<PAGE>
SUPPLEMENT DATED MAY 1, 1997
to
PROSPECTUS DATED APRIL 30, 1993
(AS PREVIOUSLY SUPPLEMENTED ON MAY 1, 1994)
for
FLEXIBLE PREMIUM MULTIFUNDED LIFE INSURANCE POLICIES
(Minimum Initial Specified Face Amount $50,000)
Issued by
METROPOLITAN LIFE INSURANCE COMPANY
This Supplement updates information contained in the Metropolitan Life
Separate Account UL Prospectus dated April 30, 1993 (the "Prospectus"), and its
supplement dated May 1, 1994. Please call Metropolitan Life Insurance Company
("Metropolitan Life") at 800-638-5000 if you need another copy of the
Prospectus or the supplement.
The individual flexible premium multifunded life insurance policies
("Policies") offered by the Prospectus are issued by Metropolitan Life and are
designed to provide lifetime insurance coverage on the insureds named in the
Policies, as well as maximum flexibility in connection with premium payments
and death benefits. This flexibility allows an owner of a Policy to provide for
changing insurance needs within the confines of a single insurance policy.
These Policies are no longer being sold by Metropolitan Life.
The premiums paid, less premium expense charges, will be allocated at the
owner's discretion among one or more investment divisions of Metropolitan Life
Separate Account UL ("Separate Account") and/or a fixed interest account
("Fixed Account") within the General Account of Metropolitan Life. The assets
in each investment division are invested in shares of a corresponding portfolio
of the Metropolitan Series Fund, Inc. ("Fund"). The available portfolios of the
Fund are the State Street Research Growth, State Street Research Income, State
Street Research Diversified, State Street Research Aggressive Growth, MetLife
Money Market, MetLife Stock Index, GFM International Stock, Loomis Sayles High
Yield Bond, T. Rowe Price Small Cap Growth, Janus Mid Cap, and Scudder Global
Equity Portfolios.
THIS SUPPLEMENT IS NOT VALID UNLESS ATTACHED TO THE CURRENT PROSPECTUS FOR THE
METROPOLITAN SERIES FUND, INC., WHICH CONTAINS ADDITIONAL INFORMATION ABOUT THE
FUND.
THIS SUPPLEMENT SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
1 Madison Avenue, New York, New York 10010 Telephone 800-638-5000
<PAGE>
The names of the following seven portfolios of the Fund and the corresponding
divisions of the Separate Account have been changed wherever they appear in the
Prospectus:
<TABLE>
<CAPTION>
OLD PORTFOLIO AND
DIVISION NAME NEW PORTFOLIO AND DIVISION NAME
- ----------------- -------------------------------
<S> <C>
Growth State Street Research Growth
Income State Street Research Income
Money Market MetLife Money Market
Diversified State Street Research Diversified
Aggressive Growth State Street Research Aggressive Growth
Stock Index MetLife Stock Index
International Stock GFM International Stock
</TABLE>
THE SEPARATE ACCOUNT AND THE METROPOLITAN SERIES FUND
Four new investment divisions that correspond to four new portfolios of the
Fund have been added to the Separate Account. Policy owners may now allocate
net premiums and cash value to these divisions. These divisions are the Loomis
Sayles High Yield Bond Division, the T. Rowe Price Small Cap Growth Division,
the Janus Mid Cap Division and the Scudder Global Equity Division. The
accompanying prospectus for the Fund describes the investment objectives and
certain attendant risks of these new portfolios. These investment divisions and
corresponding portfolios may not be available in all states. Consult a sales
representative registered with Metropolitan Life for additional information. A
brief summary of the investment objectives of these new portfolios is set forth
below:
Loomis Sayles High Yield Bond Portfolio. This portfolio seeks high total
investment return through a combination of current income and capital
appreciation. The portfolio will normally invest at least 65% of its assets in
fixed income securities of below investment grade quality.
T. Rowe Price Small Cap Growth Portfolio. This portfolio seeks long-term
capital growth by investing in small capitalization companies.
Janus Mid Cap Portfolio. This portfolio is a non-diversified portfolio whose
investment objective is to provide long-term growth of capital. It pursues this
objective by investing primarily in securities issued by medium sized
companies.
Scudder Global Equity Portfolio. This portfolio seeks long-term growth of
capital through a diversified portfolio of marketable securities, primarily
equity securities, including common stocks, preferred stocks and debt
securities convertible into common stocks. The portfolio invests on a worldwide
basis in equity securities of companies which are incorporated in the U.S. or
in foreign countries.
Metropolitan Life is the investment manager of each of the new portfolios of
the Fund. Loomis, Sayles & Company, L.P., whose general partner is indirectly
owned by Metropolitan Life, is the sub-investment manager of the Loomis Sayles
High Yield Bond Portfolio. T. Rowe Price Associates, Inc. is the sub-investment
manager of the T. Rowe Price Small Cap Growth Portfolio. Janus Capital
Corporation is the sub-investment manager of the Janus Mid Cap Portfolio.
Scudder, Stevens & Clark, Inc. is the sub-investment manager for the Scudder
Global Equity Portfolio. Sub-investment manager fees are paid by Metropolitan
Life.
It is expected that State Street Research & Management Company ("State
Street Research") will become the sub-investment manager with respect to the
MetLife Money Market Portfolio and the GFM International Stock Portfolio on
August 1, 1997. GFM International Investors Limited ("GFM") will become the
sub-sub-investment manager and will continue to have day-to-day investment
responsibility for the GFM International Stock Portfolio. In the event these
changes take place, the name of the portfolios will be changed to the State
Street Research Money Market Portfolio and the State Street Research
International Stock Portfolio, respectively.
The GFM International Stock Portfolio is now available in connection with
Policies issued in all states. The Diversified Portfolio was substituted for
the Equity Income Portfolio in 1994 and the Equity Income Division therefore is
no longer available under any policy.
S-2
<PAGE>
FUND INVESTMENT MANAGEMENT FEES AND DIRECT EXPENSES
For providing investment management services to the Fund, Metropolitan Life
receives a fee from the Fund for providing investment management services to
each Portfolio. The following chart shows the fee and other Fund expenses for
each Portfolio.
METROPOLITAN SERIES FUND ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS)
<TABLE>
<CAPTION>
OTHER
EXPENSES
AFTER EXPENSE
MANAGEMENT REIMBURSEMENT
FEES (A) TOTAL
---------- ------------- -----
<S> <C> <C> <C>
MetLife Stock Index Portfolio............... .25% .05% .30%
State Street Research Income Portfolio(d)... .33% .07% .40%
MetLife Money Market Portfolio.............. .25% .18% .43%
State Street Research Diversified
Portfolio(d)............................... .46% .04% .50%
State Street Research Growth Portfolio(d)... .51% .04% .55%
State Street Research Aggressive Growth
Portfolio(d)............................... .71% .04% .75%
T. Rowe Price Small Cap Growth
Portfolio(b)............................... .55% .20% .75%
Scudder Global Equity Portfolio(b)(c)....... .62% .20% .82%
Loomis Sayles High Yield Bond Portfolio(b).. .70% .20% .90%
Janus Mid Cap Portfolio(b).................. .75% .20% .95%
GFM International Stock Portfolio(d)........ .75% .22% .97%
</TABLE>
-------
(a) Prior to May 16, 1993, Metropolitan Life paid all expenses of
the then existing portfolios of the Fund other than management
fees, brokerage commissions, taxes, interest and any
extraordinary or non-recurring expenses.
(b) The portfolios commenced operations on March 3, 1997. Management
fees and other expenses for these portfolios are estimated
amounts for the year ending December 31, 1997. Metropolitan Life
has agreed to bear all expenses (other than management fees,
brokerage commissions, taxes, interest and any extraordinary or
non-recurring expenses) in excess of .20% of the net assets for
each of the Loomis Sayles High Yield Bond, T. Rowe Price Small
Cap Growth, Janus Mid Cap and Scudder Global Equity Portfolios
until a portfolio's total net assets are at least $100 million,
or March 2, 1999, whichever is earlier. The marginal fee rate
for the T. Rowe Price Small Cap Portfolio, Janus Mid Cap
Portfolio, and Scudder Global Equity Portfolio will decrease
when the dollar amount in each such portfolio reaches certain
threshold amounts.
(c) Metropolitan Life has agreed to waive a portion of its
investment management fee for the Scudder Global Equity
Portfolio during the first year of the Portfolio's operations.
The waiver of investment management fees during the first six
months of the portfolio's operations will be equal to .35% of
the average daily value of the aggregate net assets of the
portfolio up to $50 million, .175% of such assets on the next
$50 million, .15% of such assets on the next $400 million and
.1375% of such assets on amounts in excess of $500 million.
During the second six months of the portfolio's operations such
waiver of the investment management fee will be equal to .175%
of assets up to $50 million, .0875% of assets on the next $50
million, .075% of assets on the next $400 million and .06875% of
such assets in excess of $500 million. Absent Metropolitan
Life's waiver of its investment management fee, Metropolitan
Life estimates that the management fee and other expenses for
the Scudder Global Equity Portfolio would be .84% and .20%,
respectively, for a total of 1.04%.
