) 1 7 (2)
Contribution from the closed block - - - - -
Income (loss) before provision for
income taxes and extraordinary item 278 208 (25) (312) 10
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Asset Consolidation/
For the three months ended June 30, 2000 Management Corporate Elimination Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ - $ - $ (937) $ 3,181
Universal life and investment-type
product policy fees - - - 448
Net investment income 21 216 (713) 2,281
Other revenues 218 42 56 694
Net realized investment gains (losses) - (22) 24 (35)
Contribution from the closed block - - 1 1
Income (loss) before provision for
income taxes and extraordinary item 18 33 (18) 192
--------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Auto
&
For the three months ended June 30, 1999 Individual Institutional Home International Reinsurance
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums $ 1,050 $ 1,327 $ 370 $ 123 $ -
Universal life and investment-type
product policy fees 177 122 - 13 -
Net investment income 1,329 984 22 53 -
Other revenues 159 172 4 1 -
Net realized investment gains (losses) 41 (60) (1) 2 -
Income (loss) before provision for
income taxes and extraordinary item 242 222 21 3 -
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Asset Consolidation/
For the three months ended June 30, 1999 Management Corporate Elimination Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ - $ - $ - $ 2,870
Universal life and investment-type
product policy fees - - - 312
Net investment income 20 162 (74) 2,496
Other revenues 196 15 28 575
Net realized investment gains (losses) - (62) (1) (81)
Income (loss) before provision for
income taxes and extraordinary item 24 (579) (20) (87)
--------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
Auto
&
For the six months ended June 30, 2000 Individual Institutional Home International Reinsurance
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums $ 2,253 $ 3,377 $ 1,301 $ 319 $ 728
Universal life and investment-type
product policy fees 620 273 - 24 -
Net investment income 3,176 1,882 83 128 183
Other revenues 404 355 18 5 11
Net realized investment gains (losses) (57) (41) 6 8 (3)
Contribution from the closed block - - - - -
Income (loss) before provision for
income taxes and extraordinary item 548 409 (9) (296) 50
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Asset Consolidation/
For the six months ended June 30, 2000 Management Corporate Elimination Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ - $ - $ (937) $ 7,041
Universal life and investment-type
product policy fees - - - 917
Net investment income 42 352 (781) 5,065
Other revenues 434 63 69 1,359
Net realized investment gains (losses) - (84) 24 (147)
Contribution from the closed block - - 1 1
Income (loss) before provision for
income taxes and extraordinary item 40 (40) (35) 667
------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Auto
&
For the six months ended June 30, 1999 Individual Institutional Home International Reinsurance
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums $ 2,068 $ 2,754 $ 727 $ 237 $ -
Universal life and investment-type
product policy fees 381 249 - 21 -
Net investment income 2,601 1,898 44 101 -
Other revenues 260 305 9 3 -
Net realized investment gains (losses) 23 (72) (1) 6 -
Income (loss) before provision for
income taxes and extraordinary item 482 454 29 4 -
-------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Asset Consolidation/
For the six months ended June 30, 1999 Management Corporate Elimination Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $ - $ - $ - $ 5,786
Universal life and investment-type
product policy fees - - - 651
Net investment income 38 278 (154) 4,806
Other revenues 403 21 47 1,048
Net realized investment gains (losses) - (92) (19) (155)
Income (loss) before provision for
income taxes and extraordinary item 48 (636) (57) 324
------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At June 30, At December 31,
2000 1999
------------- ----------------
<S> <C> <C>
Assets
Individual $ 130,909 $ 109,401
Institutional 90,841 88,127
Auto & Home 4,451 4,443
International 4,873 4,381
Reinsurance 6,607 -
Asset Management 1,199 1,036
Corporate 19,643 20,499
Consolidation/Elimination (3,698) (2,655)
------------- ----------------
Total $ 254,825 $ 225,232
============= ================
</TABLE>
The Individual segment includes the results of the closed block for the
period April 7, 2000 (date the closed block became effective) through June 30,
2000 combined on a line by line basis with the results of operations outside the
closed block. See Note 3 for closed block amounts included in the Individual
segment above.
The Individual segment includes an equity ownership interest in Nvest
Companies, L.P. ("Nvest") under the equity method of accounting. Nvest has been
included within the Asset Management segment due to the types of products and
strategies employed by the entity. The Individual segment's equity in earnings
of Nvest, which is included in net investment income, was $11 and $12 for the
three months ended June 30, 2000 and 1999, respectively, and $21 and $25 for the
six months ended June 30, 2000 and 1999, respectively. The investment in Nvest
was $192 and $206 at June 30, 2000 and 1999, respectively.
24
<PAGE> 25
The Reinsurance segment includes the life reinsurance business of RGA
combined with Exeter, a previously existing ancillary life reinsurance business.
Exeter has been reported as a component of the Individual segment rather than as
a separate segment for periods prior to January 1, 2000 due to its
immateriality.
The Consolidation/Elimination column includes the elimination of all
intersegment amounts, the closed block amounts presented on a line by line basis
in the Individual segment, and the Individual segment's ownership interest in
Nvest.
Revenues (including revenues of the closed block) derived from any one
customer did not exceed 10% of consolidated revenues. Such revenues from U.S.
operations were $7,855 and $5,999 for the three months ended June 30, 2000 and
1999, respectively, which represented 97% of consolidated revenues for both 2000
and 1999. Such revenues from U.S. operations were $15,293 and $11,768 for the
six months ended June 30, 2000 and 1999, respectively, which represented 97% of
consolidated revenues for both 2000 and 1999.
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<PAGE> 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of this discussion, the term "Company" refers, at all times
prior to the plan effective date (as hereinafter defined), to Metropolitan Life
Insurance Company, a mutual life insurance company organized under the laws of
the State of New York ("Metropolitan Life"), and its subsidiaries, and at all
times on and after the plan effective date, to MetLife, Inc. ("MetLife"), a
Delaware corporation, and its subsidiaries, including Metropolitan Life on and
after the plan effective date. Following this summary is a discussion addressing
the consolidated results of operations and financial condition of the Company
for the periods indicated. The discussion of the Company's consolidated
financial results of operations includes the results of the closed block for the
period April 7, 2000 (the date the closed block became effective) through June
30, 2000 combined on a line by line basis with the results of operations outside
the closed block for such period. Amounts reported at April 7, 2000 and for the
period after demutualization are as of April 1, 2000 and for the period
beginning on April 1, 2000 as the effect of transactions between April 1, 2000
and April 7, 2000 are not considered material. This discussion should be read in
conjunction with the Company's unaudited interim condensed consolidated
financial statements included elsewhere herein.
Statements, analyses, and other information contained in this report
relating to trends in the Company's operations and financial results, the
markets for the Company's products, the future development of the Company's
business, and the risks and uncertainties to which the Company may be subject,
other than with respect to historical information, constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are not guarantees of future performance.
Actual results may differ materially from those anticipated in the forward-
looking statements as a result of risks and uncertainties including: changes in
interest rates, decline in securities markets and the effect of sales on
investment products and on the Company's investment portfolio, competition,
litigation, failure to attract and retain sales representatives, differences
between actual claims experience and underwriting and reserving assumptions,
occurrence of catastrophes, downgrade of the Company's or its affiliates'
ratings, changes in state and federal regulation, and risks related to the
demutualization of Metropolitan Life, including a challenge to the plan of
reorganization or the order of the New York Superintendent of Insurance.
Readers are also directed to other risks and uncertainties discussed, as
well as to further discussion of the risks described above, in other documents
filed by the Company with the Securities and Exchange Commission, including the
Company's Registration Statement on Form S-1 (registration no. 333-91517). The
Company specifically disclaims any obligation to update or revise any
forward-looking statement, whether as a result of new information, future
developments or otherwise.
26
<PAGE> 27
THE DEMUTUALIZATION
On April 7, 2000, pursuant to an order by the New York Superintendent of
Insurance ("Superintendent") approving its plan of reorganization, as amended
(the "plan") Metropolitan Life converted from a mutual life insurance company to
a stock life insurance company and became a wholly-owned subsidiary of MetLife.
In conjunction therewith, each policyholder's membership interest was
extinguished and each eligible policyholder received, in exchange for that
interest, trust interests representing shares of common stock of MetLife to be
held in the Metropolitan Life Policyholder Trust, cash or an adjustment to their
policy values in the form of policy credits, as provided in the plan. In
addition, Metropolitan Life's Canadian branch made cash payments to holders of
certain policies transferred to Clarica Life Insurance Company in connection
with the sale of a substantial portion of Metropolitan Life's Canadian
operations in 1998, as a result of a commitment made in connection with
obtaining Canadian regulatory approval of that sale. The payments, which were
recorded in other expenses in the 2000 second quarter, were determined in a
manner that was consistent with the treatment of, and fair and equitable to,
eligible policyholders of Metropolitan Life.
On the date of demutualization, MetLife conducted an initial public
offering of 202,000,000 shares and concurrent private placements of an aggregate
of 60,000,000 shares of its common stock at an initial public offering price of
$14.25 per share. The shares of common stock issued in the offerings are in
addition to 493,903,472 shares of common stock of MetLife distributed to the
Metropolitan Life Policyholder Trust for the benefit of policyholders of
Metropolitan Life in connection with the demutualization. On April 10, 2000,
MetLife issued 30,300,000 additional shares as a result of the exercise of
over-allotment options granted to underwriters in the initial public offering.
Concurrently with these offerings, the Company and MetLife Capital Trust
I, a Delaware statutory business trust wholly-owned by MetLife, sold 20,125,000
8.00% equity security units for an aggregate offering price of $1,006 million.
Each unit consists of (a) a contract to purchase shares of common stock and (b)
a capital security of MetLife Capital Trust I.
On the date of demutualization, the Company established the closed block
for the benefit of holders of certain individual life insurance policies of
Metropolitan Life. Assets have been allocated to the closed block in an amount
that produces cash flows which, together with anticipated revenue from the
policies included in the closed block, are reasonably expected to be sufficient
to support obligations and liabilities relating to these policies, including,
but not limited to, provisions for the payment of claims and certain expenses
and taxes, and to provide for the continuation of policyholder dividend scales
in effect for 1999, if the experience underlying such dividend scales continues,
and for appropriate adjustments in such scales if the experience changes. The
closed block assets,
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<PAGE> 28
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 stockholders. The closed block will
continue in effect as long as any policy in the closed block remains in force.
Its expected life is over 100 years.
The Company does not expect the closed block to affect its net income or
its liquidity. The Company will use the same accounting principles to account
for the participating policies included in the closed block as it used prior to
the date of demutualization. However, the Company will establish a policyholder
dividend obligation for earnings that will be paid to policyholders as
additional dividends 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. Contributions are recognized from the closed block in income
over the period the policies and contracts in the closed block remain in force.
Management believes that over time the actual cumulative contributions from the
closed block will approximately equal the expected cumulative contributions, due
to the effect of dividend changes. If, over the period the closed block remains
in existence, the actual cumulative contribution from the closed block is
greater than the expected cumulative contribution from the closed block, the
Company will recognize only the expected cumulative contribution in income with
the excess recorded as a policyholder dividend obligation, because it 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, the Company will recognize only the actual contribution in income.
However, the Company may change dividends in the future, which would be intended
to increase future actual contributions until the actual cumulative
contributions equal the expected cumulative contributions.
On June 27, 2000, MetLife's Board of Directors authorized the repurchase
of up to $1 billion of MetLife's outstanding common stock. The buyback may take
place over an unspecified period of time. MetLife may purchase stock from the
Metropolitan Life policyholder trust, in the open market, and in private
transactions.
ACQUISITIONS AND DISPOSITIONS
On January 6, 2000, the Company completed its acquisition of GenAmerica
Corporation ("GenAmerica") for $1.2 billion plus costs of the acquisition.
GenAmerica is a holding company which includes General American Life Insurance
Company, 48.3% of the outstanding shares of Reinsurance Group of America ("RGA")
common stock, a provider of reinsurance, and 61.0% of the outstanding shares of
Conning Corporation ("Conning") common stock, an asset manager. The Company
owned 9.6% of the
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<PAGE> 29
outstanding shares of RGA common stock prior to the completion of the GenAmerica
acquisition. On the date of the acquisition, the Company's ownership percentage
of the outstanding shares of RGA common stock was 57.9%.
On April 18, 2000, Metropolitan Life completed its tender offer for all of
the outstanding shares of Conning common stock not already owned by Metropolitan
Life for $73 million.
On June 16, 2000, the Company announced that its affiliates, Nvest, L.P.
and Nvest Companies, L.P., have entered into a definitive agreement to be
acquired by CDC Asset Management, an affiliate of Caisse des Depots Group. The
Company owns 48% of the outstanding units of the Nvest entities.
CDC Asset Management will pay $40 per unit for Nvest, L.P. and Nvest
Companies, L.P., subject to a possible price adjustment and other conditions set
forth in the agreement. Based on the $40 per unit price, the Company would
receive $858 upon the closing of this transaction. This transaction, which will
result in a gain, is expected to be completed in the fourth quarter of 2000.
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<PAGE> 30
RESULTS OF OPERATIONS
The following table presents summary consolidated financial information
for the periods indicated. For comparability with prior periods, the table below
includes the results of operations of the closed block combined on a line by
line basis with the results of operations outside the closed block. All
discussions are based on a comparison of such combined amounts.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- ------------------------
2000 1999 2000 1999
------------------------- ------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 4,117 $ 2,870 $ 7,977 $ 5,786
Universal life and investment-type product policy fees 448 312 917 651
Net investment income 2,924 2,496 5,708 4,806
Other revenues 677 575 1,342 1,048
Net realized investment losses (net of amounts allocable to other
accounts of $(2), $6, $17 and $40, respectively) (55) (81) (167) (155)
---------- -------- -------- --------
8,111 6,172 15,777 12,136
---------- -------- -------- --------
EXPENSES
Policyholder benefits and claims (includes amounts
directly related to net realized investment
losses of $(3), $12, $1 and $16, respectively) 4,234 3,259 8,281 6,400
Interest credited to policyholder account balances 724 597 1,421 1,207
Policyholder dividends 513 402 981 784
Other expenses (includes amounts directly related
to net realized investment losses of $1, $(6), $16
and $24, respectively) 2,448 2,001 4,427 3,421
----------- --------- --------- ---------
7,919 6,259 15,110 11,812
------------ ---------- ---------- ----------
Income (loss) before provision (benefit) for income taxes and
extraordinary item 192 (87) 667 324
Provision (benefit) for income taxes 178 (3) 376 171
------------ ---------- ---------- ----------
Income before extraordinary item 14 (84) 291 153
Extraordinary item - demutualization expense 129 36 170 44
------------ ---------- ---------- ----------
Net income (loss) $ (115) $ (120) $ 121 $ 109
============ ========== ========== ==========
</TABLE>
30
<PAGE> 31
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1999
Premiums increased by $1,247 million, or 43%, to $4,117 million for the
three months ended June 30, 2000 from $2,870 million for the comparable 1999
period, primarily due to the acquisition of GenAmerica on January 6, 2000.
Excluding the impact of this acquisition, premiums increased by $760 million, or
26%. This increase was attributable to Institutional Business, Auto & Home and
International. The increase of $431 million, or 32%, in Institutional Business
was primarily due to an increase in non-medical health premiums due to higher
sales and improved policyholder retention in this segment's dental and
disability businesses and the acquisition of Lincoln National's disability
income business in November 1999. In addition, significant premiums received
from existing group life and retirement and savings customers in 2000
contributed to the variance. The increase of $286 million, or 77%, in Auto &
Home was primarily due to the acquisition of the standard personal lines
property and casualty insurance operations of The St. Paul Companies ("St.
Paul"), representing $261 million of the increase, as well as growth in this
segment's standard auto business. The increase of $50 million, or 41%, in
International was primarily due to overall growth in Mexico, Taiwan, Korea and
Spain.
Universal life and investment-type product policy fees increased by $136
million, or 44%, to $448 million for the three months ended June 30, 2000 from
$312 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, universal life and investment-type product policy fees
increased by $73 million, or 23%. This increase was almost entirely attributable
to a $71 million, or 40%, increase in Individual Business, which was primarily
due to increased sales of variable life products, continued growth in separate
account assets and the continued acceleration of the recognition of unearned
fees in connection with a universal life product replacement program.
Net investment income increased by $428 million, or 17%, to $2,924 million
for the three months ended June 30, 2000 from $2,496 million in 1999. Excluding
the impact of the GenAmerica acquisition, net investment income increased by
$157 million, or 6%. This increase was primarily due to higher income from (i)
fixed maturities of $104 million, or 6%, (ii) mortgage loans on real estate of
$29 million, or 8%, (iii) real estate and real estate joint ventures income,
after investment expenses and depreciation, of $10 million, or 6% and (iv) cash
and short-term investments of $34 million, or 97%. These increases were
partially offset by (i) reduced income in equity securities and other limited
partnership interests of $16 million, or 14% and (ii) other investment income of
$6 million, or 27%.
Other revenues increased by $102 million, or 18%, to $677 million for the
three months ended June 30, 2000 from $575 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, other revenues
increased by $15 million, or 3%, primarily due to a $9 million, or 6%, increase
in Individual Business. The increase in Individual Business was primarily due to
higher commission and fee income associated with increased sales in this
segment's broker dealer and other subsidiaries.
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<PAGE> 32
The Company's realized investment gains and losses are net of related
policyholder amounts. The amounts netted against realized investment gains and
losses are (i) amortization of deferred policy acquisition and value of business
acquired costs attributable to the increase or decrease in product gross margins
or profits resulting from realized investment gains and losses, (ii) additional
policyholder liabilities, which are required when investment gains are realized
and the Company reinvests the proceeds in lower yielding assets ("loss
recognition"), and (iii) liabilities for those participating contracts in which
the policyholders' accounts are increased or decreased by the related investment
gains or losses.
Net realized investment losses decreased by $26 million, or 32%, to $55
million for the three months ended June 30, 2000 from $81 million for the
comparable 1999 period. This decrease reflected total gross realized investment
losses of $53 million, a decrease of $34 million, or 39%, from $87 million in
1999, before the offsets for the amortization of deferred policy acquisition and
value of business acquired costs of $2 million and $(6) million, changes in the
policyholder dividend obligation of $(7) and $0 and credits to participating
contracts of $3 million and $12 million related to assets sold in 2000 and 1999,
respectively. Excluding the impact of the GenAmerica acquisition, net realized
investment losses decreased by $24 million, or 30%. Net realized investment
losses reflect the continuation of the Company's strategy to reposition its
investment portfolio in order to provide a higher operating return on its
invested assets.