(d) Reflects 1996 fees and expenses, restated for proposed
management fee revisions expected to take effect August 1, 1997.
For a full description of the Fund, see the prospectus for the Fund, which is
attached at the end of this Supplement, and the Fund's Statement of Additional
Information referred to therein.
POLICY BENEFITS
DEATH BENEFIT OPTIONS
Increases. The underwriting charge for specified face amount increases has
been changed. The maximum guaranteed underwriting charge is $5 for each $1,000
of specified face amount increase. Currently the underwriting charge is a $100
for the first $100,000 of face increase (but no more than $5 per thousand), and
$3 per thousand thereafter, to an overall maximum charge of $2,500.
The information about or based on the actual investment performance of the
portfolios is deleted from the captions "Rates of Return" and "Illustrations"
in the Prospectus and the May 1, 1994 supplement.
ILLUSTRATIONS OF DEATH BENEFITS, CASH VALUES AND ACCUMULATED PREMIUMS
The addition of the new portfolios and the revisions to the older portfolios'
management fees that are expected to become effective August 1, 1997 would
affect the total cash values, total cash surrender values and total death
benefits
S-3
<PAGE>
shown under "Illustrations of Death Benefits, Cash Values, Cash Surrender
Values and Accumulated Premiums" in the Prospectus and the May 1, 1994
Supplement. Using a simple average of the eleven available portfolios of the
Fund, assuming the maximum management fees contemplated by the August 1, 1997
adjustment, the daily charge to the Fund for investment management services
would be increased to the equivalent of a maximum annual rate of .57% of the
average daily value of the aggregate net assets of the Fund. The result is that
the cash surrender values and cash values would be less for both death benefit
options A and B. In addition, if the minimum death benefit applies, the death
benefit would be lower for death benefit options A and B. Also, the death
benefit will be lower for death benefit option B, even if the minimum death
benefit doesn't apply. Upon request, Metropolitan Life will provide a free,
personalized hypothetical illustration that reflects these changes in the
investment management fees as they become effective.
EXPERTS
The financial statements included in this Supplement have been audited by
Deloitte & Touche llp, independent auditors, as stated in their reports
appearing herein, and have been so included in reliance upon such reports given
upon the authority of such firm as experts in auditing and accounting.
FINANCIAL STATEMENTS
The financial statements of Metropolitan Life included in this Supplement
should be considered only as bearing upon the ability of Metropolitan Life to
meet its obligations under the Policies.
S-4
<PAGE>
Annual Report
of
Metropolitan Life
Separate Account UL
December 31, 1996
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Metropolitan Life Insurance Company:
We have audited the accompanying statements of assets and liabilities of the
Growth, Income, Money Market, Diversified, International Stock, Stock Index,
and Aggressive Growth Divisions of Metropolitan Life Separate Account UL (the
"Separate Account") as of December 31, 1996, and the related statements of
operations for the year then ended and of changes in net assets for each of the
two years in the period then ended. These financial statements are the
responsibility of the Separate Account's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1996 by
correspondence with the custodian and the depositor of the Separate Account. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the net assets of the Growth, Income, Money Market, Diversified,
International Stock, Stock Index and Aggressive Growth Divisions of
Metropolitan Life Separate Account UL as of December 31, 1996 and the results
of their operations for the year then ended and the changes in their net assets
for each of the two years in the period then ended, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 28, 1997
1
<PAGE>
METROPOLITAN LIFE SEPARATE ACCOUNT UL
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONEY INTERNATIONAL STOCK AGGRESSIVE
GROWTH INCOME MARKET DIVERSIFIED STOCK INDEX GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
------------ ----------- ---------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in Metropol-
itan Series Fund, Inc.
at Value (Note 1A):
Growth Portfolio
(5,208,796 shares; cost
$133,325,492).......... $158,920,369 -- -- -- -- -- --
Income Portfolio
(2,210,984 shares; cost
$27,751,597)........... -- $27,327,760 -- -- -- -- --
Money Market Portfolio
(584,077 shares; cost
$6,278,669)............ -- -- $6,095,430 -- -- -- --
Diversified Portfolio
(6,643,203 shares; cost
$100,173,963).......... -- -- -- $110,742,194 -- -- --
International Stock
Portfolio
(1,991,487 shares; cost
$24,907,650)........... -- -- -- -- $23,798,267 -- --
Stock Index Portfolio
(1,450,886 shares; cost
$27,248,573)........... -- -- -- -- -- $32,253,185 --
Aggressive Growth Port-
folio
(3,107,005 shares; cost
$78,361,229)........... -- -- -- -- -- -- $84,106,614
------------ ----------- ---------- ------------ ----------- ----------- -----------
Total Investments...... 158,920,369 27,327,760 6,095,430 110,742,194 23,798,267 32,253,185 84,106,614
Cash and Accounts Re-
ceivable............... 11,882 3,998 86,448 168 6,129 119,880 28,704
------------ ----------- ---------- ------------ ----------- ----------- -----------
Total Assets........... 158,932,251 27,331,758 6,181,878 110,742,362 23,804,396 32,373,065 84,135,318
LIABILITIES............. 34,679 74,006 62,023 274,903 135,056 339,551 394,115
------------ ----------- ---------- ------------ ----------- ----------- -----------
NET ASSETS.............. $158,897,572 $27,257,752 $6,119,855 $110,467,459 $23,669,340 $32,033,514 $83,741,203
============ =========== ========== ============ =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
METROPOLITAN LIFE SEPARATE ACCOUNT UL
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------------
MONEY INTERNATIONAL STOCK AGGRESSIVE
GROWTH INCOME MARKET DIVERSIFIED STOCK INDEX GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ---------- -------- ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividends (Note 2)..... $15,051,436 $1,723,590 $300,997 $ 9,697,032 $ 200,282 $ 744,725 $2,234,170
Expenses:
Mortality and expense
charges (Note 3)...... 1,221,219 220,150 37,221 870,631 181,892 185,397 641,863
----------- ---------- -------- ----------- --------- ---------- ----------
Net investment income... 13,830,217 1,503,440 263,776 8,826,401 18,390 559,328 1,592,307
----------- ---------- -------- ----------- --------- ---------- ----------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss)
from security transac-
tions.................. 2,929,455 (16,679) (11,231) 532,857 (9,816) 742,061 166,243
Change in unrealized ap-
preciation (deprecia-
tion) of investments
....................... 9,406,099 (697,499) (90,379) 3,200,410 (559,306) 2,836,911 1,728,894
----------- ---------- -------- ----------- --------- ---------- ----------
Net realized and
unrealized gain (loss)
on investments (Note
1B).................... 12,335,554 (714,178) (101,610) 3,733,267 (569,122) 3,578,972 1,895,137
----------- ---------- -------- ----------- --------- ---------- ----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $26,165,771 $ 789,262 $162,166 $12,559,668 ($550,732) $4,138,300 $3,487,444
=========== ========== ======== =========== ========= ========== ==========
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
METROPOLITAN LIFE SEPARATE ACCOUNT UL
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH INCOME MONEY MARKET
DIVISION DIVISION DIVISION
-------------------------- ------------------------ ------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
From operations:
Net investment income.. $ 13,830,217 $ 4,694,831 $ 1,503,440 $ 1,147,331 $ 263,776 $ 128,508
Net realized gain
(loss) from security
transactions.......... 2,929,455 293,233 (16,679) (8,290) (11,231) 35,201
Change in unrealized
appreciation (depreci-
ation) of
investments........... 9,406,099 19,543,807 (697,499) 1,977,261 (90,379) 4,641
------------ ------------ ----------- ----------- ----------- -----------
Net increase (decrease)
in net assets resulting
from operations........ 26,165,771 24,531,871 789,262 3,116,302 162,166 168,350
------------ ------------ ----------- ----------- ----------- -----------
From capital transac-
tions:
Net premiums........... 50,115,276 41,455,659 9,255,854 8,687,776 4,945,669 2,988,786
Redemptions............ (4,742,435) (2,766,288) (764,548) (546,157) (31,149) (89,665)
Net portfolio trans-
fers.................. (2,214,936) 395,373 (154,542) 36,042 (1,062,557) (3,328,483)
Other net transfers.... (22,866,726) (19,059,583) (4,179,745) (4,186,427) (869,014) (1,058,931)
------------ ------------ ----------- ----------- ----------- -----------
Net increase (decrease)
in net assets resulting
from capital
transactions .......... 20,291,179 20,025,161 4,157,019 3,991,234 2,982,949 (1,488,293)
------------ ------------ ----------- ----------- ----------- -----------
NET CHANGE IN NET
ASSETS................. 46,456,950 44,557,032 4,946,281 7,107,536 3,145,115 (1,319,943)
NET ASSETS--BEGINNING OF
YEAR................... 112,440,622 67,883,590 22,311,471 15,203,935 2,974,740 4,294,683
------------ ------------ ----------- ----------- ----------- -----------
NET ASSETS--END OF
YEAR................... $158,897,572 $112,440,622 $27,257,752 $22,311,471 $ 6,119,855 $ 2,974,740
============ ============ =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
DIVERSIFIED INTERNATIONAL STOCK STOCK INDEX AGGRESSIVE GROWTH
DIVISION DIVISION DIVISION DIVISION
- -------------------------- ------------------------ ------------------------ --------------------------
FOR THE YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
- ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 8,826,401 $ 4,695,480 $ 18,390 $ 27,416 $ 559,328 $ 213,805 $ 1,592,307 $ 4,726,548
532,857 248,523 (9,816) 28,349 742,061 29,512 166,243 152,387
3,200,410 10,898,818 (559,306) 136,578 2,836,911 2,271,366 1,728,894 4,188,117
- ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------
12,559,668 15,842,821 (550,732) 192,343 4,138,300 2,514,683 3,487,444 9,067,052
- ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------
34,025,252 31,888,789 10,992,609 12,024,423 16,930,258 7,870,004 45,233,040 32,859,273
(3,640,372) (2,358,803) (611,355) (392,901) (385,783) (232,828) (2,071,839) (1,185,240)
(466,159) (416,768) (688,494) (658,961) 4,466,799 1,324,319 1,106,638 2,162,117
(16,191,671) (15,856,704) (2,768,825) (5,248,525) (6,541,830) (2,897,249) (18,345,877) (14,163,669)
- ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------
13,727,050 13,256,514 6,923,935 5,724,036 14,469,444 6,064,246 25,921,962 19,672,481
- ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------
26,286,718 29,099,335 6,373,203 5,916,379 18,607,744 8,578,929 29,409,406 28,739,533
84,180,741 55,081,406 17,296,137 11,379,758 13,425,770 4,846,841 54,331,797 25,592,264
- ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------
$110,467,459 $ 84,180,741 $23,669,340 $17,296,137 $32,033,514 $13,425,770 $ 83,741,203 $ 54,331,797
============ ============ =========== =========== =========== =========== ============ ============
</TABLE>
5
<PAGE>
METROPOLITAN LIFE SEPARATE ACCOUNT UL
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Metropolitan Life Separate Account UL (the "Separate Account") is a multi-
division unit investment trust registered under the Investment Company Act of
1940 and presently consists of seven investment divisions used to support
variable universal life insurance policies. The assets in each division are
invested in shares of the corresponding portfolio of the Metropolitan Series
Fund, Inc. (the "Fund"). Each portfolio has varying investment objectives
relative to growth of capital and income.
The Separate Account was formed by Metropolitan Life Insurance Company
("Metropolitan Life") on December 13, 1988, and registered as a unit investment
trust on January 5, 1990. The assets of the Separate Account are the property
of Metropolitan Life.
A summary of significant accounting policies, all of which are in accordance
with generally accepted accounting principles, is set forth below:
1. SIGNIFICANT ACCOUNTING POLICIES
A. VALUATION OF INVESTMENTS
Investments in shares of the Fund are valued at the reported net asset
values of the respective portfolios. A summary of investments of the
seven designated portfolios of the Fund in which the seven investment
divisions of the Separate Account invest as of December 31, 1996 is
included as Note 4. The methods used to value the Fund's investments at
December 31, 1996 are described in Note 1A of the Fund's 1996 Annual
Report.
B.SECURITY TRANSACTIONS
Purchases and sales are recorded on the trade date. Realized gains and
losses on sales of investments are determined on the basis of identified
cost.
C.FEDERAL INCOME TAXES
In the opinion of counsel of Metropolitan Life, the Separate Account will
be treated as a part of Metropolitan Life and its operations, and the
Separate Account will not be taxed separately as a "regulated investment
company" under existing law. Metropolitan Life is taxed as a life
insurance company. The policies permit Metropolitan Life to charge
against the Separate Account any taxes, or reserves for taxes,
attributable to the maintenance or operation of the Separate Account.
Metropolitan Life is not currently charging any Federal income taxes
against the Separate Account arising from the earnings or realized
capital gains attributable to the Separate Account. Such charges may be
imposed in future years depending on market fluctuations and transactions
involving the Separate Account.
D. NET PREMIUMS
Metropolitan Life deducts a sales load and a state premium tax charge from
premiums before amounts are allocated to the Separate Account. In the case
of certain of the policies, Metropolitan Life also deducts a Federal
income tax charge before amounts are allocated to the Separate Account.
The Federal income tax charge is imposed in connection with certain of the
policies to recover a portion of the Federal income tax adjustment
attributable to policy acquisition expenses.
2. DIVIDENDS
On April 25, 1996 and December 16, 1996, the Fund declared dividends for all
shareholders of record on April 25, 1996 and December 26, 1996, respectively.
The amount of dividends received by the Separate Account was $29,952,232. The
dividends were paid to Metropolitan Life on April 26, 1996 and December 27,
1996, respectively, and were immediately reinvested in additional shares of the
portfolios in which the investment divisions invest. As a result of this
reinvestment, the number of shares of the Fund held by each of the seven
investment divisions increased by the following: Growth Portfolio 488,416
shares, Income Portfolio 139,135 shares, Money Market Portfolio 28,861 shares,
Diversified Portfolio 578,116 shares, International Stock Portfolio 16,160
shares, Stock Index Portfolio 33,043 shares, and Aggressive Growth Portfolio
82,174 shares.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. EXPENSES
With respect to assets in the Separate Account that support certain policies,
Metropolitan Life applies a daily charge against the Separate Account for the
mortality and expense risks assumed by Metropolitan Life. This charge is
equivalent to the effective annual rate of .90% of the average daily value of
the net assets in the Separate Account which are attributable to such policies.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1996--METROPOLITAN SERIES FUND, INC.
4.
<TABLE>
<CAPTION>
GROWTH INCOME MONEY MARKET DIVERSIFIED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ------- ------------ ------- ------------ ------- --------------
VALUE VALUE VALUE VALUE
(NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Aerospace.............. $ 14,697,375 (0.9%) $ 8,224,562 (0.6%)
Automotive............. 38,188,750 (2.4%) 21,290,925 (1.5%)
Banking................ 157,307,202 (9.8%) 87,632,900 (6.0%)
Broadcasting........... 19,728,750 (1.2%) 11,025,000 (0.8%)
Business Services...... 31,078,650 (1.9%) 17,361,575 (1.2%)
Chemicals.............. 105,060,638 (6.6%) 58,547,387 (4.0%)
Cosmetics.............. 20,924,887 (1.3%) 11,739,188 (0.8%)
Drugs & Health Care.... 65,432,344 (4.1%) 36,554,638 (2.5%)
Electrical Equipment... 39,896,063 (2.5%) 22,197,437 (1.5%)
Electronics............ 147,966,575 (9.3%) 82,595,572 (5.7%)
Financial Services..... 34,196,000 (2.1%) 19,078,600 (1.3%)
Food & Beverages....... 55,678,225 (3.5%) 31,081,563 (2.1%)
Hospital Management.... 26,943,900 (1.7%) 15,140,663 (1.0%)
Hospital Supply........ 64,140,600 (4.0%) 35,693,650 (2.5%)
Hotel & Restaurant..... 34,541,887 (2.2%) 19,286,312 (1.3%)
Household Products..... 27,788,750 (1.7%) 15,490,750 (1.1%)
Insurance.............. 58,992,362 (3.7%) 32,934,038 (2.3%)
Leisure................ 37,965,054 (2.4%) 21,750,587 (1.5%)
Machinery.............. 24,072,650 (1.5%) 13,385,200 (0.9%)
Metals--Aluminum....... 45,886,900 (2.9%) 25,661,113 (1.8%)
Miscellaneous.......... 17,727,000 (1.1%) 9,861,000 (0.7%)
Office & Business
Equipment............. 104,763,338 (6.6%) 58,437,513 (4.0%)
Oil.................... 27,677,510 (1.7%) 15,646,986 (1.1%)
Oil--Domestic.......... 7,318,575 (0.5%) 4,071,375 (0.3%)
Oil--International..... 32,374,200 (2.0%) 18,031,200 (1.2%)
Oil--Services.......... 46,821,401 (2.9%) 26,157,263 (1.8%)
Retail Grocery......... 23,040,750 (1.4%) 13,019,606 (0.9%)
Retail Trade........... 74,240,420 (4.7%) 41,373,775 (2.9%)
Software............... 19,964,200 (1.3%) 11,203,265 (0.8%)
Tobacco................ 22,356,062 (1.4%) 12,602,737 (0.9%)
Transportation--
Railroad.............. 8,116,800 (0.5%) 4,548,600 (0.3%)
Transportation--
Trucking.............. 0 (0.0%) 5 (0.0%)
Utilities--Gas
Distribution &
Pipelines............. 33,212,237 (2.1%) 18,517,850 (1.3%)
-------------- --------------
Total Common Stock..... 1,468,100,055 (91.9%) 820,142,835 (56.6%)
-------------- --------------
LONG-TERM DEBT
SECURITIES
Corporate Bonds:
Banking................ $ 17,291,411 (4.5%) $ 13,220,347 (0.9%)
Collateralized Mortgage
Obligations........... 8,684,394 (2.3%) 9,152,935 (0.6%)
Financial Services..... 36,834,715 (9.6%) 60,619,051 (4.2%)
Government Sponsored... 5,656,770 (1.5%) 6,496,680 (0.5%)
Industrials............ 26,858,935 (7.0%) 33,637,368 (2.3%)
Miscellaneous.......... 6,288,068 (1.6%) 8,335,834 (0.6%)
Utilities--Electric.... 7,305,058 (1.9%) 5,318,809 (0.4%)
Utilities--
Miscellaneous......... 0 (0.0%) 2,838,920 (0.2%)
Utilities--Telephone... 0 (0.0%) 5,040,000 (0.3%)
------------ --------------
Total Corporate Bonds.. 108,919,351 (28.4%) 144,659,944 (10.0%)
------------ --------------
Federal Agency
Obligations........... 19,701,551 (5.1%) 30,641,236 (2.1%)
Federal Treasury
Obligations........... 201,495,177 (52.6%) 317,610,213 (21.9%)
Foreign Obligations.... 14,393,603 (3.8%) 20,255,361 (1.4%)
Yankee Bonds........... 15,352,261 (4.0%) 21,020,607 (1.5%)
------------ --------------
Total Bonds............ 359,861,943 (93.9%) 534,187,361 (36.9%)
------------ --------------
SHORT-TERM OBLIGATIONS
Commercial Paper....... $ 125,797,417 (7.9%) $ 17,393,000 (4.5%) $25,926,227 (62.3%) $ 82,989,000 (5.7%)
Corporate Note......... 3,998,775 (9.6%)
Federal Agency
Obligations........... 11,675,628 (28.0%)
-------------- ------------ ----------- --------------
Total Short-Term
Obligations........... 125,797,417 (7.9%) 17,393,000 (4.5%) 41,600,630 (99.9%) 82,989,000 (5.7%)
-------------- ------------ ----------- --------------
TOTAL INVESTMENTS....... 1,593,897,472 (99.8%) 377,254,943 (98.4%) 41,600,630 (99.9%) 1,437,319,196 (99.2%)
Other Assets Less
Liabilities........... 3,831,003 (0.2%) 6,139,895 (1.6%) 36,001 (0.1%) 11,521,971 (0.8%)
-------------- ------------ ----------- --------------
NET ASSETS.............. $1,597,728,475 (100.0%) $383,394,838 (100.0%) $41,636,631 (100.0%) $1,448,841,167 (100.0%)
============== ============ =========== ==============
</TABLE>
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1996--METROPOLITAN SERIES FUND,
INC.--(CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL
STOCK
PORTFOLIO
-------------
VALUE
(NOTE 1A)
<S> <C> <C>
COMMON STOCK
Automotive.............................................. $ 12,042,055 (4.0%)
Banking................................................. 28,537,013 (9.4%)
Broadcasting............................................ 1,583,340 (0.5%)
Business Services....................................... 1,353,994 (0.5%)
Chemicals............................................... 15,831,034 (5.2%)
Construction Materials.................................. 4,410,671 (1.5%)
Consumer Non-Durables................................... 1,078,633 (0.4%)
Drugs & Health Care..................................... 13,669,733 (4.5%)
Electrical Equipment.................................... 4,851,913 (1.6%)
Electronics............................................. 33,670,645 (11.1%)
Financial Services...................................... 16,109,145 (5.3%)
Food & Beverages........................................ 4,475,477 (1.5%)
Forest Products & Paper................................. 1,650,874 (0.6%)
General Business........................................ 81,167 (0.0%)
Homebuilders............................................ 2,312,664 (0.8%)
Household Products...................................... 1,626,631 (0.5%)