The Company believes the policy of netting related policyholder amounts
against realized investment gains and losses provides important information in
evaluating its operating performance. Realized investment gains and losses are
often excluded by investors when evaluating the overall financial performance of
insurers. The Company believes its presentation enables readers of its
consolidated statements of operations to easily exclude realized investment
gains and losses and the related effects on the consolidated statements of
operations when evaluating its operating performance. The Company's presentation
of realized investment gains and losses net of policyholder amounts may be
different from the presentation used by other insurance companies and,
therefore, amounts in its consolidated statements of operations may not be
comparable with amounts reported by other insurers.
Policyholder benefits and claims increased by $975 million, or 30%, to
$4,234 million for the three months ended June 30, 2000 from $3,259 million for
the comparable 1999 period. This increase reflected total gross policyholder
benefits and claims of $4,237 million, an increase of $990 million from $3,247
million in 1999, before the offsets for participating contractholder accounts of
$(3) million and $12 million directly related to net realized investment gains
and losses for the three months ended June 30, 2000 and 1999, respectively.
Excluding the impact of the GenAmerica acquisition, policyholder benefits and
claims increased $558 million, or 17%. This increase was primarily due to
increases of $295 million, or 17%, in Institutional Business and $258 million,
or 95%, in Auto & Home. The Institutional Business increase was primarily due to
overall growth within this segment's group dental and disability businesses, as
well as the acquisition of the individual disability income business of Lincoln
National in
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<PAGE> 33
November 1999. In addition, policyholder benefits and claims related
to the group life and retirement and savings businesses increased commensurate
with the premium variance discussed above. The increase in Auto & Home was
primarily due to the St. Paul acquisition ($226 million), as well as increased
volume and higher catastrophe losses and expenses in this segment's homeowners
business. In addition, a 7% increase in the number of auto policies in force, as
well as higher costs due to an increase in the use of original equipment
manufacturer parts and higher labor rates contributed to the variance.
Interest credited increased by $127 million, or 21%, to $724 million for
the three months ended June 30, 2000 from $597 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, interest credited
increased by $26 million, or 4%. This increase was primarily due to increases in
Institutional Business of $15 million, or 6%, and in Individual Business of $10
million, or 3%. The increase in Institutional Business was primarily due to
growth in this segment's bank-owned life insurance business and increases in the
cash values of executive and corporate-owned universal life plans. The increase
in Individual Business was primarily due to an increase in crediting rates on
annuity and investment products.
Policyholder dividends increased by $111 million, or 28%, to $513 million
for the three months ended June 30, 2000 from $402 million for the comparable
1999 period. Excluding the acquisition of GenAmerica, policyholder dividends
increased by $59 million, or 15%. This increase was primarily due to increases
in Institutional Business of $41 million, or 195%, and in Individual Business of
$10 million, or 3%. Policyholder dividends vary from period to period based on
participating group and traditional individual life insurance contract
experience.
Other expenses increased by $447 million, or 22%, to $2,448 million for
the three months ended June 30, 2000 from $2,001 million for the comparable 1999
period. Excluding the capitalization and amortization of deferred policy
acquisition and value of business acquired costs, other expenses increased by
$429 million, or 21%, to $2,511 million in 2000 from $2,082 million in 1999.
Excluding the impact of the GenAmerica acquisition, other expenses increased by
$46 million, or 2%. This increase was primarily attributable to increases in
International of $340 million, or 430%, Institutional Business of $106 million,
or 32%, Auto & Home of $76 million, or 70%, and Individual Business of $37
million, or 5%, partially offset by a decrease in Corporate of $537 million, or
77%. The increase in International was primarily due to payments of $327 million
made to holders of certain policies transferred to Clarica Life Insurance
Company in connection with the sale of a substantial portion of our Canadian
operations in 1998. The increase in Institutional Business was primarily due to
costs incurred in connection with initiatives that focused on improving our
service delivery capabilities through investments in technology, as well as a
$32 million increase in volume-related expenses related to premium growth. The
increase in Auto & Home was primarily due to the St. Paul acquisition. The
increase in Individual Business was primarily due to a $28 million increase in
the broker dealer and other subsidiaries commensurate with the increase in other
revenues discussed above and a $38 million increase in expenses associated with
the Company's securities lending program, partially offset by a $24 million
decrease in general administrative expenses.
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<PAGE> 34
The decrease in Corporate was primarily due to a $499 million charge in 1999
principally related to the settlement of a multidistrict litigation proceeding
involving alleged improper sales practices, accruals for sales practices claims
not covered by the settlement and other legal costs.
Deferred policy acquisition and value of business acquired costs are
principally amortized in proportion to gross margins or profits, including
realized investment gains or losses. The amortization is allocated to realized
investment gains and losses to provide consolidated statement of operations
information regarding the impact of investment gains and losses on the amount of
the amortization, and other expenses to provide amounts related to gross margins
or profits originating from transactions other than investment gains and losses.
Capitalization of deferred policy acquisition costs increased to $439
million for the three months ended June 30, 2000 from $277 million for the 1999
comparable period, while amortization of deferred policy acquisition and value
of business acquired costs increased to $375 million in 2000 from $202 million
in 1999. Excluding the impact of the GenAmerica acquisition, capitalization of
deferred policy acquisition costs increased to $359 million in 2000 from $277
million in 1999 while amortization of deferred policy acquisition and value of
business acquired costs increased to $342 million in 2000 from $202 million in
1999. Amortization of deferred policy acquisition and value of business acquired
costs of $376 million and $196 million were allocated to other expenses in 2000
and 1999, respectively, while the remainder of the amortization in each year was
allocated to realized investment losses. Excluding the impact of the GenAmerica
acquisition, amortization of deferred policy acquisition and value of business
acquired costs of $345 million and $196 million were allocated to other expenses
in 2000 and 1999, respectively, while the remainder of the amortization in each
year was allocated to realized investment losses. The increase in amortization
of deferred policy acquisition and value of business acquired costs allocated to
other expenses was primarily attributable to Auto & Home and the Individual
Business segment. Auto & Home increased to $135 million in 2000 from $42 million
in 1999, primarily due to the St. Paul acquisition. Individual Business
increased to $186 million in 2000 from $135 million in 1999, primarily due to
refinements in the calculation of estimated gross margins and profits as well as
the acceleration of the recognition of unearned fees in connection with a
product replacement program discussed above.
Income tax expense for the three months ended June 30, 2000 was $178
million, or 93% of income before provision (benefit) for income taxes and
extraordinary item compared with an income tax benefit of $3, or 3%, for the
comparable 1999 period. The 2000 effective tax rate differs from the corporate
tax rate of 35% primarily due to payments made to former Canadian policyholders
in connection with the demutualization. The 1999 effective rate differs from the
corporate tax rate of 35% primarily due to the impact of surplus tax. Prior to
its demutualization, the Company was subject to surplus tax imposed on mutual
life insurance companies under Section 809 of the Internal Revenue Code. The
surplus tax results from the disallowance of a portion of a mutual life
insurance company's policyholder dividends as a deduction from taxable income.
34
<PAGE> 35
Demutualization expenses, net of income taxes, were $129 million and $36
million for the three months ended June 30, 2000 and 1999, respectively. These
costs related to the Company's demutualization efforts.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1999
Premiums increased by $2,191 million, or 38%, to $7,977 million for the
six months ended June 30, 2000 from $5,786 million for the comparable 1999
period, primarily due to the acquisition of GenAmerica on January 6, 2000.
Excluding the impact of this acquisition, premiums increased by $1,220 million,
or 21%. This increase was attributable to Institutional Business, Auto & Home
and International. The increase of $574 million, or 21%, in Institutional
Business was primarily due to an increase in non-medical health premiums due to
higher sales and improved policyholder retention in this segment's dental and
disability businesses and the acquisition of the Lincoln National disability
income business in November 1999. In addition, significant premiums received
from existing group life and retirement and savings customers in 2000
contributed to the variance. The increase of $574 million, or 79%, in Auto &
Home was primarily due to the St. Paul acquisition, representing $520 million of
the premiums, as well as growth in this segment's standard auto business. The
increase of $82 million, or 35%, in International was primarily due to overall
growth in Mexico, Taiwan, Korea and Spain.
Universal life and investment-type product policy fees increased by $266
million, or 41%, to $917 million for the six months ended June 30, 2000 from
$651 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, universal life and investment-type product policy fees
increased by $142 million, or 22%. This increase was almost entirely
attributable to a $136 million, or 36%, increase in Individual Business, which
was primarily due to increased sales of variable life products, continued growth
in separate account assets and the acceleration of the recognition of unearned
fees in connection with a universal life product replacement program.
Net investment income increased by $902 million, or 19%, to $5,708 million
for the six months ended June 30, 2000 from $4,806 million in 1999. Excluding
the impact of the GenAmerica acquisition, net investment income increased by
$355 million, or 7%. This increase was primarily due to higher income from (i)
fixed maturities of $239 million, or 7%, (ii) mortgage loans on real estate of
$71 million, or 10%, (iii) real estate and real estate joint ventures income,
after investment expenses and depreciation, of $55 million, or 21% and (iv)
policy loans of $4 million, or 2%, and (v) cash and short-term investments of
$50 million, or 70%. These increases were partially offset by reduced income in
(i) equity securities and other limited partnership interests of $41 million, or
24%, and (ii) other investment income of $15 million, or 39%, as well as higher
investment expenses of $8 million, or 1%.
Other revenues increased by $294 million, or 28%, to $1,342 million for
the six months ended June 30, 2000 from $1,048 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, other revenues
increased by $112 million, or 11%, primarily due to increases of $64 million, or
25%, in Individual Business and $46 million, or 15%, in Institutional Business.
The increase in Individual Business was primarily due to continued growth in
this segment's broker dealer and other subsidiaries. The increase
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<PAGE> 36
in Institutional Business was primarily due to strong sales growth in this
segment's dental and disability administrative services businesses and higher
management fees from group life insurance separate accounts.
The Company's realized investment gains and losses are net of related
policyholder amounts. The amounts netted against realized investment gains and
losses are (i) amortization of deferred policy acquisition and value of business
acquired costs attributable to the increase or decrease in product gross margins
or profits resulting from realized investment gains and losses, (ii) additional
policyholder liabilities, which are required when investment gains are realized
and the Company reinvests the proceeds in lower yielding assets ("loss
recognition"), and (iii) liabilities for those participating contracts in which
the policyholders' accounts are increased or decreased by the related investment
gains or losses.
Net realized investment losses increased by $12 million, or 8%, to $167
million for the six months ended June 30, 2000 from $155 million for the
comparable 1999 period. This increase reflected total gross realized investment
losses of $184 million, a decrease of $11 million, or 6%, from $195 million in
1999, before the offsets for the amortization of deferred policy acquisition and
value of business acquired costs of $16 million and $24 million, changes in the
policyholder dividend obligation of $(7) and $0 and credits to participating
contracts of $8 million and $16 million related to assets sold in 2000 and 1999,
respectively. Excluding the impact of the GenAmerica acquisition, net realized
investment losses increased by $13 million, or 8%. Net realized investment
losses reflect the continuation of the Company's strategy to reposition its
investment portfolio in order to provide a higher operating return on its
invested assets.
The Company believes the policy of netting related policyholder amounts
against realized investment gains and losses provides important information in
evaluating its operating performance. Realized investment gains and losses are
often excluded by investors when evaluating the overall financial performance of
insurers. The Company believes its presentation enables readers of its
consolidated statements of operations to easily exclude realized investment
gains and losses and the related effects on the consolidated statements of
operations when evaluating its operating performance. The Company's presentation
of realized investment gains and losses net of policyholder amounts may be
different from the presentation used by other insurance companies and,
therefore, amounts in its consolidated statements of operations may not be
comparable with amounts reported by other insurers.
Policyholder benefits and claims increased by $1,881 million, or 29%, to
$8,281 million for the six months ended June 30, 2000 from $6,400 million for
the comparable 1999 period. This increase reflected total gross policyholder
benefits and claims of $8,280 million, an increase of $1,896 million from $6,384
million in 1999, before the offsets for participating contractholder accounts of
$1 million and $16 million directly related to net realized investment gains and
losses for the six months ended June 30, 2000 and 1999, respectively. Excluding
the impact of the GenAmerica acquisition, policyholder benefits and claims
increased $1,020 million, or 16%. This increase was
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<PAGE> 37
primarily due to increases of $533 million, or 16%, in Institutional Business
and $463 million, or 85%, in Auto & Home. The Institutional Business increase
was primarily due to overall growth within this segment's group dental and
disability businesses as well as the acquisition of the individual disability
income business of Lincoln National in November 1999. In addition, policyholder
benefits and claims related to the group life and retirement and savings
businesses increased commensurate with the premium variance discussed above. The
increase in Auto & Home was primarily due to the St. Paul acquisition ($395
million) as well as increased volume and higher catastrophe losses and expenses
in this segment's homeowners business. In addition, a 7% increase in the number
of auto policies in force, as well as higher costs due to an increase in the use
of original equipment manufacturer parts and higher labor rates contributed to
the variance.
Interest credited increased by $214 million, or 18%, to $1,421 million for
the six months ended June 30, 2000 from $1,207 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, interest credited
increased by $19 million, or 2%. This increase was almost entirely attributable
to a $19 million, or 3%, increase in Individual Business, primarily due to an
increase in policyholder account balances as well as an increase in crediting
rates on annuity and investment products.
Policyholder dividends increased by $197 million, or 25%, to $981 million
for the six months ended June 30, 2000 from $784 million for the comparable 1999
period. Excluding the acquisition of GenAmerica, policyholder dividends
increased by $93 million, or 12%. This increase was primarily due to increases
of $43 million, or 116%, in Institutional Business and $35 million, or 5%, in
Individual Business. Policyholder dividends vary from period to period based on
participating group and traditional individual life insurance contract
experience.
Other expenses increased by $1,006 million, or 29%, to $4,427 million for
the six months ended June 30, 2000 from $3,421 million for the comparable 1999
period. Excluding the capitalization and amortization of deferred policy
acquisition and value of business acquired costs, other expenses increased by
$1,031 million, or 29%, to $4,561 million in 2000 from $3,530 million in 1999.
Excluding the impact of the GenAmerica acquisition, other expenses increased by
$353 million, or 10%. This increase was primarily attributable to increases in
International of $357 million, or 253%, Auto & Home of $200 million, or 95%,
Individual Business of $186 million, or 14%, and Institutional of $117 million,
or 17%. These increases were partially offset by a $539 million, or 64%,
decrease in Corporate. The increase in International was primarily due to
payments made to holders of certain policies transferred to Clarica Life
Insurance Company in connection with the sale of a substantial potion of our
Canadian operations in 1998 of $327 million. The increase in Auto & Home was
primarily due to the St. Paul acquisition. The increase in Individual Business
was primarily due to a $72 million increase in the broker dealer and other
subsidiaries commensurate with the increase in other revenues discussed above
and a $79 million increase in expenses associated with the Company's securities
lending program. The increase in Institutional Business was primarily due to
costs incurred in connection with initiatives that focused on improving our
service delivery capabilities through investments in technology as well as a $37
37
<PAGE> 38
million increase in volume-related expenses related to premium growth. The
decrease in Corporate was primarily due to a $499 million charge in 1999
principally related to the settlement of a multidistrict litigation proceeding
involving alleged improper sales practices, accruals for sales practices claims
not covered by the settlement and other legal costs.
Deferred policy acquisition and value of business acquired costs
principally amortized in proportion to gross margins or profits, including
realized investment gains or losses. The amortization is allocated to realized
investment gains and losses to provide consolidated statement of operations
information regarding the impact of investment gains and losses on the amount of
the amortization, and other expenses to provide amounts related to gross margins
or profits originating from transactions other than investment gains and losses.
Capitalization of deferred policy acquisition and value of business
acquired costs increased to $832 million for the six months ended June 30, 2000
from $516 million for the 1999 comparable period while amortization of deferred
policy acquisition and value of business acquired costs increased to $682
million in 2000 from $383 million in 1999. Excluding the impact of the
GenAmerica acquisition, capitalization of deferred policy acquisition costs
increased to $694 million in 2000 from $516 in 1999 while amortization of
deferred policy acquisition and value of business acquired costs increased to
$615 million in 2000 from $383 million in 1999. Amortization of deferred policy
acquisition and value of business acquired costs of $698 million and $407
million were allocated to other expenses in 2000 and 1999, respectively, while
the remainder of the amortization in each year was allocated to realized
investment losses. Excluding the impact of the GenAmerica acquisition,
amortization of deferred acquisition and value of business acquired costs of
$635 million and $407 million were allocated to other expenses in 2000 and 1999,
respectively, while the remainder of the amortization in each year was allocated
to realized investment losses. The increase in amortization of deferred policy
acquisition and value of business acquired costs allocated to other expenses was
primarily attributable to Auto & Home and the Individual Business segment. Auto
& Home increased to $211 million in 2000 from $83 million in 1999, primarily due
to the St. Paul acquisition. Individual Business increased to $380 million in
2000 from $289 million in 1999, primarily due to refinements in the calculation
of estimated gross margins and profits as well as the acceleration of the
recognition of unearned fees in connection with a product replacement program
discussed above.
Income tax expense for the six months ended June 30, 2000 was $376
million, or 56% of income before provision for income taxes and extraordinary
item compared with $171 million, or 53%, for the comparable 1999 period. The
2000 effective tax rate differs from the corporate tax rate of 35% due to
payments made in the second quarter of 2000 to former Canadian policyholders in
connection with the demutualization as well as the impact of surplus tax. The
1999 effective rate differs from the corporate tax rate of 35% primarily due to
the impact of surplus tax. Prior to its demutualization, the Company was subject
to surplus tax imposed on mutual life insurance companies under Section 809 of
the Internal Revenue Code. The surplus tax results from the disallowance
38
<PAGE> 39
of a portion of a mutual life insurance company's policyholder dividends as a
deduction from taxable income.
Demutualization expenses, net of income taxes, were $170 million and $44
million for the six months ended June 30, 2000 and 1999, respectively. These
costs related to the Company's demutualization efforts.
INDIVIDUAL BUSINESS
The following table presents summary consolidated financial information
for Individual Business for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- ----------------------
2000 1999 2000 1999
----------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 1,135 $ 1,050 $ 2,253 $ 2,068
Universal life and investment-type product policy fees 301 177 620 381
Net investment income 1,598 1,329 3,176 2,601
Other revenues 190 159 404 260
Net realized investment gains (losses) (18) 41 (57) 23
----------- ---------- --------- ----------
3,206 2,756 6,396 5,333
----------- ---------- --------- ----------
EXPENSES
Policyholder benefits and claims 1,224 1,167 2,409 2,224
Interest credited to policyholder account balances 416 331 828 668
Policyholder dividends 437 375 875 736
Other expenses 851 641 1,736 1,223
----------- ---------- --------- ----------
2,928 2,514 5,848 4,851
----------- ---------- --------- ----------
Income before provision for income taxes 278 242 548 482
Provision for income taxes 96 81 193 158
----------- ---------- --------- ----------
Net income $ 182 $ 161 $ 355 $ 324
=========== ========== ========= ==========
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1999 - INDIVIDUAL BUSINESS
Premiums increased by $85 million, or 8%, to $1,135 million for the three
months ended June 30, 2000 from $1,050 million for the comparable 1999 period.
Excluding the impact of the GenAmerica acquisition, premiums decreased by $13
million, or 1%. Premiums from insurance products decreased $10 million, or 1% to
$1,021 million in 2000 compared to $1,031 million in 1999. This decrease was
primarily due to a decline in sales of traditional life insurance policies,
which reflected a continued shift in policyholders' preferences from those
policies to variable life products. Premiums from
39
<PAGE> 40
annuity and investment products decreased by $3 million, or 16%, to $16 million
in 2000 from $19 million in 1999, primarily due to a decrease in sales of
immediate annuity products.
Universal life and investment-type product policy fees increased by $124
million, or 70%, to $301 million for the three months ended June 30, 2000 from
$177 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, universal life and investment-type increased by $71
million, or 40%. Policy fees from insurance products increased by $48 million,
or 47%, to $150 million in 2000 from $102 million in 1999. This increase was
primarily due to higher sales of variable life products and continued growth in
separate accounts, reflecting a continued shift in customer preferences from
traditional life products. This increase also reflects the continued
acceleration in the recognition of unearned fees in connection with a product
replacement program for universal life policies initiated in the first quarter
of 2000. Policy fees from annuity and investment products increased by $23
million, or 31%, to $98 million in 2000 from $75 million in 1999, primarily due
to this segment's growing block of separate account assets.
Other revenues increased by $31 million, or 19%, to $190 million for the
three months ended June 30, 2000 from $159 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, other revenues
increased by $9 million, or 6%. Other revenues for insurance products increased
by $8 million, or 6%, to $159 million in 2000 from $151 million in 1999. This
increase was primarily attributable to higher commission and fee income
associated with increased sales in our broker dealer and other subsidiaries.
Other revenues for annuity and investment products increased $1 million, or 13%
to $9 million in 2000 from $8 million in 1999, primarily due to an increase in
investment advisory fees associated with the growth of our variable annuity
separate accounts.
Policyholder benefits and claims increased $57 million, or 5%, to $1,224
million for the three months ended June 30, 2000 from $1,167 million for the
comparable 1999 period. Excluding the impact of the GenAmerica acquisition,
policyholder benefits and claims decreased by $40 million, or 3%. Policyholder
benefits and claims for insurance products remained essentially unchanged at
$1,085 million in 2000 compared with $1,084 million in 1999. Policyholder
benefits and claims for annuity and investment products decreased by $41
million, or 49%, to $42 million in 2000 from $83 million in 1999. This decrease
was primarily due to the refinement of reserve estimates in the second quarter
of 1999 as well as a decrease in premiums as discussed above.
Interest credited to policyholder account balances increased by $85
million, or 26%, to $416 million for the three months ended June 30, 2000 from
$331 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, interest credited increased by $10 million, or 3%,
primarily due to an increase in crediting rates on annuity and investment
products.
40
<PAGE> 41
Policyholder dividends increased by $62 million, or 17%, to $437 million
for the three months ended June 30, 2000 from $375 million for the comparable
1999 period. Excluding the impact of the GenAmerica acquisition, policyholder
dividends increased by $10 million, or 3%. This increase was due to growth in
cash values of policies associated with this segment's large block of
traditional individual life insurance business.
Other expenses increased by $210 million, or 33%, to $851 million for the
three months ended June 30, 2000 from $641 million for the comparable 1999
period. Excluding the capitalization and amortization of deferred policy
acquisition and value of business acquired costs which are discussed below,
other expenses increased by $145 million, or 21%, to $850 million in 2000 from
$705 million in 1999. Excluding the impact of the GenAmerica acquisition, other
expenses increased by $37 million, or 5%. Other expenses related to insurance
products increased by $32 million, or 6%, to $585 million in 2000 from $553
million in 1999. This increase was primarily due to a $28 million increase in
the broker dealer and other subsidiaries commensurate with the increase in other
revenues discussed above and a $33 million increase in expenses associated with
the Company's securities lending program, partially offset by a $24 million
decrease in general and administrative expenses. Other expenses related to
annuity and investment products increased $5 million, or 3%, to $157 million in
2000 from $152 million in 1999, primarily due to an increase in expenses
associated with the Company's securities lending program.
Deferred policy acquisition and value of business acquired 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 and losses to provide consolidated statement of operations
information regarding the impact of investment gains and losses on the amount of
the amortization, and other expenses to provide amounts related to gross margins
or profits originating from transactions other than investment gains and losses.
Capitalization of deferred policy acquisition costs increased $22 million
to $221 million in 2000 from $199 million in 1999 while total amortization of
deferred policy acquisition and value of business acquired costs increased $80
million to $220 million in 2000 from $140 million in 1999. Excluding the impact
of the GenAmerica acquisition, capitalization of deferred policy acquisition
costs decreased by $4 million, or 2% while total amortization of deferred policy
acquisition and value of business acquired costs increased $42 million.
Amortization of deferred policy acquisition and value of business acquired costs
of $222 million and $135 million were allocated to other expenses in 2000 and
1999, respectively, while the remainder of the amortization in each year was
allocated to realized investment gains and losses. Excluding the impact of the
GenAmerica acquisition, amortization of deferred policy acquisition and value of
business acquired costs of $186 million and $135 million were allocated to other
expenses in 2000 and 1999, respectively, while the remainder of the amortization
in each year was allocated to realized investment gains and losses. Amortization
of deferred policy acquisition and value of business acquired costs allocated to
other expenses related to insurance products increased $51 million to $135
million in 2000 from $84 in 1999. This
41
<PAGE> 42
increase was due to refinements in the calculation of estimated gross margins
and profits as well as the acceleration of the recognition of unearned fees in
connection with the product replacement program discussed above. Amortization of
deferred acquisition costs and value of business acquired allocated to other
expenses related to annuity products and investment products were unchanged at
$51 million in 2000 and 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1999
-INDIVIDUAL BUSINESS
Premiums increased by $185 million, or 9%, to $2,253 million for the six
months ended June 30, 2000 from $2,068 million for the comparable 1999 period.
Excluding the impact of the GenAmerica acquisition, premiums decreased by $22
million, or 1%. Premiums from insurance products decreased by $26 million, or
1%, to $2,007 million in 2000 compared to $2,033 million in 1999. This decrease
was primarily due to a decline in sales of traditional life insurance policies
which reflected a continued shift in policyholders' preferences from those
policies to variable life products. Premiums from annuity and investment
products increased by $4 million, or 11%, to $39 million in 2000 from $35
million in 1999. This increase was primarily due to an increase in sales of
supplementary contracts.
Universal life and investment-type product policy fees increased by $239
million, or 63%, to $620 million for the six months ended June 30, 2000 from
$381 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, universal life and investment type fees increased by
$136 million, or 36%. Policy fees from insurance products increased by $91
million, or 39%, to $322 million in 2000 from $231 million in 1999, primarily
due to increased sales of variable life products and continued growth in
separate accounts, reflecting a continued shift in customer preferences from
traditional life products. This increase also reflects the acceleration of the
recognition of unearned fees in connection with a product replacement program
related to universal life policies. Policy fees from annuity and investment
products increased by $45 million, or 30%, to $195 million in 2000 from $150
million in 1999, primarily due to this segment's growing block of separate
account assets and stock market appreciation.
Other revenues increased by $144 million, or 55%, to $404 million for the
six months ended June 30, 2000 from $260 million for the comparable 1999 period.
Excluding the impact of the GenAmerica acquisition, other revenues increased by
$64 million, or 25%. Other revenues for insurance products increased by $60
million, or 24%, to $307 million in 2000 from $247 million in 1999. This
increase was primarily attributable to higher commission and fee income
associated with increased sales in our broker dealer and other subsidiaries.
Other revenues for annuity products increased by $4 million, or 31%, to $17
million in 2000 from $13 million in 1999, primarily due to an increase in
investment advisory fees associated with the growth of variable annuity separate
accounts.
Policyholder benefits and claims increased $185 million, or 8%, to $2,409
million for the six months ended June 30, 2000 from $2,224 million for the
comparable 1999 period. Excluding the impact of the GenAmerica acquisition,
policyholder benefits and claims
42
<PAGE> 43
decreased by $47 million or 2%. Policyholder benefits and claims for insurance
products decreased by $39 million, or 2%, to $2,089 million in 2000 from $2,128
million in 1999. This decrease was primarily due to improved mortality and
morbidity experience in the existing block of traditional life policyholder
liabilities. Policyholder benefits and claims for annuity and investment
products decreased by $8 million, or 8%, to $88 million in 2000 from $96 million
in 1999. This decrease was primarily due to refinements in reserve estimates in
the second quarter of 1999.
Interest credited to policyholder account balances increased by $160
million, or 24%, to $828 million for the six months ended June 30, 2000 from
$668 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, interest credits increased by $19 million, or 3%.
Interest on insurance products increased by $11 million, or 5%, to $214 million
in 2000 from $203 million in 1999, primarily due to an increase in policyholder
account balances. Interest on annuity and investment products increased by $8
million, or 2%, to $473 million in 2000 from $465 million in 1999, primarily
attributable to an increase in crediting rates.
Policyholder dividends increased by $139 million, or 19%, to $875 million
for the six months ended June 30, 2000 from $736 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, policyholder
dividends increased by $35 million, or 5%. This increase was due to the growth
in cash values of policies associated with this segment's large block of
traditional individual life insurance business.
Other expenses increased by $513 million, or 42%, to $1,736 million for the
six months ended June 30, 2000 from $1,223 million for the comparable 1999
period. Excluding the capitalization and amortization of deferred policy
acquisition and value of business acquired costs which are discussed below,
other expenses increased by $421 million, or 32%, to $1,733 million in 2000 from
$1,312 million in 1999. Excluding the impact of the GenAmerica acquisition,
other expenses increased by $186 million, or 14%. Other expenses related to
insurance products increased by $144 million, or 14%, to $1,164 million in 2000
from $1,020 million in 1999. This increase was primarily due to a $72 million
increase in the broker dealer and other subsidiaries commensurate with the
increase in other revenues discussed above and a $62 million increase in
expenses associated with the Company's securities lending program. Other
expenses related to annuity and investment products increased $42 million, or
14%, to $334 million in 2000 from $292 million in 1999. This increase was
primarily due to a $17 million increase in expenses associated with the
Company's securities lending program and a $23 million increase in commission
expense arising from higher sales of variable annuities.
Deferred policy acquisition and value of business acquired 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 and losses to provide consolidated statement of operations
information regarding the impact of investment gains and losses on the amount of
the amortization, and other expenses to provide
43
<PAGE> 44
amounts related to gross margins or profits originating from transactions other
than investment gains and losses.
Capitalization of deferred policy acquisition costs increased $61 million
to $439 million in 2000 from $378 million in 1999 while total amortization of
deferred policy acquisition and value of business acquired costs increased $160
million to $425 million in 2000 from $265 million in 1999. Excluding the impact
of the GenAmerica acquisition, capitalization of deferred acquisition costs
increased by $14 million, or 4% while total amortization of deferred policy
acquisition and value of business acquired costs increased $94 million.
Amortization of deferred policy acquisition and value of business acquired costs
of $442 million and $289 million were allocated to other expenses in 2000 and
1999, respectively, while the remainder of the amortization in each year was
allocated to realized investment gains and losses. Excluding the impact of the
GenAmerica acquisition, amortization of deferred policy acquisition and value of
business acquired costs of $380 million and $289 million were allocated to other
expenses in 2000 and 1999, respectively, while the remainder of the amortization
in each year was allocated to realized investment gains and losses. Amortization
of deferred policy acquisition and value of business acquired costs allocated to
other expenses related to insurance products increased $74 million to $278
million in 2000 from $204 in 1999. This increase was due to refinements in the
calculation of estimated gross margins and profits as well as the acceleration
of the recognition of unearned fees in connection with the product replacement
program discussed above. Amortization of deferred policy acquisition and value
of business acquired costs allocated to other expenses related to annuity
products and investment products increased $17 million to $102 million in 2000
compared to $85 million in 1999. This increase was related to refinements in the
calculation of estimated gross profits.
44
<PAGE> 45
INSTITUTIONAL BUSINESS
The following table presents summary consolidated financial information
for Institutional Business for the periods as indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- -----------------------
2000 1999 2000 1999
--------- --------- ---------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 1,784 $ 1,327 $ 3,377 $ 2,754
Universal life and investment-type product policy fees 136 122 273 249
Net investment income 954 984 1,882 1,898
Other revenues 172 172 355 305
Net realized investment losses (25) (60) (41) (72)
-------- --------- -------- --------
3,021 2,545 5,846 5,134
-------- --------- -------- --------
EXPENSES
Policyholder benefits and claims 2,043 1,712 4,016 3,420
Interest credited to policyholder account balances 267 255 514 513
Policyholder dividends 63 21 81 37
Other expenses 440 335 826 710
-------- --------- -------- --------
2,813 2,323 5,437 4,680
-------- --------- -------- --------
Income before provision for income taxes 208 222 409 454
Provision for income taxes 77 80 148 168
-------- --------- -------- --------
Net income $ 131 $ 142 $ 261 $ 286
======== ========= ======== ========
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1999 -- INSTITUTIONAL BUSINESS
Premiums increased by $457 million, or 34%, to $1,784 million for the
three months ended June 30, 2000 from $1,327 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, premiums increased
by $431 million, or 32%, to $1,758 million in 2000 from $1,327 million in 1999.
Group insurance premiums increased by $309 million, or 25%, to $1,530 million in
2000 from $1,221 million in 1999. This increase was primarily due to strong
sales and continued favorable policyholder retention in this segment's dental
and disability businesses and $89 million of additional insurance coverages
purchased by existing customers with funds received in the demutualization. In
addition, significant premiums received from several existing group life
customers in 2000 and the acquisition of the Lincoln National disability income
business in November 1999 contributed to the variance. Retirement and savings
premiums increased by $122 million, or 115%, to $228 million in 2000 from $106
million in 1999, primarily due to significant premiums received from existing
customers in 2000.
45
<PAGE> 46
Universal life and investment-type product policy fees increased by $14
million, or 11%, to $136 million for the three months ended June 30, 2000 from
$122 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, universal life and investment-type product policy fees
increased by $5 million, or 4%, to $127 million in 2000 from $122 million in
1999. This increase reflected growth in our group universal life products.
Other revenues remained unchanged at $172 million for the three months
ended June 30, 2000 and 1999. Excluding the impact of the GenAmerica
acquisition, other revenues decreased by $2 million, or 1%, to $170 million in
2000 from $172 million in 1999. Group insurance increased by $4 million, or 5%,
to $86 million in 2000 from $82 million in 1999. This increase was primarily due
to sales growth in this segment's dental and disability administrative services
businesses. Retirement and savings other revenues decreased by $6 million, or
7%, to $84 million in 2000 from $90 million in 1999, primarily due to lower
administrative fees from separate accounts and defined contribution
record-keeping services.
Policyholder benefits and claims increased by $331 million, or 19%, to
$2,043 million for the three months ended June 30, 2000 from $1,712 million for
the comparable 1999 period. Excluding the impact of the GenAmerica acquisition,
policyholder benefits and claims increased by $295 million, or 17%, to $2,007
million in 2000 from $1,712 million in 1999. Group life increased by $36
million, or 4%, to $931 million in 2000 from $895 million in 1999, primarily due
to growth in the business commensurate with the increase in premiums discussed
above. Non-medical health increased by $156 million, or 47%, to $491 million in
2000 from $335 million in 1999, due to significant growth in this segment's
dental and disability insurance businesses as well as the acquisition of Lincoln
National's individual disability income business discussed above. Retirement and
savings increased by $103 million, or 21%, to $585 million in 2000 from $482
million in 1999, commensurate with the premium variance discussed above.
Interest credited to policyholder account balances increased by $12
million, or 5%, to $267 million for the three months ended June 30, 2000 from
$255 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, interest credited to policyholder account balances
increased by $15 million, or 6%, to $270 million in 2000 from $255 million in
1999. Group life insurance increased by $19 million, or 19%, to $120 million in
2000 from $101 million in 1999. This increase was primarily due to growth in the
bank-owned life insurance business and increases in the cash values of executive
and corporate-owned universal life plans. In addition, an increase in funding
agreements, resulting from the reinvestment of cash received in connection with
the demutualization, contributed to the variance. Retirement and savings
decreased by $4 million, or 3%, to $150 million in 2000 from $154 million in
1999, due to a continued shift in customers' investment preferences from
guaranteed interest products to separate account alternatives.
46
<PAGE> 47
Policyholder dividends increased by $42 million, or 200%, to $63 million
for the three months ended June 30, 2000 from $21 million for the comparable
1999 period. Policyholder dividends vary from period to period based on
participating group insurance contract experience.
Other expenses increased by $105 million, or 31%, to $440 million for the
three months ended June 30, 2000 from $335 million for the comparable 1999
period. Excluding the impact of the GenAmerica acquisition, expenses increased
by $94 million, or 28%, to $429 million for the three months ended June 30, 2000
from $335 million in 1999. Other expenses related to group insurance increased
by $77 million, or $35%, to $294 million in 2000 from $217 in 1999. Other
expenses related to group life increased by $53 million, or 78%, to $121 million
in 2000 from $68 million in 1999. Other expenses related to group non-medical
health increased by $24 million, or 16%, to $173 million in 2000 from $149
million in 1999. Other expenses related to retirement and savings increased by
$17 million, or 14%, to $135 million in 2000 from $118 million in 1999. These
increases were primarily due to costs incurred in connection with initiatives
that focused on improving our service delivery capabilities through investments
in technology as well as a $32 million increase in volume-related expenses
related to premium growth. Volume-related expenses include premium taxes,
separate account investment management expenses and commissions.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1999
- INSTITUTIONAL BUSINESS
Premiums increased by $623 million, or 23%, to $3,377 million for the six
months ended June 30, 2000 from $2,754 million for the comparable 1999 period.