Insurance............................................... 12,269,901 (4.0%)
Investment Companies.................................... 2,234,375 (0.7%)
Leisure................................................. 2,828,608 (0.9%)
Machinery............................................... 5,079,733 (1.7%)
Metals--Gold............................................ 59,942 (0.0%)
Metals--Non-Ferrous..................................... 4,051,349 (1.3%)
Metals--Steel & Iron.................................... 6,796,496 (2.2%)
Miscellaneous........................................... 5,656,864 (1.9%)
Multi-Industry.......................................... 14,979,104 (4.9%)
Oil & Gas Exploration................................... 6,073,231 (2.0%)
Oil--International...................................... 15,038,125 (4.9%)
Printing & Publishing................................... 3,890,524 (1.3%)
Real Estate............................................. 15,753,267 (5.2%)
Retail Trade............................................ 8,007,127 (2.6%)
Textiles & Apparel...................................... 2,385,456 (0.8%)
Toys & Amusements....................................... 976,600 (0.3%)
Transportation.......................................... 1,745,426 (0.6%)
Utilities--Electric..................................... 4,565,840 (1.5%)
Utilities--Gas Distribution & Pipelines................. 3,750,981 (1.2%)
Utilities--Miscellaneous................................ 3,130,194 (1.0%)
Utilities--Telephone.................................... 7,711,745 (2.5%)
------------
Total Common Stock...................................... 270,269,877 (88.9%)
------------
PREFERRED STOCK
Retail Trade............................................ 518,032 (0.2%)
------------
Total Equity Securities................................. 270,787,909 (89.1%)
TOTAL LONG-TERM DEBT SECURITIES--CONVERTIBLE BONDS....... 19,499,259 (6.4%)
------------
TOTAL INVESTMENTS........................................ 290,287,168 (95.5%)
Other Assets Less Liabilities........................... 13,538,315 (4.5%)
------------
NET ASSETS............................................... $303,825,483 (100.0%)
============
</TABLE>
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1996--METROPOLITAN SERIES FUND,
INC.--(CONTINUED)
<TABLE>
<CAPTION>
STOCK INDEX
PORTFOLIO
-----------
VALUE
(NOTE 1A)
<S> <C> <C>
COMMON STOCK
Aerospace.............................................. $ 28,736,048 (2.6%)
Automotive............................................. 28,701,626 (2.6%)
Banking................................................ 93,714,830 (8.4%)
Broadcasting........................................... 11,450,367 (1.0%)
Building & Construction................................ 7,528,376 (0.7%)
Business Services...................................... 14,455,324 (1.3%)
Chemicals.............................................. 34,500,400 (3.1%)
Containers & Glass..................................... 1,693,750 (0.2%)
Cosmetics.............................................. 3,360,350 (0.3%)
Drugs & Health Care.................................... 72,616,988 (6.5%)
Electrical Equipment................................... 48,407,363 (4.3%)
Electronics............................................ 63,125,007 (5.6%)
Financial Services..................................... 35,084,926 (3.1%)
Food & Beverages....................................... 68,548,136 (6.1%)
Forest Products & Paper................................ 16,456,307 (1.5%)
Hospital Management.................................... 10,165,689 (0.9%)
Hospital Supply........................................ 30,587,031 (2.7%)
Hotel & Restaurant..................................... 10,602,137 (0.9%)
Household Appliances & Home Furnishings................ 1,995,625 (0.2%)
Household Products..................................... 34,569,100 (3.1%)
Insurance.............................................. 38,990,773 (3.5%)
Leisure................................................ 9,888,705 (0.9%)
Liquor................................................. 2,526,500 (0.2%)
Machinery.............................................. 14,790,412 (1.3%)
Metals--Aluminum....................................... 4,013,638 (0.4%)
Metals--Gold........................................... 5,642,260 (0.5%)
Metals--Non-Ferrous.................................... 2,738,985 (0.2%)
Metals--Steel & Iron................................... 1,839,738 (0.2%)
Mining................................................. 2,180,087 (0.2%)
Miscellaneous.......................................... 3,178,900 (0.3%)
Multi-Industry......................................... 9,577,826 (0.9%)
Newspapers............................................. 6,143,637 (0.5%)
Office & Business Equipment............................ 48,538,755 (4.3%)
Oil & Gas Exploration.................................. 2,800,313 (0.2%)
Oil--Domestic.......................................... 21,819,438 (1.9%)
Oil--International..................................... 65,066,563 (5.8%)
Oil--Services.......................................... 11,558,751 (1.0%)
Photography............................................ 5,953,875 (0.5%)
Printing & Publishing.................................. 3,554,968 (0.3%)
Retail Grocery......................................... 5,887,863 (0.5%)
Retail Trade........................................... 42,490,678 (3.8%)
Software............................................... 30,829,784 (2.7%)
Textiles & Apparel..................................... 6,880,088 (0.6%)
Tires & Rubber......................................... 3,116,200 (0.3%)
Tobacco................................................ 21,138,225 (1.9%)
Toys & Amusements...................................... 2,450,273 (0.2%)
Transportation--Airlines............................... 4,475,875 (0.4%)
Transportation--Railroad............................... 11,508,961 (1.0%)
Transportation--Trucking............................... 1,006,875 (0.1%)
Utilities--Electric.................................... 27,914,283 (2.5%)
Utilities--Gas Distribution & Pipelines................ 14,503,806 (1.3%)
Utilities--Telephone................................... 72,606,227 (6.5%)
--------------
Total Common Stock..................................... 1,121,912,642 (100.0%)
PREFERRED STOCK
Hospital Supply........................................ 1,774 (0.0%)
--------------
Total Equity Securities................................ 1,121,914,416 (100.0%)
TOTAL SHORT-TERM OBLIGATIONS--U.S. TREASURY BILLS....... 6,119,501 (0.5%)
--------------
TOTAL INVESTMENTS....................................... 1,128,033,917 (100.5%)
Other Assets Less Liabilities.......................... (5,736,583) (-0.5%)
--------------
NET ASSETS.............................................. $1,122,297,334 (100.0%)
==============
</TABLE>
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
4. SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1996--METROPOLITAN SERIES FUND,
INC.--(CONCLUDED)
<TABLE>
<CAPTION>
AGGRESSIVE
GROWTH
PORTFOLIO
----------
VALUE
(NOTE 1A)
---------
<S> <C> <C>
COMMON STOCK
Automotive............................................. $ 8,300,475 (0.6%)
Banking................................................ 52,161,093 (4.0%)
Broadcasting........................................... 1,911,644 (0.1%)
Business Services...................................... 111,731,275 (8.5%)
Chemicals.............................................. 8,035,150 (0.6%)
Drugs & Health Care.................................... 40,531,901 (3.1%)
Electronics............................................ 159,063,920 (12.0%)
Finance................................................ 1,903,687 (0.1%)
Financial Services..................................... 36,782,250 (2.8%)
Food & Beverages....................................... 8,800,137 (0.7%)
Hospital Supply........................................ 24,680,369 (1.9%)
Hotel & Restaurant..................................... 147,865,328 (11.2%)
Insurance.............................................. 24,104,063 (1.8%)
Leisure................................................ 22,011,718 (1.7%)
Machinery.............................................. 5,305,125 (0.4%)
Office & Business Equipment............................ 46,756,744 (3.5%)
Oil.................................................... 1,795,219 (0.1%)
Oil & Gas Exploration.................................. 22,009,875 (1.7%)
Oil--Services.......................................... 115,561,562 (8.7%)
Personal Care.......................................... 2,647,288 (0.2%)
Printing & Publishing.................................. 7,947,212 (0.6%)
Retail Trade........................................... 116,932,900 (8.9%)
Software............................................... 110,257,289 (8.3%)
Textiles & Apparel..................................... 38,388,025 (2.9%)
Tobacco................................................ 1,785,938 (0.1%)
Transportation--Airlines............................... 19,139,375 (1.4%)
Utilities--Miscellaneous............................... 7,936,000 (0.6%)
Utilities--Telephone................................... 19,502,387 (1.5%)
--------------
Total Common Stock..................................... 1,163,847,949 (88.0%)
PREFERRED STOCK
Printing & Publishing.................................. 3,590,300 (0.3%)
--------------
Total Equity Securities................................. 1,167,438,249 (88.3%)
TOTAL LONG-TERM DEBT SECURITIES--CONVERTIBLE BONDS...... 2,312,500 (0.2%)
TOTAL SHORT-TERM OBLIGATIONS--COMMERCIAL PAPER.......... 142,773,021 (10.8%)
--------------
TOTAL INVESTMENTS....................................... 1,312,523,770 (99.3%)
Other Assets Less Liabilities.......................... 9,325,594 (0.7%)
--------------
NET ASSETS.............................................. $1,321,849,364 (100.0%)
==============
</TABLE>
11
<PAGE>
Annual Financial Statements
of
Metropolitan Life Insurance
Company
December 31, 1996
<PAGE>
INDEPENDENT AUDITORS' REPORT
Metropolitan Life Insurance Company
We have audited the accompanying consolidated balance sheets of Metropolitan
Life Insurance Company (the "Company") as of December 31, 1996 and 1995 and the
related consolidated statements of earnings, equity and cash flows for each of
the three years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 1996 and 1995 and the consolidated results of its operations and
its consolidated cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 13 to the consolidated financial statements, the
Company has retroactively adopted applicable generally accepted accounting
principles relating to mutual life insurance companies and has changed, as of
December 31, 1994, the method of accounting for fixed maturity investments.
DELOITTE & TOUCHE LLP
New York, New York
April 4, 1997
MLI-1
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
NOTES 1996 1995
----- -------- --------
<S> <C> <C> <C>
ASSETS
Investments:
Fixed Maturities: 2,12
Available for Sale, at Estimated Fair Value......... $ 75,039 $ 76,412
Held to Maturity, at Amortized Cost................. 11,322 11,340
Equity Securities..................................... 2,12 2,816 1,749
Mortgage Loans on Real Estate......................... 2,12 18,964 17,216
Policy Loans.......................................... 12 5,842 5,714
Real Estate........................................... 2 7,744 8,761
Real Estate Joint Ventures............................ 4 851 753
Other Limited Partnership Interests................... 4 992 797
Leases and Leveraged Leases........................... 2 1,883 1,503
Short-Term Investments................................ 12 741 1,769
Other Invested Assets................................. 2,692 2,651
-------- --------
Total Investments................................... 128,886 128,665
Cash and Cash Equivalents.............................. 12 2,325 1,930
Deferred Policy Acquisition Costs...................... 7,227 6,508
Accrued Investment Income.............................. 1,611 1,961
Premiums and Other Receivables......................... 2,916 2,533
Deferred Income Taxes Receivable....................... 37 --
Other Assets........................................... 2,094 2,157
Separate Account Assets................................ 43,775 39,384
-------- --------
Total Assets........................................ $188,871 $183,138
======== ========
LIABILITIES AND EQUITY
LIABILITIES
Future Policy Benefits................................. 5 $ 69,223 $ 68,256
Policyholder Account Balances.......................... 5,12 47,674 48,133
Other Policyholder Funds............................... 12 4,179 4,006
Policyholder Dividends Payable......................... 1,817 1,825
Short- and Long-Term Debt.............................. 9,12 5,365 5,580
Income Taxes Payable: 6
Current............................................... 599 827
Deferred.............................................. -- 230
Other Liabilities...................................... 4,632 3,666
Separate Account Liabilities........................... 43,399 38,861
-------- --------
Total Liabilities................................... 176,888 171,384
-------- --------
Commitments and Contingencies (Notes 2, 4 and 10)
EQUITY
Retained Earnings...................................... 10,937 10,084
Net Unrealized Investment Gains........................ 3 1,028 1,646
Foreign Currency Translation Adjustments............... 18 24
-------- --------
Total Equity........................................ 13 11,983 11,754
-------- --------
Total Liabilities and Equity........................ $188,871 $183,138
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
The New York State Insurance Department (the "Department") recognizes only
statutory accounting practices for determining and reporting the financial
condition and results of operations of an insurance company for determining
solvency under the New York Insurance Law. No consideration is given by the
Department to financial statements prepared in accordance with generally
accepted accounting principles in making such determination.
MLI-2
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (IN MILLIONS)
<TABLE>
<CAPTION>
NOTES 1996 1995 1994
----- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Premiums....................................... 5 $11,462 $11,178 $10,078
Universal Life and Investment-Type Product Pol-
icy Fee Income................................ 1,173 1,105 883
Net Investment Income.......................... 3 8,848 8,711 8,283
Investment Gains, Net.......................... 3 603 199 4
Commissions, Fees and Other Income............. 1,152 741 636
------- ------- -------
Total Revenues................................ 23,238 21,934 19,884
------- ------- -------
BENEFITS AND OTHER DEDUCTIONS
Policyholder Benefits.......................... 5 12,525 11,976 11,179
Interest Credited to Policyholder Account Bal-
ances......................................... 2,868 3,143 3,040
Policyholder Dividends......................... 1,728 1,786 1,752
Other Operating Costs and Expenses............. 4,711 4,285 3,500
------- ------- -------
Total Benefits and Other Deductions........... 21,832 21,190 19,471
------- ------- -------
Earnings from Continuing Operations before In-
come Taxes.................................... 1,406 744 413
Income Taxes................................... 6 482 407 380
------- ------- -------
Earnings from Continuing Operations............ 924 337 33
------- ------- -------
Discontinued Operations:
(Loss) Earnings from Discontinued Operations
(Net of Income Tax (Benefit) Expense of $(18)
in 1996, $32 in 1995 and $54 in 1994)........ (52) (54) 81
(Loss) Gain on Disposal of Discontinued Opera-
tions (Net of Income Tax (Benefit) Expense of
$(11) in 1996 and $106 in 1995).............. (19) 416 --
------- ------- -------
(Loss) Earnings from Discontinued Operations... (71) 362 81
------- ------- -------
Net Earnings................................... 13 $ 853 $ 699 $ 114
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
MLI-3
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 ,1995 AND 1994 (IN MILLIONS)
<TABLE>
<CAPTION>
NOTES 1996 1995 1994
----- ------- ------- ------
<S> <C> <C> <C> <C>
Retained Earnings, Beginning of Year........... $10,084 $ 9,385 $9,271
Net Earnings................................... 853 699 114
------- ------- ------
Retained Earnings, End of Year................. 10,937 10,084 9,385
------- ------- ------
Net Unrealized Investment Gains (Losses),
Beginning of Year.............................. 1,646 (955) 259
Cumulative Effect of Accounting Change......... 1 -- -- (1,247)
Change in Unrealized Investment (Losses) Gains. (618) 2,601 33
------- ------- ------
Net Unrealized Investment Gains (Losses), End
of Year........................................ 1,028 1,646 (955)
------- ------- ------
Foreign Currency Translation Adjustments,
Beginning of Year.............................. 24 (2) (17)
Change in Foreign Currency Translation
Adjustments.................................... (6) 26 15
------- ------- ------
Foreign Currency Translation Adjustments, End
of Year........................................ 18 24 (2)
------- ------- ------
Total Equity, End of Year...................... 13 $11,983 $11,754 $8,428
======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
MLI-4
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net Cash Provided by Operating Activities......... $ 3,688 $ 4,823 $ 3,980
Cash Flows from Investing Activities:
Sales, Maturities and Repayments of:
Fixed Maturities................................ 76,117 64,372 47,658
Equity Securities............................... 2,069 694 795
Mortgage Loans on Real Estate................... 2,380 3,182 2,684
Real Estate..................................... 1,948 1,193 688
Real Estate Joint Ventures...................... 410 387 471
Other Limited Partnership Interests............. 178 42 24
Purchases of:
Fixed Maturities................................ (76,225) (66,693) (51,073)
Equity Securities............................... (2,742) (781) (812)
Mortgage Loans on Real Estate................... (4,225) (2,491) (1,465)
Real Estate..................................... (859) (904) (773)
Real Estate Joint Ventures...................... (130) (285) (51)
Other Limited Partnership Interests............. (307) (87) (164)
Net Change in Short-Term Investments............. 1,028 (634) 198
Net Change in Policy Loans....................... (128) (112) (393)
Other, Net ...................................... (438) (568) (107)
-------- -------- --------
Net Cash Used by Investing Activities............. (924) (2,685) (2,320)
-------- -------- --------
Cash Flows from Financing Activities:
Policyholder Account Balances
Deposits........................................ 17,167 16,017 15,580
Withdrawals..................................... (19,321) (19,142) (16,876)
Additions to Long-Term Debt...................... -- 692 148
Repayments of Long-Term Debt..................... (284) (389) (334)
Net Increase (Decrease) in Short-Term Debt....... 69 (78) 143
-------- -------- --------