Excluding the impact of the GenAmerica acquisition, premiums increased by $574
million, or 21%, to $3,328 million in 2000 from $2,754 million in 1999. Group
insurance premiums increased by $406 million, or 16%, to $2,947 million in 2000
from $2,541 million in 1999. This increase was primarily due to strong sales and
continued favorable policyholder retention in this segment's dental and
disability businesses and $89 million of additional insurance coverages
purchased by existing customers with funds received in the demutualization. In
addition, significant premiums received from several existing group life
customers in 2000 and the acquisition of the Lincoln National disability income
business in November 1999 contributed to the variance. Retirement and savings
premiums increased by $168 million, or 79%, to $381 million in 2000 from $213
million in 1999, primarily due to significant premiums received from existing
customers in 2000.
Universal life and investment-type product policy fees increased by $24
million, or 10%, to $273 million for the six months ended June 30, 2000 from
$249 million for the comparable 1999 period, primarily due to the acquisition of
GenAmerica. Excluding the impact of the GenAmerica acquisition, universal life
and investment-type product policy fees increased by $4 million, or 2%, to $253
million in 2000 from $249 million in 1999. This increase reflected growth in our
group universal life products.
47
<PAGE> 48
Other revenues increased by $50 million, or 16%, to $355 million for the
six months ended June 30, 2000 from $305 million for the comparable 1999 period.
Excluding the impact of the GenAmerica acquisition, other revenues increased by
$46 million, or 15%, to $351 million in 2000 from $305 million in 1999. Group
insurance increased by $44 million, or 32%, to $183 million in 2000 from $139
million in 1999. This increase was primarily due to strong sales growth in this
segment's dental and disability administrative services businesses and higher
management fees from group life insurance separate accounts. Retirement and
savings other revenues were essentially unchanged at $168 million in 2000
compared with $166 million in 1999.
Policyholder benefits and claims increased by $596 million, or 17%, to
$4,016 million for the six months ended June 30, 2000 from $3,420 million for
the comparable 1999 period. Excluding the impact of the GenAmerica acquisition,
policyholder benefits and claims increased by $533 million, or 16%, to $3,953
million in 2000 from $3,420 million in 1999. Group life increased by $68
million, or 4%, to $1,895 million in 2000 from $1,827 million in 1999, primarily
due to overall growth in the business, commensurate with the premium variance
discussed above. Non-medical health increased by $298 million, or 46%, to $947
million in 2000 from $649 million in 1999, due to significant growth in this
segment's dental and disability insurance businesses as well as the acquisition
of Lincoln National's individual disability income business discussed above.
Retirement and savings increased by $167 million, or 18%, to $1,111 million in
2000 from $944 million in 1999 commensurate with the premium variance discussed
above.
Interest credited to policyholder account balances were essentially
unchanged at $514 million for the six months ended June 30, 2000 compared with
$513 million for the comparable 1999 period. Excluding the impact of the
GenAmerica acquisition, interest credited to policyholder account balances
decreased by $1 million to $512 million in 2000 from $513 million in 1999. Group
life insurance increased by $29 million, or 15%, to $224 million in 2000 from
$195 million in 1999. This increase was primarily due to growth in the
bank-owned life insurance business and increases in the cash values of executive
and corporate-owned universal life plans. In addition, an increase in funding
agreements, resulting from the reinvestment of cash received in connection with
the demutualization, contributed to the variance. Retirement and savings
decreased by $30 million, or 9%, to $288 million in 2000 from $318 million in
1999, due to a continued shift in customers' investment preferences from
guaranteed interest products to separate account alternatives.
Policyholder dividends increased by $44 million, or 119%, to $81 million
for the six months ended June 30, 2000 from $37 million for the comparable 1999
period. Policyholder dividends vary from period to period based on participating
group insurance contract experience.
Other expenses increased by $116 million, or 16%, to $826 million for the
six months ended June 30, 2000 from $710 million for the comparable 1999 period.
Excluding the impact of the GenAmerica acquisition, expenses increased by $95
million, or 13%, to $805 million in 2000 compared with $710 million in 1999.
Other expenses related to group insurance increased by $79 million, or $17%, to
$545 million in 2000 from $466
48
<PAGE> 49
million in 1999. Other expenses related to group life increased by $49 million,
or 30%, to $214 million in 2000 from $165 million in 1999. Other expenses
related to group non-medical health increased by $30 million, or 10%, to $331
million in 2000 from $301 million in 1999. Other expenses related to retirement
and savings increased $16 million, or 7%, to $260 million in 2000 from $244
million in 1999. These increases were primarily due to costs incurred in
connection with initiatives that focused on improving our service delivery
capabilities through investments in technology as well as a $37 million increase
in volume-related expenses related to premium growth. Volume-related expenses
include premium taxes, separate account investment management expenses and
commissions.
REINSURANCE
As a result of the acquisition of GenAmerica on January 6, 2000, MetLife
beneficially owns approximately 58% of Reinsurance Group of America,
Incorporated ("RGA"). RGA, through its subsidiaries RGA Reinsurance Company and
RGA Life Reinsurance Company of Canada, is among the largest providers of life
reinsurance in North America. In addition to its North American operations, RGA
has subsidiary companies or branch offices in Argentina, Australia, Barbados,
Bermuda, Hong Kong, Japan, Taiwan, South Africa, and the United Kingdom.
Worldwide, RGA has over $480 billion of life reinsurance in force and assets of
$5.8 billion.
MetLife has designated the life reinsurance business of RGA, combined with
an existing ancillary life reinsurance business, as its Reinsurance segment. The
existing ancillary life reinsurance business was an immaterial component of
MetLife's Individual segment for periods prior to January 1, 2000. Life
reinsurance is an arrangement under which an insurance company, the "reinsurer,"
agrees to indemnify another insurance company, the "ceding company," for all or
a portion of the insurance risks underwritten by the ceding company. Life
reinsurance is designed to (i) reduce the net liability on individual risks,
thereby enabling the ceding company to increase the volume of business it can
underwrite, as well as increase the maximum risk it can underwrite on a single
life or risk; (ii) stabilize operating results by leveling fluctuations in the
ceding company's loss experience; (iii) assist the ceding company to meet
applicable regulatory requirements; and (iv) enhance the ceding company's
financial strength and surplus position.
49
<PAGE> 50
The following table presents summary consolidated financial information for
Reinsurance for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
------------- --------------
2000 2000
------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
REVENUES
Premiums $ 370 $ 728
Net investment income 95 183
Other revenues 9 11
Net realized investment losses (2) (3)
------------- --------------
472 919
------------- --------------
EXPENSES
Policyholder benefits and claims 289 574
Interest credited to policyholder account balances 28 51
Policyholder dividends 5 10
Other expenses 113 198
------------- --------------
435 833
------------- --------------
Income before provision for income taxes 37 86
Provision for income taxes 3 22
Minority interest 27 36
------------- --------------
Net income $ 7 $ 28
============= ==============
</TABLE>
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 - REINSURANCE
Revenues were $472 million and $919 million for the three months and six
months ended June 30, 2000, respectively. Reinsurance revenues are primarily
derived from renewal premiums from existing reinsurance treaties, new business
premiums from existing or new reinsurance treaties and income earned on
invested assets. Premium levels are significantly influenced by large
transactions and reporting practices of ceding companies and, as a result, can
fluctuate from period to period.
Expenses were $435 million and $833 million for the three months and six
months ended June 30, 2000, respectively. Policy benefits and claims were 78.1%
and 78.8% of premiums for the three months and six months ended June 30, 2000,
respectively. Mortality is expected to vary from period to period, but
generally remains fairly constant over the long-term. Underwriting, acquisition
and insurance expenses, which are
50
<PAGE> 51
included in other expenses, were 21% and 18% of premiums for the three months
and six months ended June 30, 2000, respectively. This percentage fluctuates
depending on the mix of the underlying insurance products being reinsured.
Interest credited to policyholder account balances related to amounts credited
on RGA's deposit type contracts and cash value products in this segment, which
have a significant mortality component. This amount fluctuates with the changes
in cash values and changes in interest crediting rates.
Minority interest reflects third-party ownership interests in RGA.
AUTO & HOME
The following table presents summary consolidated financial information for
Auto & Home for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- --------------------
2000 1999 2000 1999
--------- ----------- --------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 656 $ 370 $ 1,301 $ 727
Net investment income 47 22 83 44
Other revenues 5 4 18 9
Net realized investment gains (losses) 1 (1) 6 (1)
--------- ----------- --------- --------
709 395 1,408 779
--------- ----------- --------- --------
EXPENSES
Policyholder benefits and claims 531 273 1,010 547
Other expenses 203 101 407 203
--------- ----------- --------- --------
734 374 1,417 750
--------- ----------- --------- --------
Income (loss) before provision (benefit) for income taxes (25) 21 (9) 29
Provision (benefit) for income taxes (13) 3 (8) 4
--------- ----------- --------- --------
Net income (loss) $ (12) $ 18 $ (1) $ 25
========= =========== ========= ========
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1999 - AUTO & HOME
Premiums increased by $286 million, or 77%, to $656 million for the three
months ended June 30, 2000 from $370 million for the 1999 comparable period,
primarily due to the St. Paul acquisition. Excluding the impact of the St. Paul
acquisition, premiums increased $25 million or 7%. Automobile premiums
increased by $21 million, or 7%, to $324 million in 2000 from $303 million in
1999. This increase was primarily due to growth in our standard auto insurance
book of business which was attributable to increased new business production
and improved retention in the existing business. Policyholder retention in our
standard auto business increased by 1% to 88%.
51
<PAGE> 52
Homeowner premiums increased by $1 million or 2% to $65 million in 2000 from
$64 million in 1999 due to an increase in policyholder retention of 1% to 90%
in 2000 from 89% in 1999. Premiums from other personal lines increased to $6
million in 2000 from $3 million in 1999.
Other revenues were essentially unchanged at $5 million for the three months
ended June 30, 2000 compared with $4 million for the comparable 1999 period.
Expenses increased by $360 million, or 96%, to $734 million for the three
months ended June 30, 2000 from $374 million for the comparable 1999 period.
Excluding the impact of the St. Paul acquisition, expenses increased by $33
million or 9%, which resulted in an increase in the combined ratio to 103.3% in
2000 from 101.1% in 1999. This increase was primarily due to higher overall
loss costs predominately in the homeowners line, as discussed below.
Policyholder benefits and claims increased by $258 million, or 95%, to $531
million for the three months ended June 30, 2000 from $273 million for the
comparable 1999 period. The auto loss ratio decreased to 76.0% in 2000 from
78.4% in 1999 while the homeowners loss ratio increased to 94.9% from 55.8% in
1999. The increase in the homeowners loss ratio was primarily due to higher
catastrophe losses and expenses, predominately in the St. Paul book of
business. Catastrophes, including multiple storms and the Cerro Grande Fire,
represented 30.6% of homeowners premiums for the three months ended June 30,
2000 compared with 4.0% for the comparable 1999 period. Excluding the impact of
the St. Paul acquisition, policyholder benefits and claims increased by $32
million, or 12%. Auto policyholder benefits and claims increased by $11
million, or 5%, to $248 million in 2000 from $237 million in 1999, primarily
due to a 7% increase in the number of policies in force, as well as increased
costs due to an increase in the use of original equipment manufacturer parts
and higher labor rates. Correspondingly, the auto loss ratio decreased to 76.6%
in 2000 from 78.4% in 1999. Homeowners benefits and claims increased $18
million, or 50%, to $54 million in 2000 from $36 million in 1999, primarily due
to increased volume of this book of business and increased catastrophe
experience as discussed above. The homeowners loss ratio increased by 25.4% to
81.2% in 2000 from 55.8% in 1999. Other personal lines benefits and claims
increased by $3 million to $3 million in 2000.
Other expenses increased by $102 million, or 101%, to $203 million for the
three months ended June 30, 2000 from $101 million for the comparable 1999
period, which resulted in an increase in our expense ratio to 30.9% in 2000
from 27.3% in 1999. Excluding the impact of the St. Paul acquisition, other
expenses increased $1 million, or 1%, resulting in a decrease in the expense
ratio to 26.1% in 2000 from 27.3% in 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1999
- AUTO & HOME
Premiums increased by $574 million, or 79%, to $1,301 million for the six
months ended June 30, 2000 from $727 million for the 1999 comparable period,
primarily due to the St. Paul acquisition. Excluding the impact of the St. Paul
acquisition, premiums
52
<PAGE> 53
increased $54 million or 7%. Automobile premiums increased by $34 million, or
6%, to $636 million in 2000 from $602 million in 1999. This increase was
primarily due to growth in our standard auto insurance book of business which
was attributable to increased new business production and improved retention in
the existing business. Policyholder retention in our standard auto business
increased 1% to 88%. Homeowner premiums increased by $12 million or 10% to $130
million in 2000 from $118 million in 1999 due to higher new business production
and an increase in policyholder retention of 1% to 90% in 2000 from 89% in
1999. Premiums from other personal lines increased to $15 million in 2000 from
$7 million in 1999.
Other revenues increased by $9 million, or 100%, to $18 million for the
three months ended June 30, 2000 from $9 million for the comparable 1999
period, primarily due to a revision of an estimate of amounts recoverable from
reinsurers related to the disposition of this segment's reinsurance business in
1990.
Expenses increased by $667 million, or 89%, to $1,417 million for the six
months ended June 30, 2000 from $750 million for the comparable 1999 period.
Excluding the impact of the St. Paul acquisition, expenses increased by $81
million or 11%, which resulted in an increase in the combined ratio to 106.4%
in 2000 from 103.1% in 1999. This increase was primarily due to higher overall
loss costs predominately in the homeowners line, as discussed below.
Policyholder benefits and claims increased by $463 million, or 85%, to
$1,010 million for the six months ended June 30, 2000 from $547 million for the
comparable 1999 period. The automobile loss ratio decreased to 76.0% in 2000
from 77.9% in 1999 while the homeowners loss ratio increased to 83.8% from
64.3% in 1999. The increase in the homeowners loss ratio was primarily due to
higher catastrophe losses and expenses, predominately in the St. Paul book of
business. Catastrophes, including multiple storms and the Cerro Grande Fire,
represented 17.8% of homeowners premiums for the three months ended June 30,
2000 compared with 11.1% for the comparable 1999 period. Excluding the impact
of the St. Paul acquisition, policyholder benefits and claims increased by $68
million, or 12%. Auto policyholder benefits and claims increased by $38
million, or 8%, to $507 million in 2000 from $469 million in 1999, primarily
due to a 7% increase in the number of policies in force, as well as increased
costs due to an increase in the use of original equipment manufacturer parts
and higher labor rates. Correspondingly, the auto loss ratio increased to 79.6%
in 2000 from 77.9% in 1999. Homeowners benefits and claims increased $26
million, or 34%, to $102 million in 2000 from $76 million in 1999, primarily
due to the increased volume of this book of business and increased catastrophe
experience as discussed above. The homeowners loss ratio increased by 13.8% to
78.1% in 2000 from 64.3% in 1999. Other personal lines benefits and claims
increased by $4 million to $6 million in 2000 from $2 million in 1999.
Other expenses increased by $204 million, or 100%, to $407 million for the
six months ended June 30, 2000 from $203 million for the comparable 1999
period, which resulted in an increase in our expense ratio to 31.3% in 2000
from 27.9% in 1999. Excluding the impact of the St. Paul acquisition, operating
expenses increased by $13
53
<PAGE> 54
million, or 6%, resulting in a slight decrease in our expense ratio to 27.7% in
2000 from 27.9% in 1999.
ASSET MANAGEMENT
The following table presents summary consolidated financial information for
Asset Management for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Net investment income $ 21 $ 20 $ 42 $ 38
Other revenues 218 196 434 403
----------- ----------- ----------- -----------
239 216 476 441
OTHER EXPENSES 210 179 412 365
----------- ----------- ----------- -----------
Income before provision for income taxes
and minority interest 29 37 64 76
Provision for income taxes 7 10 18 20
Minority interest 11 13 24 28
----------- ----------- ----------- -----------
Net Income $ 11 $ 14 $ 22 $ 28
=========== =========== =========== ===========
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1999--ASSET MANAGEMENT
Other revenues, which are primarily comprised of management and advisory
fees, increased by $22 million, or 11%, to $218 million for the three months
ended June 30, 2000 from $196 million for the comparable 1999 period,
reflecting an overall increase in assets under management of $18 billion, or
9%, to $210 billion in 2000 from $192 billion in 1999. Excluding the impact of
Conning, which was acquired as part of the GenAmerica acquisition, assets under
management decreased $6 billion or 3%, to $186 billion in 2000 from $192
billion in 1999 primarily due to the reassignment of $4 billion of general
account assets to in-house management in conjunction with the demutualization
as well as a $1 billion decline in value style products. In connection with
this decrease, other revenues decreased by $1 million, or 1%, to $195 million
in 2000 from $196 million in 1999, primarily due to a change in asset mix from
value style products to fixed income and other retail equity products.
Management and advisory fees are typically calculated based
54
<PAGE> 55
on a percentage of assets under management, and are not necessarily
proportionate to average assets managed due to changes in account mix.
Other expenses increased by $31 million, or 17%, to $210 million for the
three months ended June 30, 2000 from $179 million for the comparable 1999
period. Excluding the impact of Conning, other expenses increased by $5
million, or 3%, to $184 million in 2000 from $179 million in 1999. Total
compensation and benefits of $100 million consisted of approximately 56% base
compensation and 44% variable compensation. Base compensation was essentially
unchanged at $56 million in 2000 compared with $57 million in 1999. Variable
compensation decreased by $2 million, or 4%, to $44 million in 2000 from $46
million in 1999. Variable incentive payments are based upon profitability,
investment portfolio performance, new business sales and growth in revenues and
profits. The variable compensation plans reward the employees for growth in
their businesses, but also require them to share in the impact of any declines.
In addition, general and administrative expenses increased $8 million, or 11%,
to $84 million in 2000 from $76 million in 1999, primarily due to increased
discretionary spending.
Minority interest, reflecting third-party ownership interest in Nvest,
decreased by $2 million, or 15%, to $11 million for the three months ended June
30, 2000 from $13 million for the comparable 1999 period.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE SIX MONTHS ENDED JUNE 30,
1999--ASSET MANAGEMENT
Other revenues, which are primarily comprised of management and advisory
fees, increased by $31 million, or 8%, to $434 million for the six months ended
June 30, 2000 from $403 million for the comparable 1999 period, reflecting an
overall increase in assets under management of $18 billion, or 9%, to $210
billion in 2000 from $192 billion in 1999. Excluding the impact of Conning,
which was acquired as part of the GenAmerica acquisition, assets under
management decreased $6 billion or 3%, to $186 billion in 2000 from $192
billion in 1999, primarily due to the reassignment of $4 billion of general
account assets to in-house management in conjunction with the demutualization
as well as a $1 billion decline in value style products. In connection with
this decrease, other revenues decreased by $11 million, or 3%, to $392 million
in 2000 from $403 million in 1999, primarily due to a change in asset mix from
value style products to fixed income and other retail equity products.
Management and advisory fees are typically calculated based on a percentage of
assets under management, and are not necessarily proportionate to average
assets managed due to changes in account mix.
Other expenses increased by $47 million, or 13%, to $412 million for the six
months ended June 30, 2000 from $365 million for the comparable 1999 period.
Excluding the impact of Conning, other expenses increased by $3 million, or 1%,
to $368 million in 2000 from $365 million in 1999. Total compensation and
benefits of $206 million consisted of approximately 58% base compensation and
42% variable compensation. Base compensation increased by $6 million, or 5%, to
$119 million in 2000 from $113 million in 1999, primarily due to annual salary
increases and higher staffing levels. Variable
55
<PAGE> 56
compensation decreased by $9 million, or 9%, to $87 million in 2000 from $96
million in 1999. Variable incentive payments are based upon profitability,
investment portfolio performance, new business sales and growth in revenues and
profits. The variable compensation plans reward the employees for growth in
their businesses, but also require them to share in the impact of any declines.
In addition, general and administrative expenses increased $6 million, or 4%,
to $162 million in 2000 from $156 million in 1999, primarily due to increased
discretionary spending.
Minority interest, reflecting third-party ownership interest in Nvest,
decreased by $4 million, or 14%, to $24 million for the six months ended June
30, 2000 from $28 million for the comparable 1999 period.
INTERNATIONAL
The following table presents summary consolidated financial information for
International for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- -----------------------
2000 1999 2000 1999
--------- -------- ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 173 $ 123 $ 319 $ 237
Universal life and investment-type product policy fees 11 13 24 21
Net investment income 63 53 128 101
Other revenues 2 1 5 3
Net realized investment gains 7 2 8 6
--------- -------- ---------- ---------
256 192 484 368
--------- -------- ---------- ---------
EXPENSES
Policyholder benefits and claims 147 107 272 209
Interest credited to policyholder account balances 13 11 28 26
Policyholder dividends 8 6 15 11
Payments to former Canadian policyholders 327 -- 327 --
Other expenses 73 65 138 118
--------- -------- ---------- ---------
568 189 780 364
--------- -------- ---------- ---------
Income (loss) before provision (benefit) for income taxes (312) 3 (296) 4
Provision (benefit) for income taxes 1 (3) 7 (7)
--------- -------- ---------- ---------
Net income (loss) $ (313) $ 6 $ (303) $ 11
========= ======== ========== ========
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1999 - INTERNATIONAL
Premiums increased by $50 million, or 41%, to $173 million for the three
months ended June 30, 2000 from $123 million for the three months ended June
30, 1999. Mexico's premiums increased by $19 million primarily due to several
large group customers obtained in 2000. Taiwan's premiums increased by $15
million, primarily due
56
<PAGE> 57
to overall growth in the individual life business. Korea's premiums increased
by $6 million, primarily due to improved policyholder retention, which
increased to 78% in 2000 from 70% in 1999. Spain's premiums increased by $5
million, primarily due to increased sales from its joint venture partnership,
principally in the direct auto business. Brazil and Argentina's premiums
increased by $4 million and $2 million, respectively, primarily due to expanded
business operations.
Universal life and investment-type product policy fees decreased by $2
million, or 15%, to $11 million for the three months ended June 30, 2000 from
$13 million for the comparable 1999 period, primarily due a shift in Spain's
product mix to the unit-linked product that was introduced in the second
quarter of 1999. This unit-linked product is similar to a variable universal
life product in the United States.
Other revenues were essentially unchanged at $2 million for the three months
ended June 30, 2000 compared with $1 million for the comparable 1999 period.
Policyholder benefits and claims increased by $40 million, or 37%, to $147
million for the three months ended June 30, 2000 from $107 million for the
comparable 1999 period. Mexico, Taiwan and Korea increased by $16 million, $12
million and $5 million, respectively, commensurate with the overall premium
growth discussed above. The remainder of the increase was primarily due to
minor increases in several other countries.
Interest credited to policyholder account balances increased by $2 million,
or 18%, to $13 million for the three months ended June 30, 2000 from $11
million for the comparable 1999 period in line with increased account balances.
Policyholder dividends increased by $2 million, or 33%, to $8 million for
the three months ended June 30, 2000 from $6 million for the comparable 1999
period. These dividends vary from period to period based on the claims
experience of participating insurance contracts.
Payments of $327 million were made during the second quarter of 2000 to
holders of certain policies transferred to Clarica Life Insurance Company in
connection with the sale of a substantial portion of our Canadian operations
in 1998.
Other expenses increased by $8 million, or 12%, to $73 million for the three
months ended June 30, 2000 from $65 million for the comparable 1999 period. The
primary causes of this increase were higher sales commissions related to premium
growth and higher business development costs in Brazil.
57
<PAGE> 58
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1999
- INTERNATIONAL
Premiums increased by $82 million, or 35%, to $319 million for the six
months ended June 30, 2000 from $237 million for the comparable 1999 period.
Mexico's premiums increased by $26 million, primarily due to several large
group customers obtained in 2000. Taiwan's premiums increased by $24 million,
primarily due to overall growth in the individual life business as well as an
increase in group premiums as a result of a large group customer obtained in
the third quarter of 1999. Korea's premiums increased by $13 million, primarily
due to improved policyholder retention, which increased to 78% in 2000 from 70%
in 1999. Spain's premiums increased by $12 million, primarily due to increased
sales from its joint venture partnership, specifically in the agency and direct
auto businesses. Brazil's premiums increased $6 million, primarily due to
expanded business operations.
Universal life and investment-type product policy fees increased by $3
million, or 14%, to $24 million for the six months ended June 30, 2000 from $21
million for the comparable 1999 period, primarily due to expanded business
operations in Argentina.
Other revenues were essentially unchanged at $5 million for the six months
ended June 30, 2000 compared with $3 million for the comparable 1999 period.
Policyholder benefits and claims increased by $63 million, or 30%, to $272
million for the six months ended June 30, 2000 from $209 million for the
comparable 1999 period. Taiwan, Mexico and Korea increased by $23 million, $19
million and $9 million, respectively, commensurate with the overall premium
growth discussed above. Spain increased by $5 million, primarily due to
increases in auto premiums. The remainder of the increase was primarily due to
minor increases in several other countries.
Interest credited to policyholder account balances increased by $2 million,
or 8%, to $28 million for the six months ended June 30, 2000 from $26 million
for the comparable 1999 period in line with increased account balances.
Policyholder dividends increased by $4 million, or 36%, to $15 million for
the six months ended June 30, 2000 from $11 million for the comparable 1999
period. These dividends vary from period to period based on the claims
experience of participating insurance contracts.
Payments of $327 million were made during the second quarter of 2000 to
holders of certain policies transferred to Clarica Life Insurance Company in
connection with the sale of a substantial portion of our Canadian operations
in 1998.
Other expenses increased by $20 million, or 17%, to $138 million for the six
months ended June 30, 2000 from $118 million for the comparable 1999 period. The
primary causes of this increase were higher sales commissions related to premium
growth and higher business development costs.
58
<PAGE> 59
CORPORATE
Total revenues for the Corporate segment, which consisted of net investment
income and realized investment losses that were not allocated to other business
segments, increased by $121 million, or 105%, to $236 million for the three
months ended June 30, 2000 from $115 million for the comparable 1999 period.
Excluding the impact of the GenAmerica acquisition, total revenues increased by
$83 million, or 72%. This increase was primarily due to a $49 million increase
in net investment income and a $40 million decrease in realized investment
losses. These variances reflect the continuation of the Company's strategy to
reposition its investment portfolio to provide a higher operating return on its
invested assets. Total Corporate expenses decreased by $491 million, or 71%, to
$203 million in 2000 from $694 million in 1999. Excluding the impact of the
GenAmerica acquisition, total expenses decreased $537 million, or 77%. During
1999, the Company reported a $499 million charge principally related to the
settlement of a multidistrict litigation proceeding involving alleged improper
sales practices, accruals for sales practices claims not covered by the
settlement and other legal costs. Demutualization expenses increased by $93
million, or 258%. This segment reported a net loss of $105 million for the
three months ended June 30, 2000, compared with a net loss of $445 million for
the comparable 1999 period, which was primarily attributable to the
aforementioned events.
Total revenues for the Corporate segment, which consisted of net investment
income and realized investment losses that were not allocated to other business
segments, increased by $124 million, or 60%, to $331 million for the six months
ended June 30, 2000 from $207 million for the comparable 1999 period. Excluding
the impact of the GenAmerica acquisition, total revenues increased by $72
million, or 35%. This increase was primarily due to a $65 million increase in
net investment income and a $8 million decrease in realized investment losses.
These variances reflect the continuation of the Company's strategy to
reposition its investment portfolio to provide a higher operating return on its
invested assets. Total Corporate expenses decreased by $472 million, or 56%, to
$371 million in 2000 from $843 million in 1999. Excluding the impact of the
GenAmerica acquisition, total expenses decreased by $539 million, or 64%.
During 1999, the Company reported a $499 million charge principally related to
the settlement of a multidistrict litigation proceeding involving alleged
improper sales practices, accruals for sales practices claims not covered by
the settlement and other legal costs. Demutualization expenses increased by
$126 million, or 286%. This segment recorded a net loss of $225 million for the
six months ended June 30, 2000, compared with a net loss of $522 million for
the comparable 1999 period, which was primarily attributable to the
aforementioned events.
59
<PAGE> 60
LIQUIDITY AND CAPITAL RESOURCES
METLIFE, INC.
The primary uses of liquidity of MetLife, Inc. include the payment of common
stock dividends, interest payments on debentures issued to MetLife Capital
Trust I and other debt servicing, contributions to subsidiaries and payment of
general operating expenses. The primary source of MetLife's liquidity will be
dividends it may receive from Metropolitan Life and the interest received from
Metropolitan Life under the capital note described below. In addition, MetLife
retained $340 million from the proceeds of the offerings and the private
placements, which will be available to pay dividends to stockholders, make
contributions to subsidiaries, make payments on the debentures issued to
MetLife Capital Trust I and meet other obligations. MetLife's ability, on a
continuing basis, to meet its cash needs depends primarily on the receipt of
dividends and the interest on the capital note from Metropolitan Life.
Under the New York Insurance Law, Metropolitan Life will be permitted to pay
a stockholder dividend to MetLife 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. Management of the Company cannot provide assurance that Metropolitan
Life will have statutory earnings to support payment of dividends to
MetLife, Inc. in an amount sufficient to fund its cash requirements and pay cash
dividends or that the Superintendent will not disapprove any dividends that
Metropolitan Life may seek to pay. MetLife's other insurance subsidiaries are
also subject to restrictions on the payment of dividends.
The dividend limitation is based on statutory financial results. Statutory
accounting practices differ in certain respects from accounting principles used
in financial statements prepared in conformity with generally accepted
accounting principles. The significant differences relate to deferred
acquisition costs, deferred income taxes, required investment reserves, reserve
calculation assumptions, capital notes and surplus notes. Furthermore, although
the impact cannot be determined at this time, the recent adoption of the
Codification of Statutory Accounting Principles by the NAIC may reduce
statutory surplus, thereby making the dividend limitation more restrictive.
In connection with the contribution of the net proceeds from the initial
public offering, the private placements and the offering of equity security
units to Metropolitan Life as described in Note 2 of Notes to Unaudited Interim
Condensed Consolidated Financial Statements, Metropolitan Life issued to
MetLife a $1,006 8.00% mandatorily convertible capital note due 2005.
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<PAGE> 61
The Superintendent approved the issuance of the capital note on April 4,
2000. If the payment of interest is prevented by application of the payment
restrictions described above, the interest on the capital note will not be
available as a source of liquidity for MetLife.
Based on the historic cash flows and the current financial results of
Metropolitan Life, subject to any dividend limitations which may be imposed
upon Metropolitan Life or its subsidiaries by regulatory authorities,
management believes that cash flows from operating activities, together with
the $340 million of proceeds from the offerings and the private placements
retained by MetLife and the interest received on the capital note from
Metropolitan Life, will be sufficient to enable MetLife to make dividend
payments on its common stock, to pay all operating expenses, make payments on
the debentures issued to MetLife Capital Trust I and meet its other
obligations.
THE COMPANY
LIQUIDITY SOURCES. The Company's principal cash inflows from its
insurance activities come from life insurance premiums, annuity considerations
and deposit funds. A primary liquidity concern with respect to these cash
inflows is the risk of early contract holder and policyholder withdrawal.
The Company seeks to include provisions limiting withdrawal rights from
general account institutional pension products (generally group annuities,
including guaranteed interest contracts and certain deposit fund liabilities)
sold to employee benefit plan sponsors.
The Company's principal cash inflows from its investment activities
result from repayments of principal and proceeds from maturities and sales of
invested assets, investment income, as well as dividends and distributions from
subsidiaries. The primary liquidity concerns with respect to these cash inflows
are the risks of default by debtors, interest rate and other market
volatilities and potential illiquidity of subsidiaries. The Company
closely monitors and manages these risks.
Additional sources of liquidity to meet unexpected cash outflows are
available from the Company's portfolio of liquid assets. These liquid
assets include substantial holdings of U.S. treasury securities, short-term
investments, common stocks and marketable fixed maturity securities.
The Company's available portfolio of liquid assets was approximately $99
billion and $88 billion at June 30, 2000 and December 31, 1999, respectively.
Sources of liquidity also include facilities for short and long-term
borrowing as needed, primarily arranged through MetLife Funding, Inc., a
subsidiary of Metropolitan Life. See "--Financing".
LIQUIDITY USES. The Company's principal cash outflows primarily relate
to the liabilities associated with its various life insurance, annuity and
group pension products, operating expenses, income taxes, contributions to
subsidiaries, as well as principal and interest on its outstanding debt
obligations. Liabilities arising from its insurance activities
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<PAGE> 62
primarily relate to benefit payments under the above-named products, as well as
payments for policy surrenders, withdrawals and loans.
The Company's management believes that its sources of liquidity are more
than adequate to meet its current cash requirements.
LITIGATION. Various litigation claims and assessments against the Company
have arisen in the course of the Company's business, including in connection
with its activities as an insurer, employer, investor, investment advisor and
taxpayer. Further, state insurance regulatory authorities and other authorities
regularly make inquiries and conduct investigations concerning the Company's
compliance with applicable insurance and other laws and regulations.
In some of these matters, very large and/or indeterminate amounts, including
punitive and treble damages, are sought. While it is not feasible to predict or
determine the ultimate outcome of all pending investigations and legal
proceedings or to provide reasonable ranges of potential losses, it is the
opinion of the Company's management that their outcomes, after consideration of
available insurance and reinsurance and the provisions made in the Company's
consolidated financial statements, are not likely to have a material adverse
effect on its consolidated financial condition. However, given the large and/or
indeterminate amounts sought in certain of these matters and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's operating results or cash flows in particular quarterly or annual
periods. See Note 8 in Notes to Unaudited Interim Condensed Consolidated
Financial Statements.
RISK-BASED CAPITAL. Section 1322 of the New York Insurance Law requires that
New York life insurers report their risk-based capital ("RBC") based on a
formula calculated by applying factors to various asset, premium and statutory
reserve items. The formula takes into account the risk characteristics of the
insurer, including asset risk, insurance risk, interest rate risk and business
risk. Section 1322 gives the Superintendent explicit regulatory authority to
require various actions by, or take various actions against, insurers whose
total adjusted capital does not exceed certain RBC levels. At June 30, 2000,
Metropolitan Life's and each of its U.S. insurance subsidiaries' total adjusted
capital was in excess of each of those RBC levels.
The NAIC has recently adopted the Codification of Statutory Accounting
Principles for life insurers, which is to become effective on January 1, 2001.
Prior to implementation by Metropolitan Life, 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 and its U.S. insurance subsidiaries.
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<PAGE> 63
FINANCING. MetLife Funding, Inc. serves as a centralized finance unit for
the Company. Pursuant to a support agreement, Metropolitan Life has agreed to
cause MetLife Funding to have a tangible net worth of at least one dollar. At
June 30, 2000 and December 31, 1999, MetLife Funding had a tangible net worth
of $10.7 million and $10.5 million, respectively. MetLife Funding raises funds
from various funding sources and uses the proceeds to extend loans to MetLife,
Metropolitan Life and its other subsidiaries. MetLife Funding manages its
funding sources to enhance the financial flexibility and liquidity of MetLife.
At June 30, 2000 and December 31, 1999, MetLife Funding had total outstanding
liabilities of $1.7 billion and $4.2 billion, respectively, consisting
primarily of commercial paper.
In connection with the Company's acquisition of the stock of GenAmerica, the
Company incurred $900 million of short-term debt, consisting primarily of
commercial paper. In April 2000, the entire debt was repaid with proceeds from
the offerings and the private placements. The Company also incurred
approximately $3.2 billion of short-term debt, consisting primarily of
commercial paper, in connection with its October 1, 1999 exchange offer to
holders of General American Life funding agreements. Through June 30, 2000,
$2.7 billion of this debt was repaid. The remaining $500 million was included
in the outstanding liabilities of MetLife Funding at June 30, 2000.