Net Cash Used by Financing Activities............. (2,369) (2,900) (1,339)
-------- -------- --------
Change in Cash and Cash Equivalents............... 395 (762) 321
Cash and Cash Equivalents, Beginning of Year...... 1,930 2,692 2,371
-------- -------- --------
Cash and Cash Equivalents, End of Year............ $ 2,325 $ 1,930 $ 2,692
======== ======== ========
Supplemental Cash Flow Information:
Interest Paid.................................... $ 310 $ 280 $ 257
======== ======== ========
Income Taxes Paid................................ $ 497 $ 283 $ 161
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
MLI-5
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net Earnings........................................... $ 853 $ 699 $ 114
Adjustments to Reconcile Net Earnings to Net Cash
Provided by Operating Activities:
Change in Deferred Policy Acquisition Costs, Net..... (391) (376) (538)
Change in Accrued Investment Income.................. 350 (191) (70)
Change in Premiums and Other Receivables............. (106) (29) (458)
Undistributed (Income) Loss of Real Estate Joint
Ventures and Other Limited Partnerships............. 100 (95) 150
Gains from Sale of Investments and Businesses, Net... (573) (721) (4)
Depreciation and Amortization Expenses............... (18) 30 (25)
Interest Credited to Policyholder Account Balances... 2,868 3,143 3,040
Universal Life and Investment-Type Product Policy Fee
Income.............................................. (1,173) (1,105) (883)
Change in Future Policy Benefits..................... 2,149 2,332 2,089
Change in Other Policyholder Funds................... 181 (66) 65
Change in Policyholder Dividends Payable............. (8) 11 (55)
Change in Income Taxes Payable....................... (134) 327 503
Other, Net........................................... (410) 864 52
------ ------ ------
Net Cash Provided by Operating Activities.............. $3,688 $4,823 $3,980
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
MLI-6
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Metropolitan Life Insurance Company ("MetLife") and its subsidiaries
(collectively, the "Company") principally provide life insurance and annuity
products and pension, pension-related and investment-related services to
individuals, corporations and other institutions. The Company also provides
nonmedical health, disability and property and casualty insurance and offers
investment management, investment advisory, and commercial finance services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"). The New York
State Insurance Department (the "Department") recognizes only statutory
accounting practices for determining and reporting the financial condition and
results of operations of an insurance company for determining solvency under
the New York Insurance Law. No consideration is given by the Department to
financial statements prepared in accordance with GAAP in making such
determination.
The accompanying consolidated financial statements include the accounts of
MetLife and its subsidiaries, partnerships and joint venture interests in which
MetLife has control. Other equity investments in affiliated companies,
partnerships and joint ventures are generally reported on the equity basis.
Significant intercompany transactions and balances have been eliminated in
consolidation.
Minority interest related to subsidiaries, partnership and joint venture
interests that are consolidated amounted to $149 million and $137 million at
December 31, 1996 and 1995, respectively, and is included in other liabilities.
Minority interest in earnings of $30 million, $22 million and $5 million in
1996, 1995 and 1994, respectively, is included in other operating costs and
expenses.
In August 1996, MetLife completed a merger with New England Mutual Life
Insurance Company ("The New England") whereby The New England was merged
directly into MetLife. The merger was accounted for as a pooling of interest
and, accordingly, the accompanying consolidated financial statements include
the accounts and operations of The New England for all periods.
Prior to 1996, MetLife, as a mutual life insurance company, prepared its
financial statements in conformity with accounting practices prescribed or
permitted by the Department (statutory financial statements), which accounting
practices were considered to be GAAP for a mutual life insurance company. In
1996, MetLife adopted Interpretation No. 40, Applicability of Generally
Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises
(the "Interpretation"), and Statement of Financial Accounting Standards
("SFAS") No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises
and by Insurance Enterprises for Certain Long Duration Participating Policies
(the "Standard"), of the Financial Accounting Standards Board ("FASB"). The
Interpretation and the Standard required mutual life insurance companies to
adopt all standards promulgated by the FASB in their general purpose financial
statements. The financial statements of MetLife for 1995 and 1994 have been
retroactively restated to reflect the adoption of all applicable authoritative
GAAP pronouncements. The effect of such adoption, except for SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," has been
reflected in equity at January 1, 1994 (see Note 13).
As of December 31, 1994, the Company adopted SFAS No. 115, which expanded the
use of fair value accounting for those securities that a company does not have
positive intent and ability to hold to maturity. Implementation of SFAS No. 115
decreased consolidated equity at December 31, 1994, by $1,247 million, net of
deferred income taxes, amounts attributable to participating pension
contractholders and adjustments of deferred policy acquisition costs and future
policy benefits. In 1995, the FASB issued implementation guidance for SFAS No.
115 and permitted companies a one-time opportunity, through December 31, 1995,
to reassess the appropriateness of the classification of all securities held at
that time. On December 31, 1995, the Company transferred $3,058 million of
securities classified as held to maturity to the available for sale portfolio.
As a result, consolidated equity at December 31, 1995, increased by $135
million, excluding the effects of deferred income taxes, amounts attributable
to participating pension contractholders and adjustments of deferred policy
acquisition costs and future policy benefits.
MLI-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
VALUATION OF INVESTMENTS
Fixed maturity securities for which the Company has the positive intent and
ability to hold to maturity are stated principally at amortized cost and
include bonds and redeemable preferred stock. All other fixed maturity
securities are classified as available for sale and are reported at estimated
fair value. Equity securities are stated principally at estimated fair value
and include common stocks and nonredeemable preferred stocks. Unrealized
investment gains and losses on fixed maturity securities available for sale and
equity securities are reported as a separate component of equity. Such amounts
are net of related deferred income taxes, amounts attributable to participating
pension contractholders and adjustments of deferred policy acquisition costs
and future policy benefits relating to unrealized gains on available for sale
securities. Costs of fixed maturity and equity securities are adjusted for
impairments in value deemed to be other than temporary. All security
transactions are recorded on a trade date basis.
Mortgage loans in good standing are carried at outstanding principal balances
less unaccreted discounts. Mortgage loans are considered impaired when, based
on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contract terms of the loan
agreement. When the Company determines that a loan is impaired, an allowance
for loss is established for the difference between the carrying value of the
mortgage loan and the estimated fair value. Estimated fair value is based on
either the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price or the fair value
of the collateral. The provision for losses is reported as a realized
investment loss. Mortgage loans deemed to be uncollectible are charged against
the allowance for losses and subsequent recoveries, if any, are credited to the
allowance for losses.
Investment real estate, including real estate acquired in satisfaction of
debt, is generally stated at depreciated cost (or amortized cost for capital
leases). At the date of foreclosure, real estate acquired in satisfaction of
debt is recorded at estimated fair value. Cost is adjusted for impairment
whenever events or changes in circumstances indicate that the carrying amount
of the investment may not be recoverable. In performing the review for
recoverability, management estimates future cash flows expected from real
estate investments including proceeds on disposition. If the sum of such
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the real estate, an impairment loss is recognized.
Measurement of impairment losses is based on the estimated fair market value of
the real estate, which is generally computed using the present value of
expected future cash flows discounted at a rate commensurate with underlying
risks. Real estate investments that management intends to sell in the near term
are reported at the lower of cost or estimated fair market value less
allowances for the estimated cost of sales. Changes in allowances relating to
real estate to be disposed of and impairments of real estate are reported as
realized investment gains or losses.