The Company also maintained $3 billion ($1 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 June 30, 2000, as compared with $7 billion ($5
billion of which served as back-up for the commercial paper incurred in
connection with the exchange offer to holders of General American Life funding
agreements and $2 billion in committed credit facilities) at December 31, 1999.
These credit facilities were not utilized for the six months ended June 30,
2000 or for the year ended December 31, 1999.
SUPPORT AGREEMENTS. In addition to its support agreement with MetLife
Funding, Metropolitan Life has entered into a net worth maintenance agreement
with New England Life Insurance Company ("NELICO"), whereby it is obligated to
maintain NELICO's statutory capital and surplus at the greater of $10 million
or the amount necessary to prevent certain regulatory action by Massachusetts,
the state of domicile of this subsidiary. The capital and surplus of NELICO at
June 30, 2000 was significantly in excess of the amount that would trigger such
an event. Furthermore, Metropolitan Life has never been called upon to provide
support to NELICO.
In connection with the Company's acquisition of GenAmerica, Metropolitan
Life entered into a net worth maintenance agreement with General American Life
Insurance Company ("General American Life"), whereby Metropolitan Life is
obligated to maintain General American Life's statutory capital and surplus at
the greater of $10 million or the amount necessary to maintain the capital and
surplus of General American Life at a level not less than 180% of the NAIC Risk
Based Capitalization Model. The capital and surplus of General American Life at
June 30, 2000 was in excess of the required amount.
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<PAGE> 64
Metropolitan Life has also entered into arrangements with some of its other
subsidiaries and affiliates to assist such subsidiaries and affiliates in
meeting various jurisdictions' regulatory requirements regarding capital and
surplus. In addition, Metropolitan Life has entered into a support arrangement
with respect to reinsurance obligations of its wholly-owned subsidiary,
Metropolitan Insurance and Annuity Company. Management does not anticipate that
these arrangements will place any significant demands upon the Company's
liquidity resources.
CONSOLIDATED CASH FLOWS. Net cash provided by operating activities was
$1,900 million and $1,280 million for the six months ended June 30, 2000 and
1999, respectively. The increase in cash provided by the Company's operations
in 2000 compared with 1999 was primarily due to strong sales and continued
favorable policyholder retention in the Institutional segment's dental and
disability businesses as well as timing in the settlement of other receivables
and payables. The increase in cash provided by the Company's operations was
partially offset by a $643 million cash transfer to the closed block in
connection with the demutualization. Operating cash flows in the periods
presented have been more than adequate to meet liquidity requirements.
Net cash used in investing activities was $1,519 million and $477 million
for the six months ended June 30, 2000 and 1999, respectively. Purchases of
investments exceeded sales, maturities and repayments by $3,522 million and
$1,613 million in 2000 and 1999, respectively. These increases were primarily
attributable to the investment of collateral received in connection with our
securities lending program. In addition, cash flows from investing activities
also increased by $1,015 million and $505 million in 2000 and 1999,
respectively, as a result of activity from the Company's securities lending
program.
Net cash provided by (used in) financing activities was $17 million and
$(2,315) million for the six months ended June 30, 2000 and 1999, respectively.
The increase in cash provided by financing activities was primarily the result
of proceeds from the Company's initial public offering and concurrent private
placements in April 2000. In addition, financing activities increased as a
result of proceeds from the issuance of mandatorily convertible securities in
connection with the formation of MetLife Capital Trust I. These increases were
partially offset by cash payments to eligible policyholders in connection with
the demutualization. Deposits to policyholders' account balances exceeded
withdrawals by $133 million in 2000 compared with an excess of withdrawals over
deposits of $1,241 million in 1999. Short-term financing decreased by $2,436
million and $1,058 million in 2000 and 1999, respectively, while net additions
in long-term debt were $106 million in 2000 compared with net reductions of $16
million in 1999. Cash outflows related to the purchase of treasury stock were
$214 million for the six months ended June 30, 2000.
The operating, investing and financing activities described above resulted
in an increase in cash and cash equivalents of $398 million for the six months
ended June 30, 2000 compared with a decrease of $1,512 million in the 1999
comparable period.
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<PAGE> 65
INSOLVENCY ASSESSMENTS
Most of the jurisdictions in which the Company is admitted to transact
business require life insurers doing business within the jurisdiction to
participate in guaranty associations, which are organized to pay contractual
benefits owed pursuant to insurance policies issued by impaired, insolvent or
failed life insurers. These associations levy assessments, up to prescribed
limits, on all member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers in the lines of
business in which the impaired, insolvent or failed insurer engaged. Some
states permit member insurers to recover assessments paid through full or
partial premium tax offsets. Assessments levied against the Company from
January 1, 1999 through June 30, 2000 aggregated $6 million. The Company
maintained a liability of $58 million at June 30, 2000 for future assessments
in respect of currently impaired, insolvent or failed insurers.
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<PAGE> 66
EFFECTS OF INFLATION
The Company does not believe that inflation has had a material effect on
consolidated results of operations, except insofar as inflation may affect
interest rates.
INVESTMENTS
All investment data and discussion is based on the investments in the
general account combined with the amounts in the closed block.
The Company had total cash and invested assets at June 30, 2000 of $154.5
billion. In addition, the Company had $73.7 billion held in its separate
accounts, for which the Company generally does not bear investment risk.
The Company's primary investment objective is to maximize after-tax
operating income consistent with acceptable risk parameters. The Company is
exposed to three primary sources of investment risk:
- credit risk, relating to the uncertainty associated with the
continued ability of a given obligor to make timely payments of
principal and interest;
- interest rate risk, relating to the market price and cash flow
variability associated with changes in market interest rates; and
- market valuation risk for equity holdings.
The Company manages credit risk through in-house fundamental analysis of the
underlying obligors, issuers, transaction structures and real estate
properties. The Company also manages credit risk and valuation risk through
industry and issuer diversification and asset allocation. For real estate and
agricultural assets, the Company manages credit risk and valuation risk through
geographic, property type, and product type diversification and asset
allocation. The Company manages interest rate risk as part of its asset and
liability management strategies, product design, such as the use of market
value adjustment features and surrender charges, and proactive monitoring and
management of certain non-guaranteed elements of its products, such as the
resetting of credited interest and dividend rates for policies that permit such
adjustments.
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<PAGE> 67
The following table summarizes the Company's cash and invested assets at
June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
2000 1999
-------------------------- ---------------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
------------- --------- ------------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed maturities available-for-sale, at fair value $ 107,579 69.6 % $ 96,981 69.9 %
Mortgage loans on real estate 21,431 13.9 19,739 14.2
Policy loans 7,955 5.1 5,598 4.0
Equity real estate and real estate joint ventures 5,619 3.6 5,649 4.1
Cash and cash equivalents 4,192 2.7 2,789 2.0
Other invested assets 2,550 1.7 1,501 1.1
Equity securities and other limited partnership
interests 3,716 2.4 3,337 2.5
Short-term investments 1,489 1.0 3,055 2.2
------------- --------- ------------- --------
Total cash and invested assets $ 154,531 100.0 % $ 138,649 100.0%
============= ========= ============= ========
</TABLE>
INVESTMENT RESULTS
The annualized yields on general account cash and invested assets, excluding
net realized investment gains and losses, were 7.5% and 7.5% for the three
months ended June 30, 2000 and 1999, respectively, and 7.4% and 7.2% for the six
months ended June 30, 2000 and 1999, respectively.
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<PAGE> 68
The following table illustrates the annualized yields on average assets for
each of the components of the Company's investment portfolio for the three and
six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED JUNE 30, AT OR FOR THE SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
---------------------- ------------------- ------------------- ----------------------
YIELD (1) AMOUNT YIELD (1) AMOUNT YIELD (1) AMOUNT YIELD (1) AMOUNT
--------- -------- ---------- -------- --------- ------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED MATURITIES: (2)
Investment income 7.6% $ 2,084 7.5% $ 1,797 7.6% $ 4,122 7.3% $ 3,522
Net realized losses (75) (171) (244) (276)
----------- ---------- ----------- -----------
Total $ 2,009 $ 1,626 $ 3,878 $ 3,246
Ending assets $ 107,579 $ 97,193 $ 107,579 $ 97,193
----------- ---------- ----------- -----------
MORTGAGE LOANS: (3)
Investment income 7.8% $ 416 7.9% $ 351 7.8% $ 834 8.0% $ 696
Net realized gains (losses) 4 (6) 6 4
----------- ---------- ----------- -----------
Total $ 420 $ 345 $ 840 $ 700
----------- ---------- ----------- -----------
Ending assets $ 21,431 $ 18,248 $ 21,431 $ 18,248
----------- ---------- ----------- -----------
EQUITY REAL ESTATE AND REAL ESTATE JOINT
VENTURES: (4)
Investment income, net of expenses 11.7% $ 166 10.2% $ 156 11.2% $ 322 8.7% $ 267
Net realized gains 14 105 27 166
----------- ---------- ----------- -----------
Total $ 180 $ 261 $ 349 $ 433
----------- ---------- ----------- -----------
Ending assets $ 5,619 $ 6,006 $ 5,619 $ 6,006
----------- ---------- ----------- -----------
POLICY LOANS:
Investment income 6.4% $ 127 6.2% $ 86 6.4% $ 252 6.1% $ 168
----------- ---------- ----------- -----------
Ending assets $ 7,955 $ 5,513 $ 7,955 $ 5,513
----------- ---------- ----------- -----------
EQUITY SECURITIES AND OTHER LIMITED
PARTNERSHIP INTERESTS:
Investment income 11.0% $ 100 13.8% $ 116 7.3% $ 130 10.2% $ 171
Net realized gains (losses) 4 13 76 (10)
----------- ---------- ----------- -----------
Total $ 104 $ 129 $ 206 $ 161
----------- ---------- ----------- -----------
Ending assets $ 3,716 $ 3,363 $ 3,716 $ 3,363
----------- ---------- ----------- -----------
CASH, CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS:
Investment income 6.2% $ 74 5.0% $ 35 5.1% $ 135 4.1% $ 71
Net realized losses - (1) (2) (1)
----------- ---------- ----------- -----------
Total $ 74 $ 34 $ 133 $ 70
----------- ---------- ----------- -----------
Ending assets $ 5,681 $ 2,547 $ 5,681 $ 2,547
----------- ---------- ----------- -----------
OTHER INVESTED ASSETS:
Investment income 4.2% $ 26 5.7% $ 22 4.1% $ 51 4.9% $ 38
Net realized losses - (27) (47) (78)
----------- ---------- ----------- -----------
Total $ 26 $ (5) $ 4 $ (40)
----------- ---------- ----------- -----------
Ending assets $ 2,550 $ 1,497 $ 2,550 $ 1,497
TOTAL INVESTMENTS:
Investment income 7.7% $ 2,993 7.7% $ 2,563 7.6% $ 5,846 7.4% $ 4,933
Investment expenses and fees (0.2%) (69) (0.2%) (67) (0.2%) (138) (0.2%) (127)
------ ----------- ----- ---------- ----- ----------- ----- -----------
Net investment income 7.5% $ 2,924 7.5% $ 2,496 7.4% $ 5,708 7.2% $ 4,806
Gross realized losses (53) (87) (184) (195)
Adjustments to realized losses (5) (2) 6 17 40
----------- ---------- ----------- -----------
$ 2,869 $ 2,415 $ 5,541 $ 4,651
=========== ========== =========== ===========
</TABLE>
(1) Yields are based on average asset carrying values for the three and six
months ended June 30, 2000 and 1999, excluding unrealized gains and
losses, and for yield calculation purposes, average assets exclude fixed
maturities associated with the Company's securities lending program. Fixed
maturity investment income has been reduced by rebates paid under the
program.
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<PAGE> 69
(2) Included in fixed maturities are equity linked notes of $773 million and
$1,302 million at June 30, 2000 and 1999, 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.
(3) Investment income from mortgage loans includes prepayment fees.
(4) Equity real estate and real estate joint venture income is shown net of
depreciation of $55 million and $62 million for the three months ended
June 30, 2000 and 1999, respectively, and $110 million and $129 million
for the six months ended June 30, 2000 and 1999 respectively.
(5) Adjustments to realized losses include amortization of deferred
acquisition costs and charges to participating contracts.
FIXED MATURITIES
Fixed maturities consist principally of publicly traded and privately placed
debt securities, and represented 69.6% and 69.9% of total cash and invested
assets at June 30, 2000 and December 31, 1999, respectively.
Based on estimated fair value, public fixed maturities and private fixed
maturities comprised 84.5% and 15.5% of total fixed maturities at June 30,
2000, respectively, and 82.6% and 17.4% at December 31, 1999, respectively. The
Company invests in privately placed fixed maturities to enhance the overall
value of the portfolio, increase diversification and obtain higher yields than
can ordinarily be obtained with comparable public market securities. Generally,
private placements provide the Company with protective covenants, call
protection features and, where applicable, a higher level of collateral.
However, the Company may not freely trade its private placements because of
restrictions imposed by federal and state securities laws and illiquid trading
markets.
The Securities Valuation Office of the NAIC evaluates the bond investments
of insurers for regulatory reporting purposes and assigns securities to one of
six investment categories called "NAIC designations". The NAIC designations
parallel the credit ratings of the Nationally Recognized Statistical Rating
Organizations for marketable bonds. NAIC designations 1 and 2 include bonds
considered investment grade (rated "Baa3" or higher by Moody's, or rated "BBB-"
or higher by S&P) by such rating organizations. NAIC designations 3 through 6
include bonds considered below investment grade (rated "Ba1" or lower by
Moody's, or rated "BB+" or lower by S&P).
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<PAGE> 70
The following tables present the Company's public, private and total fixed
maturities by NAIC designation and the equivalent ratings of the Nationally
Recognized Statistical Rating Organizations at June 30, 2000 and December 31,
1999, as well as the percentage, based on estimated fair value, that each
designation comprises:
<TABLE>
<CAPTION>
PUBLIC FIXED MATURITIES BY CREDIT QUALITY
AT JUNE 30, 2000 AT DECEMBER 31, 1999
----------------------------------------- ---------------------------------------
ESTIMATED ESTIMATED
RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF
EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL
--------------------------- ------------ ----------- --------- ------------- ----------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Aaa/Aa/A $ 61,578 $ 61,013 67.2 % $ 55,258 $ 54,511 68.1 %
Baa 23,797 22,946 25.2 19,908 19,106 23.8
Ba 4,542 4,203 4.6 4,355 4,232 5.3
B 2,714 2,614 2.9 2,184 2,153 2.7
Caa and lower 168 99 0.1 64 54 0.1
In or near default 15 11 0.0 23 23 0.0
------------ ----------- --------- ------------- ----------- --------
Subtotal 92,814 90,886 100.0 81,792 80,079 100.0
Redeemable preferred stock 12 12 0.0 0.0 0.0 0.0
------------ ----------- --------- ------------- ----------- --------
Total public fixed maturities $ 92,826 $ 90,898 100.0 % $ 81,792 $ 80,079 100.0 %
============ =========== ========= ============= =========== ========
</TABLE>
PRIVATE FIXED MATURITIES BY CREDIT QUALITY
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
-------------------------------------- ------------------------------------
ESTIMATED ESTIMATED
NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF
RATING EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL
-------- ------------------------------ ------------ ----------- --------- ---------- ------------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $ 7,324 $ 7,363 44.1 % $ 7,597 $ 7,696 45.5 %
2 Baa 6,670 6,520 39.1 6,975 6,845 40.5
3 Ba 1,820 1,734 10.4 1,453 1,404 8.3
4 B 933 916 5.5 833 816 4.8
5 Caa and lower 113 101 0.6 104 87 0.5
6 In or near default 10 14 0.1 45 44 0.3
------------ ----------- --------- ---------- ------------ --------
Subtotal 16,870 16,648 99.8 17,007 16,892 99.9
Redeemable preferred stock 33 33 0.2 10 10 0.1
------------ ----------- --------- ---------- ------------ --------
Total private fixed maturities $ 16,903 $ 16,681 100.0 % $ 17,017 $ 16,902 100.0 %
============ =========== ========= ========== ============ ========
</TABLE>
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<PAGE> 71
TOTAL FIXED MATURITIES BY CREDIT QUALITY
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
-------------------------------------- ------------------------------------
ESTIMATED ESTIMATED
NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF
RATING EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL
-------- ------------------------------ ------------ ----------- --------- ---------- ------------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $ 68,902 $ 68,376 63.6 % $ 62,855 $ 62,207 64.2 %
2 Baa 30,467 29,466 27.4 26,883 25,951 26.8
3 Ba 6,362 5,937 5.5 5,808 5,636 5.8
4 B 3,647 3,530 3.3 3,017 2,969 3.1
5 Caa and lower 281 200 0.2 168 141 0.1
6 In or near default 25 25 0.0 68 67 0.0
------------ ----------- --------- ---------- ------------ --------
Subtotal 109,684 107,534 100.0 98,799 96,971 100.0
Redeemable preferred stock 45 45 0.0 10 10 0.0
------------ ----------- --------- ---------- ------------ --------
Total fixed maturities $ 109,729 $ 107,579 100.0 % $ 98,809 $ 96,981 100.0 %
============ =========== ========= ========== ============ ========
</TABLE>
Based on estimated fair values, total investment grade public and private
placement fixed maturities comprised 91.0% of total fixed maturities in the
general account at June 30, 2000 and December 31, 1999.
The following table shows the amortized cost and estimated fair value of
fixed maturities, by contractual maturity dates (excluding scheduled sinking
funds) at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
---------------------------- ---------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ------------ ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less $ 3,285 $ 3,267 $ 3,180 $ 3,217
Due after one year through five years 21,348 21,133 18,152 18,061
Due after five years through ten years 24,180 23,479 23,755 23,114
Due after ten years 29,077 28,542 26,316 25,918
------------ ------------ ----------- -----------
Subtotal 77,890 76,421 71,403 70,310
Mortgage-backed and other asset-backed
securities 31,794 31,113 27,396 26,661
------------ ------------ ----------- -----------
Subtotal 109,684 107,534 98,799 96,971
Redeemable preferred stock 45 45 10 10
------------ ------------ ----------- -----------
Total fixed maturities $ 109,729 $ 107,579 $ 98,809 $ 96,981
============ ============ =========== ===========
</TABLE>
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED FIXED MATURITIES. The Company
monitors fixed maturities to identify investments that management considers to
be problems or potential problems. The Company also monitors investments that
have been restructured.
The Company defines problem securities in the fixed maturities category as
securities as to which principal or interest payments are in default or are to
be restructured pursuant to commenced negotiations, or as securities issued by
a debtor that has subsequently entered bankruptcy.
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<PAGE> 72
The Company defines potential problem securities in the fixed maturity
category as securities of an issuer deemed to be experiencing significant
operating problems or difficult industry conditions. The Company uses various
criteria, including the following, to identify potential problem securities:
- debt service coverage or cash flow falling below certain thresholds
which vary according to the issuer's industry and other relevant
factors;
- significant declines in revenues or margins;
- violation of financial covenants;
- public securities trading at a substantial discount as a result
of specific credit concerns; and
- other subjective factors.
The Company defines restructured securities in the fixed maturities category
as securities to which the Company has granted a concession that it would not
have otherwise considered but for the financial difficulties of the obligor.
The Company enters into a restructuring when it believes it will realize a
greater economic value under the new terms than through liquidation or
disposition. The terms of the restructuring may involve some or all of the
following characteristics: a reduction in the interest rate, an extension of
the maturity date, an exchange of debt for equity or a partial forgiveness of
principal or interest.
72
<PAGE> 73
The following table presents the estimated fair value of the Company's
total fixed maturities classified as performing, problem, potential problem and
restructured fixed maturities at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
---------------------------- ------------------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Performing $ 106,654 99.2 % $ 96,464 99.5 %
Problem 121 0.1 20 0.0
Potential Problem 800 0.7 482 0.5
Restructured 4 0.0 15 0.0
----------- ----------- ----------- -----------
Total $ 107,579 100.0 % $ 96,981 100.0 %
=========== =========== =========== ===========
</TABLE>
The Company classifies all of its fixed maturities as available-for-sale and
marks them to market. The Company writes down to management's expectations of
ultimate realizable value fixed maturities that the Company deems to be other
than temporarily impaired. The Company records write-downs as realized losses
and includes them in earnings and adjusts the cost basis of the fixed maturities
accordingly. The Company does not change the revised cost basis for subsequent
recoveries in value. Such write-downs were $35 million and $52 million for the
six months ended June 30, 2000 and 1999, respectively.
73
<PAGE> 74
FIXED MATURITIES BY SECTOR. The Company diversifies its fixed maturities
by security sector. The following tables set forth the estimated fair value of
the Company's fixed maturities by sector, as well as the percentage of the total
fixed maturities holdings that each security sector comprised at June 30, 2000
and December 31, 1999, and show by security type the relative amounts of
publicly traded and privately placed securities:
<TABLE>
<CAPTION>
AT JUNE 30, 2000
-----------------------------------------------------------------------
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 $ 5,793 6.4% $ 1 0.0% $ 5,794 5.4%
Corporate securities 45,637 50.2 14,907 89.5 60,544 56.3
Foreign government securities 4,987 5.5 108 0.6 5,095 4.7
Mortgage-backed securities 23,214 25.5 318 1.9 23,532 21.9
Asset-backed securities 6,723 7.4 858 5.1 7,581 7.0
Other fixed income assets 4,544 5.0 489 2.9 5,033 4.7
-------- ----- -------- ----- -------- -----
Total $ 90,898 100.0% $ 16,681 100.0% $107,579 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
<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>
74
<PAGE> 75
CORPORATE FIXED MATURITIES. The table below shows the major industry types
that comprise the corporate bond holdings at the dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
------------------------------- -------------------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
------------ ------- ------------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Industrial $ 28,327 46.8% $ 26,480 47.6%
Utility 7,038 11.6 6,487 11.7
Finance 13,994 23.1 11,631 21.0
Yankee/Foreign (1) 10,344 17.1 10,423 18.8
Other 841 1.4 522 0.9
----------- ----- ----------- -----
Total $ 60,544 100.0% $ 55,543 100.0%
=========== ===== =========== =====
</TABLE>
(1) Includes publicly traded, dollar-denominated debt obligations of foreign
obligors, known as Yankee bonds, and other foreign investments.
The Company diversifies its corporate bond holdings by industry and
issuer. The portfolio has no significant exposure to any single issuer. At June
30, 2000, the Company's combined holdings in the ten issuers to which it had the
greatest exposure totaled $3,257 million, which was less than 5% of the
Company's total invested assets at such date. The exposure to the largest single
issuer of corporate bonds the Company held at June 30, 2000 was $395 million,
which was less than 1% of its total invested assets at such date.
At June 30, 2000, investments of $4,069 million, or 39.3% of the
Yankee/Foreign sector, represented exposure to traditional "Yankee" bonds, which
are dollar-denominated debt obligations of foreign obligors. The balance of this
exposure was primarily dollar-denominated, foreign private placements and
project finance loans. The Company diversifies the Yankee/Foreign portfolio by
country and issuer.
The Company does not have material exposure to foreign currency risk in
its invested assets. In the Company's international insurance operations, both
its assets and liabilities are denominated in local currencies. Foreign currency
denominated securities supporting U.S. dollar liabilities are generally swapped
back into U.S. dollars.
75
<PAGE> 76
MORTGAGE-BACKED SECURITIES. The following table shows the types of
mortgage-backed securities the Company held at June 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
------------------------------ ------------------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Pass-through securities $ 9,628 40.9% $ 8,478 41.8%
------------- ----- ------------ -----
Collateralized mortgage obligations
Planned amortization class 3,945 16.8 3,974 19.6
Sequential pay class 4,586 19.5 3,359 16.5
Other 493 2.1 361 1.8
------------- ----- ------------ -----
Subtotal 9,024 38.4 7,694 37.9
Commercial mortgage-backed securities 4,880 20.7 4,107 20.3
------------- ----- ------------ -----
Total $ 23,532 100.0% $ 20,279 100.0%
============= ===== ============ =====
</TABLE>
At June 30, 2000, pass-through and collateralized mortgage obligations
totaled $18,652 million, or 79.3% 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 June
30, 2000, approximately $3,256 million, or 66.7% of the commercial
mortgage-backed securities and $17,192 million, or 92.2% of the pass-through
securities and collateralized mortgage obligations were rated Aaa/AAA by Moody's
or S&P.
Mortgage-backed securities are purchased to diversify the portfolio risk
characteristics from primarily corporate credit risk to a mix of credit risk and
cash flow risk. The majority of the mortgage-backed securities in the Company's
investment portfolio have relatively low cash flow variability.
The principal risks inherent in holding mortgage-backed securities are
prepayment and extension risks, which will affect the timing of when cash flow
will be received. The Company's active monitoring of its mortgage-backed
securities mitigates exposure to losses from cash flow risk associated with
interest rate fluctuations.
Mortgage-backed pass-through certificates are the most liquid assets in
the mortgage-backed sector. Pass-through securities represented 40.9% and 41.8%
of the Company's mortgage-backed securities at June 30, 2000 and December 31,
1999, respectively. Pass-through securities distribute, on a pro rata basis to
their holders, the monthly cash flows of principal and interest, both scheduled
and prepayments, generated by the underlying mortgages.
The Company also invested 38.4% and 37.9% of its mortgage-backed
securities at June 30, 2000 and December 31, 1999, respectively, in
collateralized mortgage obligations ("CMOs") which have a greater degree of cash
flow stability than pass-throughs.
76
<PAGE> 77
Planned Amortization Class bonds ("PAC") represented 16.8% and 19.6% of
the Company's mortgage-backed securities at June 30, 2000 and December 31, 1999,
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
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, the Company accepts 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 the Company 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
the Company's PACs and Sequential Pay Class tranches, the Company had
approximately $83 million invested in interest-only or principal-only securities
at June 30, 2000.
ASSET-BACKED SECURITIES. The following table below shows the types of
asset-backed securities the Company held at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
---------------------- ----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Credit card receivables $1,688 22.3% $1,960 30.7 %
Automobile receivables 924 12.2 1,070 16.8
Home equity loans 1,950 25.7 1,541 24.1
Other 3,019 39.8 1,811 28.4
---------- ----- ---------- -----
Total $7,581 100.0% $6,382 100.0 %
========== ===== ========== =====
</TABLE>
Asset-backed securities are purchased both to diversify the overall risks
of the Company's fixed maturities assets and to provide attractive returns. The
Company's asset-backed securities are diversified both by type of asset and by
issuer. Home equity loans constitute the largest exposure in the Company's
asset-backed securities investments. Except for asset-backed securities backed
by home equity loans, the asset-backed securities investments generally have
little sensitivity to changes in interest rates. At June 30, 2000, approximately
$3,730 million, or 49.2%, 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,
77
<PAGE> 78
equipment lessees, and corporate obligors. Capital market risks include the
general level of interest rates and the liquidity for these securities in the
market place.
MORTGAGE LOANS
The Company's mortgage loans are collateralized by commercial,
agricultural and residential properties. Mortgage loans comprised 13.9% and
14.2% of the Company's total cash and invested assets at June 30, 2000 and
December 31, 1999, respectively. The carrying value of mortgage loans is stated
at original cost net of repayments, amortization of premiums, accretion of
discounts and valuation allowances. The following table shows the carrying value
of the Company's mortgage loans by such types at June 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
--------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Commercial $16,511 77.0 % $14,862 75.3 %
Agricultural 4,819 22.5 4,798 24.3
Residential 101 0.5 79 0.4
------- ------- ------- ------
Total $21,431 100.0 % $19,739 100.0 %
======= ======= ======= ======
</TABLE>
78
<PAGE> 79
COMMERCIAL MORTGAGE LOANS. The Company diversifies its commercial mortgage
loans by both geographic region and property type, and manages these investments
through a network of regional offices overseen by its investment department. The
following table presents the distribution across geographic regions and property
types for commercial mortgage loans at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
-------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- ------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REGION
South Atlantic $ 4,513 27.2% $ 4,098 27.6 %
Pacific 3,014 18.3 2,596 17.5
Middle Atlantic 2,832 17.2 2,703 18.2
East North Central 1,821 11.0 1,865 12.5
West South Central 1,203 7.3 1,012 6.8
New England 1,115 6.8 1,095 7.4
Mountain 812 4.9 490 3.3
West North Central 764 4.6 652 4.4
International 280 1.7 202 1.3
East South Central 157 1.0 149 1.0
------- ----- ------- -----
Total $16,511 100.0% $14,862 100.0%
======= ===== ======= =====
PROPERTY TYPE
Office $ 7,414 45.0% $ 6,789 45.7 %
Retail 3,974 24.1 3,620 24.4
Apartments 2,650 16.0 2,382 16.0
Industrial 1,488 9.0 1,136 7.6
Hotel 880 5.3 843 5.7
Other 105 0.6 92 0.6
------- ----- ------- -----
Total $16,511 100.0% $14,862 100.0%
======= ===== ======= =====
</TABLE>
79
<PAGE> 80
The following table presents the scheduled maturities for the Company's
commercial mortgage loans at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
-------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- ------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Due in 1 year or less $ 790 4.8 % $ 806 5.4 %
Due after 1 year through 2 years 737 4.5 482 3.2
Due after 2 years through 3 years 797 4.8 708 4.8
Due after 3 years through 4 years 1,627 9.9 787 5.3
Due after 4 years through 5 years 627 3.8 1,608 10.8
Due after 5 years 11,933 72.2 10,471 70.5
------- ------ ------- ------
Total $16,511 100.0 % $14,862 100.0 %
======= ====== ======= ======
</TABLE>
The Company monitors its mortgage loan investments on a continual basis.
Through this monitoring process, the Company reviews loans that are
restructured, delinquent or under foreclosure and identifies those that
management considers to be potentially delinquent. These loan classifications
are generally consistent with those used in industry practice.
The Company defines restructured mortgage loans, consistent with industry
practice, as loans in which the Company, for economic or legal reasons related
to the debtor's financial difficulties, grants a concession to the debtor that
it would not otherwise consider. This definition provides for loans to exit the
restructured category under certain conditions. The Company defines delinquent
mortgage loans, consistent with industry practice, as loans in which two or more
interest or principal payments are past due. The Company defines mortgage loans
under foreclosure, consistent with industry practice, as loans in which
foreclosure proceedings have formally commenced. The Company defines potentially
delinquent loans as loans that, in management's opinion, have a high probability
of becoming delinquent.
The Company reviews all mortgage loans on an annual basis. These reviews
may include an analysis of the property financial statement and rent roll, lease
rollover analysis, property inspections, market analysis and tenant
creditworthiness. The Company also reviews loan-to-value ratios and debt
coverage ratios for restructured loans, delinquent loans, loans under
foreclosure, potentially delinquent loans, loans with an existing valuation
allowance, loans maturing within two years and loans with a loan-to-value ratio
greater than 90% as determined in the prior year.
The Company establishes valuation allowances for loans that it deems
impaired, as determined through its annual review process. The Company defines
impaired loans consistent with Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, as loans which it
probably will not collect all amounts due according to applicable contractual
terms of the agreement. The Company bases valuation allowances upon the present
value of expected future cash flows discounted at the
80
<PAGE> 81
loan's original effective interest rate or the value of the loan's collateral.
The Company records valuation allowances as realized losses and includes them in
earnings. The Company records subsequent adjustments to allowances as realized
gains or losses and includes them in earnings.
The following table presents the amortized cost and valuation allowances
for commercial mortgage loans distributed by loan classification at June 30,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
---------------------------------------------- ------------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST
--------- ----- --------- --------- --------- ----- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Performing $15,793 95.3 % $ 13 0.1 % $ 14,098 94.5 % $ 11 0.1 %
Restructured 694 4.2 42 6.1 % 810 5.4 52 6.4 %
Delinquent or under
foreclosure 49 0.3 11 22.4 % 17 0.1 4 25.0 %
Potentially delinquent 41 0.2 - 0.0 % 6 0.0 2 33.3 %
--------- ----- --------- --------- ----- ---------
Total $16,577 100.0 % $ 66 0.4 % $ 14,931 100.0 % $ 69 0.5 %
========= ===== ========= ========= ===== =========
</TABLE>
(1) Amortized cost is equal to carrying value before valuation allowances.
The following table presents the changes in valuation allowances for
commercial mortgage loans for the six months ended June 30, 2000:
SIX MONTHS ENDED
JUNE 30, 2000
---------------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 69
Additions 30
Deductions for writedowns and dispositions (33)
------------------
Balance, end of period $ 66
==================
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.
81
<PAGE> 82
AGRICULTURAL MORTGAGE LOANS. The Company diversifies its agricultural
mortgage loans by both geographic region and product type. The Company manages
these investments through a network of regional offices and field professionals
overseen by its investment department. The following table presents the
distribution across geographic regions and product types for agricultural
mortgage loans at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
---------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REGION
Pacific $ 1,154 23.9 % $ 1,184 24.7 %
West North Central 1,065 22.0 1,053 21.9
South Atlantic 827 17.2 840 17.5
East North Central 755 15.7 737 15.4
West South Central 393 8.2 405 8.5
Mountain 371 7.7 371 7.7
East South Central 235 4.9 189 3.9
New England 19 0.4 19 0.4
------ ----- ------ -----
Total $4,819 100.0 % $4,798 100.0 %
====== ===== ====== =====
PROPERTY TYPE
Annual Crop $2,228 46.1 % $2,276 47.4 %
Permanent 987 20.5 932 19.5
Agribusiness 716 14.9 761 15.8
Livestock 678 14.1 655 13.7
Timber 210 4.4 174 3.6
------ ----- ------ -----
Total $4,819 100.0 % $4,798 100.0 %
====== ===== ====== =====
</TABLE>
The following table presents the scheduled maturities for the Company's
agricultural mortgage loans at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
---------------------- ----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Due in 1 year or less $ 109 2.3 % $ 99 2.1 %
Due after 1 year through 2 years 89 1.8 74 1.5
Due after 2 year through 3 years 70 1.5 97 2.0
Due after 3 year through 4 years 140 2.9 135 2.8
Due after 4 year through 5 years 92 1.9 134 2.8
Due after 5 years 4,319 89.6 4,259 88.8
------ ----- ------ -----
Total $4,819 100.0 % $4,798 100.0 %
====== ===== ====== =====
</TABLE>
82
<PAGE> 83
Approximately 60% of the $4,819 million of agricultural mortgage loans
outstanding at June 30, 2000 was subject to rate resets prior to maturity. A
substantial portion of these loans were successfully renegotiated and remain
outstanding to maturity. The process and policies for monitoring the
agricultural mortgage loans and classifying them by performance status are
generally the same as those for the commercial loans.
The following table presents the amortized cost and valuation allowances
for agricultural mortgage loans distributed by loan classification at June 30,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
--------------------------------------------- ---------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST
--------- ----- --------- --------- --------- ----- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Performing $4,592 95.0 % $ - 0.0 % $ 4,616 95.8 % $ 1 0.0 %
Restructured 145 3.0 6 4.1 % 165 3.4 11 6.7 %
Delinquent or under
foreclosure 94 1.9 11 11.7 % 27 0.6 2 7.4 %
Potentially delinquent 5 0.1 - 0.0 % 8 0.2 4 50.0 %
Total $4,836 100.0 % $ 17 0.4 % $ 4,816 100.0 % $ 18 0.4 %
====== ===== ======== ======= ======= ===== ======= =====
</TABLE>
(1) Amortized cost is equal to carrying value before valuation allowances.
The following table presents the changes in valuation allowances for
agricultural mortgage loans for the six months ended June 30, 2000:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000
-------------------
(DOLLARS IN MILLIONS)
<S> <C>
Balance, beginning of period $ 18
Additions 4
Deductions for writedowns and dispositions (5)
------------
Balance, end of period $ 17
============
</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.
83
<PAGE> 84
EQUITY REAL ESTATE AND REAL ESTATE JOINT VENTURES
The Company's equity real estate and real estate joint venture investments
consist of commercial and agricultural properties located throughout the U.S.
and Canada. The Company manages these investments through a network of regional
offices overseen by its investment department. At June 30, 2000 and December 31,
1999, the carrying value of the Company's equity real estate and real estate
joint ventures was $5,619 million and $5,649 million, respectively, or 3.6% and
4.1% of total cash and invested assets. The carrying value of equity real estate
was stated at depreciated cost net of impairments and valuation allowances. The
carrying value of real estate joint ventures was stated at the Company's equity
in the real estate joint ventures net of impairments and valuation allowances.