Depreciation, including charges relating to capital leases, of real estate is
computed using the straight-line method over the estimated useful lives of the
properties, which generally range from 20 to 40 years or the terms of the
lease, if shorter. Accumulated depreciation and amortization on real estate was
$2,109 million and $2,187 million at December 31, 1996 and 1995, respectively.
Depreciation and amortization expense totaled $348 million, $427 million and
$356 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Policy loans are stated at unpaid principal balances. Short-term investments
are stated at amortized cost, which approximates fair value.
The Company acts as the lessor of equipment in both direct financing and
operating lease transactions. At lease commencement, the Company records the
aggregate future minimum lease payments due, the estimated residual value of
the leased equipment and unearned lease income for direct financing leases. The
unearned lease income represents the excess of aggregate future minimum lease
receipts plus the estimated residual value over the cost of the leased
equipment or its net capitalized value. Lease income is recognized over the
term of the lease in a manner which reflects a level yield on the net
investment in the lease. Certain origination fees and costs are deferred and
recognized over the term of the lease using the interest method. For operating
lease transactions, the cost of equipment or its net realizable value is
depreciated on a straight-line basis over its estimated economic life and lease
income is recorded as earned.
The Company participates in leasing transactions in which it supplies only a
portion of the purchase price, but generally has the entire equity interest in
the equipment and rentals receivable (leveraged leases). These interests,
however, are subordinated to the interests of the lenders supplying the
nonequity portion of the repurchase price. The financing is generally in the
form of long-term debt that provides for no recourse against the Company and is
collateralized by the property. The investment in leveraged leases is recorded
net of the nonrecourse debt. Revenue, including related tax benefits, is
recorded over the term of the lease at a level rate of return. Management
regularly reviews residual values and writes down residuals to expected values
as needed.
MLI-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INVESTMENT RESULTS
Realized investment gains and losses are determined by specific
identification and are presented as a component of revenues. Valuation
allowances are netted against asset categories to which they apply and
provisions for losses for investments are included in investment gains and
losses.
PROPERTY AND EQUIPMENT
Property and equipment and leasehold improvements are included in other
assets, and are stated at cost, less accumulated depreciation and amortization.
Depreciation, including charges relating to capitalized leases, is provided
using the straight-line or sum of the years digits methods over the estimated
useful lives of the assets, which generally range from 20 to 40 years for real
estate and five to 15 years or the term of the lease, if shorter, for all other
property and equipment. Amortization of leasehold improvements is provided
using the straight-line method over the lesser of the term of the lease or the
estimated useful life of the improvements.
RECOGNITION OF INCOME AND EXPENSES
Premiums from traditional life and annuity policies with life contingencies
are generally recognized as income when due. Benefits and expenses are matched
with such income so as to result in the recognition of profits over the life of
the contract. This match is accomplished by means of the provision for
liabilities for future policy benefits and the deferral and subsequent
amortization of policy acquisition costs.
For contracts with a single premium, or limited number of premium payments
due over a significantly shorter period of time than the total period over
which benefits are provided ("limited payment contracts"), premiums are
recorded as income when due with any excess profit deferred and recognized in
income in a constant relationship to insurance in force or, for annuities, the
amount of expected future benefit payments.
Premiums from nonmedical health contracts are recognized as income on a pro
rata basis over the contract terms.
Premiums from universal life and investment-type contracts are reported as
deposits to policyholder account balances. Revenues from these contracts
consist of amounts assessed during the period against policyholder account
balances for mortality, policy administration and surrender charges. Policy
benefits and claims that are charged to expenses include benefit claims
incurred in the period in excess of related policyholder account balances and
interest credited to policyholder account balances.
Property and liability premiums are generally recognized as revenue on a pro
rata basis over the policy term. Unearned premiums are included in other
liabilities and are computed principally by the monthly pro rata method.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally commissions, agency and
policy issue expenses, all of which vary with and are primarily related to the
production of new business, have been deferred. Deferred policy acquisition
costs are subject to recoverability testing at the time of policy issue and
loss recognition testing at the end of each accounting period.
Deferred policy acquisition costs are amortized over 40 years for
participating traditional life and 30 years for universal life and investment-
type products as a constant percentage of estimated gross margins or profits
arising principally from surrender charges and interest, mortality and expense
margins based on historical and anticipated future experience, updated
regularly. The effects of revisions to experience on previous amortization of
deferred policy acquisition costs are reflected in earnings in the period
estimated gross margins or profits are revised.
For nonparticipating traditional life and annuity policies with life
contingencies, deferred policy acquisition costs are amortized in proportion to
anticipated premiums. Assumptions as to anticipated premiums are estimated at
the date of policy issue and are consistently applied during the life of the
contracts. Deviations from estimated experience are reflected in earnings in
the period such deviations occur. For these contracts, the amortization periods
generally are for the estimated life of the policy.
For nonmedical health insurance contracts, deferred policy acquisition costs
are amortized over the life of the contracts (generally 10 years) in proportion
to anticipated premium revenue at the time of issue.
MLI-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For property and liability insurance, deferred policy acquisition costs are
amortized over the terms of policies or reinsurance treaties.
VALUE OF INSURANCE BUSINESS ACQUIRED AND GOODWILL
The cost of insurance acquired of $358 million and $381 million at December
31, 1996 and 1995, respectively, and the excess of purchase price over the fair
value of net assets acquired of $17 million and $22 million at December 31,
1996 and 1995, respectively, are included in other assets. The cost of
insurance acquired is being amortized over the expected policy or contract
duration in relation to the present value of estimated gross profits from such
policies and contracts. Accumulated amortization of cost of insurance acquired
was $48 million and $18 million at December 31, 1996 and 1995, respectively,
and related amortization expense was $30 million, $27 million and $2 million
for the years ended December 31, 1996, 1995 and 1994, respectively. The excess
of purchase price over the fair value of assets acquired is being amortized
generally over a 10 year period using the straight-line method. Accumulated
amortization of cost in excess of net assets acquired was $48 million and $43
million at December 31, 1996 and 1995, respectively, and related amortization
expense was $5 million, $5 million and $6 million for the years ended December
31, 1996, 1995 and 1994, respectively.
FUTURE POLICY BENEFITS AND POLICYHOLDER ACCOUNT BALANCES
Future policy benefit liabilities for participating traditional life
insurance policies are equal to the aggregate of net level premium reserves for
death and endowment policy benefits, the liability for terminal dividends and
premium deficiency reserves. The net level premium reserve is calculated based
on the nonforfeiture interest rate, ranging from 2.5 percent to 7.0 percent,
and mortality rates guaranteed in calculating the cash surrender values
described in such contracts. Premium deficiency reserves are established, if
necessary, when the liabilities for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for
expected future policy benefits and expenses after deferred policy acquisition
costs are written off.
Future policy benefit liabilities for traditional annuities during the
accumulation period are equal to accumulated contractholder fund balances and,
after annuitization, are equal to the present value of expected future
payments. Interest rates used in establishing future policy benefit liabilities
range from 2.5 percent to 7.0 percent for life insurance policies and 6.0
percent to 8.25 percent for annuity contracts.
Policyholder account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account values
represent an accumulation of gross premium payments plus credited interest less
expense and mortality charges and withdrawals.
Benefit liabilities for nonmedical health insurance are calculated using the
net level premium method and assumptions as to future morbidity, withdrawals
and interest, which provide a margin for adverse deviation. Benefit liabilities
for disabled lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
For property and liability insurance, the liability for unpaid reported
losses is based on a case by case or overall estimate using the Company's past
experience. A provision is also made for losses incurred but not reported on
the basis of estimates and past experience.
INCOME TAXES
MetLife and its eligible life insurance and nonlife insurance subsidiaries
file a consolidated federal income tax return. The future tax consequences of
temporary differences between financial reporting and tax basis of assets and
liabilities are measured as of the balance sheet dates and are recorded as
deferred tax assets or liabilities.
SEPARATE ACCOUNT OPERATIONS
Separate Accounts are established in conformity with insurance laws and are
generally not chargeable with liabilities that arise from any other business of
the Company. Separate Account assets are subject to general account claims only
to the extent the value of such assets exceeds the Separate Account
liabilities. Separate Account assets and liabilities also include assets and
liabilities relating to unit-linked products sold in the United Kingdom.
MLI-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investments held in the Separate Accounts (stated at estimated fair market
value) and liabilities of the Separate Accounts (including participants'
corresponding equity in the Separate Accounts) are reported separately as
assets and liabilities. Deposits to Separate Accounts are reported as increases
in Separate Account liabilities and are not reported in revenues. Mortality,
policy administration and surrender charges to all Separate Accounts are
included in revenues.
POLICYHOLDER DIVIDENDS
The amount of policyholder dividends to be paid is determined annually by the
Board of Directors. The aggregate amount of policyholder dividends is related
to actual interest, mortality, morbidity and expense experience for the year
and management's judgment as to the appropriate level of statutory surplus to
be retained by the Company.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
CONSOLIDATED STATEMENTS OF CASH FLOWS--NON CASH TRANSACTIONS
For the years ended December 31, 1996, 1995 and 1994, respectively, real
estate of $189 million, $429 million and $273 million was acquired in
satisfaction of debt. At December 31, 1996 and 1995, the Company owned real
estate acquired in satisfaction of debt of $456 million and $649 million,
respectively. During 1995 and 1994, respectively, the company assumed
liabilities of $1,573 million and $88 million and received assets of $1,573
million and $86 million through assumption of certain businesses from other
insurance companies.