These holdings consist of equity real estate, interests in real estate joint
ventures and real estate acquired upon foreclosure of commercial and
agricultural mortgage loans. The following table presents the carrying value of
the Company's equity real estate and real estate joint ventures at June 30, 2000
and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
--------------------- --------------------
CARRYING % OF CARRYING % OF
TYPE VALUE TOTAL VALUE TOTAL
---- -------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Equity real estate $5,167 92.0 % $5,271 93.3 %
Real estate joint ventures 375 6.7 331 5.9
------ ----- ------ -----
Subtotal $5,542 98.6 $5,602 99.2
Foreclosed real estate 77 1.4 47 0.8
------ ----- ------ -----
Total $5,619 100.0 % $5,649 100.0 %
====== ===== ====== =====
</TABLE>
84
<PAGE> 85
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 June
30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
--------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
------ ----- ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
REGION
East $1,853 33.0 % $1,863 33.0 %
West 1,769 31.5 1,657 29.3
South 1,351 24.0 1,416 25.1
Midwest 535 9.5 544 9.6
International 111 2.0 169 3.0
------ ----- ------ -----
Total $5,619 100.0 % $5,649 100.0 %
====== ===== ====== =====
PROPERTY TYPE
Office $3,680 65.4 % $3,846 68.1 %
Retail 595 10.6 587 10.4
Apartments 507 9.0 474 8.4
Land 300 5.3 258 4.6
Industrial 156 2.8 160 2.8
Hotel 172 3.1 151 2.7
Agriculture 105 1.9 96 1.7
Other 104 1.9 77 1.3
------ ----- ------ -----
Total $5,619 100.0 % $5,649 100.0 %
====== ===== ====== =====
</TABLE>
Office properties representing 65.4% and 68.1% of the Company's equity
real estate and real estate joint venture holdings at June 30, 2000 and December
31, 1999, respectively, are well diversified geographically. The average
occupancy level of office properties was 94% and 92% at June 30, 2000 and
December 31, 1999, respectively.
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<PAGE> 86
The Company classifies 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 June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
-------------------- ---------------------
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 $5,098 90.7 % $5,151 91.2 %
Equity real estate and real estate joint ventures held for sale 521 9.3 498 8.8
------ ----- ------ -----
Total $5,619 100.0 % $5,649 100.0 %
====== ===== ====== =====
</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 the Company's exit strategy. In addition to
individual property reviews, the Company employs an overall strategy of
selective dispositions and acquisitions as market opportunities arise.
The Company adjusts the carrying value of equity real estate and real
estate joint ventures held for investment for impairments whenever events or
changes in circumstances indicate that the carrying value of the property may
not be recoverable. The Company writes down impaired real estate to estimated
fair value, which it generally computes using the present value of future cash
flows from the property, discounted at a rate commensurate with the underlying
risks. The Company records write-downs as realized losses through earnings and
reduces the cost basis of the properties accordingly. The Company does not
change the new cost basis for subsequent recoveries in value.
The Company records real estate acquired upon foreclosure of commercial
and agricultural mortgage loans at the lower of estimated fair value or the
carrying value of the mortgage loan at the date of foreclosure.
Once the Company identifies a property to be sold and commences a firm
plan for marketing the property, the Company establishes and periodically
revises, if necessary, a valuation allowance to adjust the carrying value of the
property to its expected sales value, less associated selling costs, if it is
lower than the property's carrying value. The Company records allowances as
realized losses and includes them in earnings. The Company records subsequent
adjustments to allowances as realized gains or losses and includes them in
earnings.
The Company's carrying value of equity real estate and real estate joint
ventures held for sale, including real estate acquired upon foreclosure of
commercial and agricultural mortgage loans, in the amounts of $521 million and
$498 million at June 30, 2000 and
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<PAGE> 87
December 31, 1999, respectively, are net of impairments of $119 million and $187
million and net of valuation allowances of $29 million and $34 million,
respectively.
EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
The Company's 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. The Company classifies
its investments in common stocks as available-for-sale and marks them to market
except for non-marketable private equities which are generally carried at cost.
The Company accounts for its investments in limited partnership interests in
which it does not have a controlling interest in accordance with the equity
method of accounting. The Company's investments in equity securities represented
1.4% and 1.5% of cash and invested assets at June 30, 2000 and December 31,
1999, respectively.
The following table presents the carrying values of the Company's
investments in equity securities and other limited partnership interests at June
30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
-------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Equity securities $2,157 58.0 % $2,006 60.1 %
Other limited partnership interests 1,559 42.0 1,331 39.9
-------- ------- -------- --------
Total $3,716 100.0 % $3,337 100.0 %
======== ======= ======== ========
</TABLE>
Equity securities include, at June 30, 2000 and December 31, 1999, $262
million and $237 million, respectively, of private equity securities. The
Company may not freely trade its private equity securities because of
restrictions imposed by federal and state securities laws and illiquid trading
markets.
At June 30, 2000 and December 31, 1999, approximately $408 million and
$380 million, respectively, of the Company's equity securities holdings were
effectively fixed at a minimum value of $355 million in these respective
periods, primarily through the use of convertible securities and other
derivatives. The exchangeable subordinated debt securities mature through 2002
and the Company may terminate them earlier at its discretion.
PROBLEM AND POTENTIAL PROBLEM EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP
INTERESTS
The Company monitors its equity securities and other limited partnership
interests on a continual basis. Through this monitoring process, the Company
identifies investments that management considers to be problems or potential
problems.
87
<PAGE> 88
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. Write-downs are recorded as realized
investment losses and are included in earnings and the cost basis of the equity
securities and other limited partnership interests are adjusted accordingly. The
new cost basis is not changed for subsequent recoveries in value. For the six
months ended June 30, 2000 and 1999, such write-downs were $3 million and $27
million, respectively.
OTHER INVESTED ASSETS
The Company's other invested assets consisted principally of leveraged
leases, which were recorded net of non-recourse debt. The Company participates
in lease transactions which are diversified by geographic area. The Company
regularly reviews residual values and writes down residuals to expected values
as needed. The Company's other invested assets represented 1.7% and 1.1% of cash
and invested assets at June 30, 2000 and December 31, 1999, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative instruments to manage market risk through one
of four principal risk management strategies: the hedging of invested assets,
liabilities, portfolios of assets or liabilities and anticipated transactions.
The Company's derivative strategy employs a variety of instruments including
financial futures, financial forwards foreign exchange contracts, foreign
currency swaps, interest rate swaps, interest rate caps and options.
88
<PAGE> 89
The Company held the following positions in derivative financial
instruments at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
AT JUNE 30, 2000 AT DECEMBER 31, 1999
--------------------- ----------------------
NOTIONAL % OF NOTIONAL % OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Financial futures $ 1,168 7.0 % $ 3,140 15.1 %
Foreign exchange contracts 5 0.0 - 0.0
Foreign currency swaps 4,298 26.0 4,002 19.2
Interest rate swaps 2,153 13.0 1,316 6.3
Interest rate caps 8,968 54.0 12,376 59.4
Options 8 0.0 - 0.0
------- ------ ------- ------
Total $16,600 100.0 % $20,834 100.0 %
======= ===== ======= =====
</TABLE>
SECURITIES LENDING
Pursuant to the Company's securities lending program, it lends securities
to major brokerage firms. The Company's policy requires a minimum of 102% of the
fair value of the loaned securities as collateral, calculated on a daily basis.
The Company's securities on loan at June 30, 2000 and December 31, 1999 had
estimated fair values of $10,446 million and $6,391 million, respectively.
SEPARATE ACCOUNT ASSETS
The Company manages each separate account's assets in accordance with the
prescribed investment policy that applies to that specific separate account. The
Company establishes separate accounts on a single client and multi-client
commingled basis in conformity with insurance laws. Generally, separate accounts
are not chargeable with liabilities that arise from any other business of the
Company. Separate account assets are subject to the Company's general account's
claims only to the extent that the value of such assets exceeds the separate
account liabilities, as defined by the account's contract. If the Company uses a
separate account to support a contract providing guaranteed benefits, the
Company must comply with the asset maintenance requirements stipulated under
Regulation 128 of the New York Insurance Department. The Company monitors these
requirements at least monthly and in addition performs cash flow analyses,
similar to that conducted for the general account, on an annual basis. The
Company reports separately as assets and liabilities investments held in
separate accounts and liabilities of the separate accounts. The Company reports
substantially all separate account assets at their fair market value. Investment
income and gains or losses on the investments of separate accounts accrue
directly to contract holders, and, accordingly, the Company does not reflect
them in its consolidated statements of operations and cash flows. The Company
reflects in its revenues fees charged to the separate accounts by the Company,
including mortality charges, risk charges, policy administration fees,
investment management fees and surrender charges.
89
<PAGE> 90
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has material exposure to interest rate, equity market and
foreign exchange risk. The Company analyzes interest rate risk using various
models including multi-scenario cash flow projection models that forecast cash
flows of the liabilities and their supporting investments, including derivative
instruments. There have been no material changes in market risk exposures from
December 31, 1999, a description of which may be found in MetLife's Registration
Statement on Form S-1 (registration number 333-91517) filed with the Securities
and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 8 to Unaudited
Interim Condensed Consolidated Financial Statements in Part 1 of this Report
("Note 8").
Eight of the nine purported or certified class actions currently pending
against New England Mutual Life Insurance Company ("New England") 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. New England has agreed to a settlement with class counsel. The
District Court has granted preliminary approval and a fairness hearing is
scheduled for October 2000.
Three putative sales practices class action lawsuits 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 of this consolidated
proceeding. General American Life Insurance Company has not reached agreement
with plaintiffs' counsel on the attorneys' fees to be paid, and the District
Court will decide that issue.
As previously disclosed, several lawsuits have been brought challenging
the fairness of Metropolitan Life's plan of reorganization and the adequacy and
accuracy of Metropolitan Life's disclosures to policyholders regarding the plan.
Two additional purported class actions were filed against Metropolitan Life and
MetLife, Inc. on May 31, 2000 and June 23, 2000 in the United States District
Court for the Eastern District of New York claiming violation of the Securities
Act of 1933. The plaintiffs in these actions claim that the Policyholder
Information Booklets relating to the plan failed to disclose certain material
facts and seek rescission and compensatory damages. These actions have been
consolidated along with a previously pending federal court action, and the
defendants have moved to dismiss the complaints. In addition, on August 3, 2000,
a purported class action was filed in the United States District Court for the
Southern District of New York seeking damages from MetLife for alleged
violations of various provisions of the Constitution of the United States in
connection with the plan of reorganization.
90
<PAGE> 91
Metropolitan Life, MetLife, Inc. and the individual defendants believe they
have meritorious defenses and intend to contest vigorously all of the claims in
these actions.
Two lawsuits have been filed against Metropolitan Life alleging racial
discrimination against African-Americans in the marketing, sale, and
administration of inexpensive life insurance policies, including "industrial"
life insurance policies, sold by Metropolitan Life decades ago. The first
lawsuit was filed on July 12, 2000 in the United States District Court for the
Southern District of New York, and the second was filed on July 26, 2000 in the
United States District Court for the Eastern District of Louisiana. The
plaintiffs in these purported class actions seek unspecified compensatory
damages, punitive damages, reformation, imposition of a constructive trust, a
declaration that the alleged practices are discriminatory and illegal,
injunctive relief requiring Metropolitan Life to discontinue the alleged
discriminatory practices and adjust policy values, and other relief.
Metropolitan Life believes it has meritorious defenses to the plaintiffs' claims
and intends to contest vigorously all of the plaintiffs' claims in these
actions.
Insurance departments in a number of states recently have initiated
inquiries about possible race-based underwriting of life insurance. These
inquiries generally have been directed to all life insurers licensed in the
respective states, including Metropolitan Life and certain of its subsidiaries.
Various litigation, claims and assessments against the Company, in
addition to those discussed above and those otherwise provided for in the
Company's consolidated financial statements, have arisen in the course of its
business, including, but not limited to, in connection with its activities as an
insurer, employer, investor, investment advisor and taxpayer. Further, state
insurance regulatory authorities and other federal and state authorities
regularly make inquiries and conduct investigations concerning the Company's
compliance with applicable insurance and other laws and regulations.
In some of the matters referred to above and in Note 8, very large and/or
indeterminate amounts, including punitive and treble damages, are sought. While
it is not feasible to predict or determine the ultimate outcome of all pending
investigations and legal proceedings or provide reasonable ranges of potential
losses, it is the opinion of the Company's management that their outcomes, after
consideration of available insurance and reinsurance and the provisions made in
its consolidated financial statements, are not likely to have a material adverse
effect on our consolidated financial position. However, given the large and/or
indeterminate amounts sought in certain of these matters and the inherent
unpredictably of litigation, it is possible that an adverse outcome in certain
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.
91
<PAGE> 92
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) The Public Offerings
On April 4, 2000, the Securities and Exchange Commission declared
effective (i) the Registration Statement on Form S-1 (Registration No.
333-91517) of MetLife with respect to the MetLife's common stock, par value $.01
per share (the "Common Stock"); and (ii) the Registration Statement on Form S-1
(Registration Nos. 333-32074 and 333-32074-01) of MetLife and MetLife Capital
Trust I with respect to 8.00% Equity Security Units (the "Units"). The offerings
of the securities registered on the registration statements referred to in (i)
and (ii) above are collectively referred to as the "Public Offerings."
The aggregate offering price of the Common Stock sold was $3,310,275,000
(including $431,775,000 of gross proceeds attributable to the shares of Common
Stock sold pursuant to exercise of the underwriters' over-allotment options).
MetLife incurred the following expenses in connection with the offering of
Common Stock:
<TABLE>
<S> <C>
Underwriting discounts and commissions $148,672,000
Other expenses (legal and accounting fees, printing and
engraving expenses, filing and listing fees, transfer
agent and registrar fees and miscellaneous) 7,164,507
------------------------
Total $155,836,507
========================
</TABLE>
The net proceeds to MetLife from the offering of Common Stock, after
deducting the foregoing expenses, were $3,154,438,493.
The aggregate offering price of the Units sold was $1,006,250,000
(including $131,250,000 of gross proceeds attributable to the Units sold
pursuant to exercise of the underwriters' over-allotment options). MetLife
incurred the following expenses in connection with the offering of the Units:
<TABLE>
<S> <C>
Underwriting discounts and commissions $35,218,750
Other expenses (legal and accounting fees, printing and
engraving expenses, filing and listing fees, transfer
agent and registrar fees and miscellaneous) 2,141,129
------------------------
Total $37,359,879
========================
</TABLE>
The net proceeds to MetLife from the offering of the Units, after
deducting the foregoing expenses, were $968,890,121.
The Private Placements
Contemporaneously with the Public Offerings and in reliance upon the
exemption from registration provided under Section 4(2) of the Securities Act of
1933, MetLife conducted private placements (referred to collectively as the
"Private Placements" and,
92
<PAGE> 93
together with the Public Offerings, as the "Offerings") to (i) Credit Suisse
First Boston and Winterthur Life (collectively, "CSFB") and (ii) Banco Santander
Central Hispano ("Banco Santander"). Each of CSFB and Banco Santander purchased
30,000,000 shares of Common Stock, at $14.25 per share, the initial public
offering price of the Common Stock. The Private Placements were completed on
April 7, 2000. The net proceeds to MetLife from the Private Placements were
$855,000,000.
The total net proceeds to MetLife from the Public Offerings and the
Private Placements were $4,978,328,614. MetLife retained $340,000,000 of the net
proceeds and contributed the balance of $4,638,328,614 to Metropolitan Life.
Of the net proceeds contributed by MetLife to Metropolitan Life,
approximately $408,000,000 was used to reimburse Metropolitan Life for the
crediting of policy credits to certain policyholders in the demutualization of
Metropolitan Life (the "Demutualization"); (ii) approximately $2,550,000,000 was
used to reimburse Metropolitan Life for the payment of cash to certain
policyholders in the Demutualization; (iii) approximately $327,000,000 was used
to reimburse Metropolitan Life for the payment of cash to be made by its
Canadian branch to certain holders of policies included in the Canadian business
previously sold; (iv) approximately $399,000,000 was used to reimburse
Metropolitan Life for the payment of fees and expenses, net of income taxes
incurred in connection with the Demutualization; (v) approximately $900,000,000
was used to repay short-term debt incurred in connection with the acquisition of
GenAmerica Corporation and (vi) approximately $54,000,000 is expected to be used
for general corporate purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of Shareholders of MetLife was held on April 3,
2000. At the Meeting, the following matters were approved by Metropolitan Life,
the then sole shareholder of the Registrant: (i) the election of Robert H.
Benmosche, Gerald Clark, John J. Phelan, Jr., Hugh B. Price and Ruth J. Simmons
as Class I directors, each to hold office until the Registrant's 2003 Annual
Meeting of Shareholders and (ii) the amendment and restatement of the 2000 Stock
Incentive Plan and the 2000 Directors Stock Plan. The following directors' terms
of office continued after such Annual Meeting: Curtis H. Barnette; 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 and William C.
Steere, Jr.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
93
<PAGE> 94
During the three months ended June 30, 2000, the following current
reports were filed on Form 8-K:
1. Current Report on Form 8-K filed April 14, 2000 attaching press
release dated April 12, 2000 announcing (i) the closing of the
over-allotment granted to the underwriters in the initial public
offering and (ii) the commencement of the sales program for the
MetLife Policyholder Trust.
2. Current Report on Form 8-K filed April 21, 2000 attaching press
release dated April 19, 2000 announcing the completion of the
acquisition of Conning Corporation.
3. Current Report on Form 8-K filed May 10, 2000 attaching press release
dated May 9, 2000 announcing first quarter 2000 results.
4. Current Report on Form 8-K filed May 22, 2000 attaching press release
dated May 19, 2000 of New England Life Insurance Company (doing
business as New England Financial), a subsidiary of MetLife, Inc.,
announcing that it had reached a proposed settlement in multi-district
sales litigation.
5. Current Report on Form 8-K filed June 16, 2000 attaching press release
dated June 16, 2000 announcing the sale of MetLife, Inc.'s 48%
ownership interest in Nvest, L.P. and Nvest Companies, L.P.
6. Current Report on Form 8-K filed June 28, 2000 attaching press release
dated June 27, 2000 announcing a stock repurchase program.
94
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METLIFE, INC.
By: /s/Virginia M. Wilson
---------------------------
Virginia M. Wilson
Senior Vice-President and
Controller
(Authorized signatory and
principal accounting officer)
Date: August 14, 2000
95
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT NAME PAGE NUMBER
<S> <C> <C>
27.1 FINANCIAL DATA SCHEDULE
</TABLE>
96