DISCONTINUED OPERATIONS
In January 1995, the Company contributed its group medical benefits
businesses to a corporate joint venture, The MetraHealth Companies, Inc.
("MetraHealth"). In October 1995, the Company sold its investment in
MetraHealth to United HealthCare Corporation. For its interest in MetraHealth,
the Company received $485 million face amount of United HealthCare Corporation
convertible preferred stock and $326 million in cash (including additional
consideration of $50 million in 1996). The sale resulted in an aftertax loss of
$36 million in 1996 and an aftertax gain of $372 million in 1995. Operating
losses in 1996 related principally to the finalization of the transfer of group
medical contracts to MetraHealth. The Company also has the right to receive
from United HealthCare Corporation up to approximately $169 million in cash
based on the 1997 consolidated financial results of United HealthCare
Corporation.
During 1995, the company also sold its real estate brokerage, mortgage
banking and mortgage administration operations for an aggregate consideration
of $251 million (including additional cash consideration of $25 million in
1996), resulting in aftertax gains of $17 million in 1996 and $44 million in
1995.
These operations are accounted for as discontinued operations and,
accordingly, are segregated in the accompanying consolidated statements of
earnings.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations and subsidiaries are translated
at the exchange rate in effect at year end. Revenues and benefits and other
expenses are translated at the average rate prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are charged or credited directly to equity.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
MLI-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES
The cost or amortized cost, gross unrealized gain and loss and estimated fair
value of fixed maturity and equity securities, by category, are shown below.
HELD TO MATURITY SECURITIES--DECEMBER 31, 1996 (in millions)
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- -------- ---- ----------
<S> <C> <C> <C> <C>
Fixed Maturities:
Bonds:
U. S. Treasury securities and
obligations of U. S. government
corporations and agencies............ $ 48 $ 3 $ 51
States and political subdivisions..... 58 1 59
Foreign governments................... 260 5 265
Corporate............................. 7,520 236 $ 64 7,692
Mortgage-backed securities............ 689 1 16 674
Other................................. 2,746 85 24 2,807
------- -------- -------- -------
Total bonds......................... 11,321 331 104 11,548
Redeemable preferred stocks............ 1 -- -- 1
------- -------- -------- -------
Total Fixed Maturities.............. $11,322 $ 331 $ 104 $11,549
======= ======== ======== =======
HELD TO MATURITY SECURITIES--DECEMBER 31, 1995 (in millions)
<CAPTION>
Fixed Maturities:
Bonds:
<S> <C> <C> <C> <C>
U. S. Treasury securities and
obligations of U. S. government
corporations and agencies............ $ 63 $ 3 $ 66
States and political subdivisions..... 57 -- 57
Foreign governments................... 194 10 204
Corporate............................. 8,039 398 $ 33 8,404
Mortgage-backed securities............ 860 5 31 834
Other................................. 2,126 128 5 2,249
------- -------- -------- -------
Total bonds......................... 11,339 544 69 11,814
Redeemable preferred stocks............ 1 -- -- 1
------- -------- -------- -------
Total Fixed Maturities.............. $11,340 $ 544 $ 69 $11,815
======= ======== ======== =======
</TABLE>
MLI-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AVAILABLE FOR SALE SECURITIES--DECEMBER 31, 1996 (in millions)
<TABLE>
<CAPTION>
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------ FAIR
COST GAIN LOSS VALUE
--------- --------- -----------------
Fixed Maturities:
Bonds:
<S> <C> <C> <C> <C>
U. S. Treasury securities and
obligations of U. S. government
corporations and agencies............. $12,949 $ 901 $ 128 $13,722
States and political subdivisions...... 536 13 1 548
Foreign governments.................... 2,597 266 6 2,857
Corporate.............................. 32,520 1,102 294 33,328
Mortgage-backed securities............. 21,200 407 91 21,516
Other.................................. 2,511 90 30 2,571
------- --------- ------- -------
Total bonds........................... 72,313 2,779 550 74,542
Redeemable preferred stocks............. 500 -- 3 497
------- --------- ------- -------
Total Fixed Maturities................ $72,813 $ 2,779 $ 553 $75,039
======= ========= ======= =======
Equity Securities:
Common stocks........................... $ 1,882 $ 648 $ 55 $ 2,475
Nonredeemable preferred stocks.......... 371 51 81 341
------- --------- ------- -------
Total Equity Securities................ $ 2,253 $ 699 $ 136 $ 2,816
======= ========= ======= =======
AVAILABLE FOR SALE SECURITIES--DECEMBER 31, 1995 (in millions)
Fixed Maturities:
Bonds:
U. S. Treasury securities and
obligations
of U. S. government corporations and
agencies.............................. $15,963 $ 2,194 $ 4 $18,153
States and political subdivisions...... 54 1 -- 55
Foreign governments.................... 1,851 195 -- 2,046
Corporate.............................. 29,742 1,905 124 31,523
Mortgage-backed securities............. 21,255 707 28 21,934
Other.................................. 1,788 235 7 2,016
------- --------- ------- -------
Total bonds........................... 70,653 5,237 163 75,727
Redeemable preferred stocks............. 593 95 3 685
------- --------- ------- -------
Total Fixed Maturities................ $71,246 $ 5,332 $ 166 $76,412
======= ========= ======= =======
Equity Securities:
Common stocks........................... $ 1,372 $ 389 $ 134 $ 1,627
Nonredeemable preferred stocks.......... 167 2 47 122
------- --------- ------- -------
Total Equity Securities................ $ 1,539 $ 391 $ 181 $ 1,749
======= ========= ======= =======
</TABLE>
MLI-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair value of bonds classified as held to
maturity, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
DECEMBER 31, 1996 (in millions)
Due in one year or less.............................. $ 389 $ 391
Due after one year through five years................ 3,317 3,413
Due after five years through 10 years................ 5,444 5,562
Due after 10 years................................... 1,482 1,508
------- -------
Subtotal............................................ 10,632 10,874
Mortgage-backed securities........................... 689 674
------- -------
Total.............................................. $11,321 $11,548
======= =======
</TABLE>
The amortized cost and estimated fair value of bonds classified as available
for sale, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
DECEMBER 31, 1996 (in millions)
Due in one year or less.............................. $ 1,842 $ 1,844
Due after one year through five years................ 13,659 13,957
Due after five years through 10 years................ 15,729 16,228
Due after 10 years................................... 19,883 20,997
------- -------
Subtotal............................................ 51,113 53,026
Mortgage-backed securities........................... 21,200 21,516
------- -------
Total.............................................. $72,313 $74,542
======= =======
</TABLE>
Bonds not due at a single maturity date have been included in the above tables
in the year of final maturity. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without prepayment penalties.
MORTGAGE LOANS
Mortgage loans are collateralized by properties principally located
throughout the United States and Canada. At December 31, 1996, approximately 16
percent and 7 percent of the properties were located in California and
Illinois, respectively. Generally, the Company (as the lender) requires that a
minimum of one-fourth of the purchase price of the underlying real estate be
paid by the borrower.
The mortgage loan investments were categorized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
DECEMBER 31
Office buildings..................................................... 30% 32%
Retail............................................................... 19% 18%
Residential.......................................................... 16% 17%
Agricultural......................................................... 18% 16%
Other................................................................ 17% 17%
--- ---
Total.............................................................. 100% 100%
=== ===
</TABLE>
Many of the Company's real estate joint ventures have loans with the Company.
The carrying values of such mortgages were $869 million and $1,164 million at
December 31, 1996 and 1995, respectively.
MLI-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mortgage loan valuation allowances and changes thereto are shown below.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
DECEMBER 31 (in millions)
Balance, beginning of year.................................... $466 $483 $569
Additions charged to income................................... 144 107 89
Deductions for writedowns and dispositions.................... (166) (124) (175)
---- ---- ----
Balance, end of year.......................................... $444 $466 $483
==== ==== ====
</TABLE>
Impaired mortgage loans and related valuation allowances are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
DECEMBER 31 (in millions)
Impaired mortgage loans with valuation allowances............... $1,677 $2,028
Impaired mortgage loans with no valuation allowances............ 165 389
------ ------
Recorded investment in impaired mortgage loans.................. 1,842 2,417
Valuation allowances............................................ (427) (449)
------ ------
Net impaired mortgage loans..................................... $1,415 $1,968
====== ======
</TABLE>
During the years ended December 31, 1996 and 1995, the Company's average
recorded investment in impaired mortgage loans was $2,113 million and $2,365
million, respectively. Interest income recognized on these impaired mortgage
loans totaled $122 million and $169 million for the years ended December 31,
1996 and 1995, respectively. Interest income earned on loans where the
collateral value is used to measure impairment is recorded on a cash basis.
Interest income on loans, where the present value method is used to measure
impairment, is accrued on the net carrying value amount of the loan at the
interest rate used to discount the cash flows.
REAL ESTATE
Real Estate valuation allowances and changes thereto are shown below.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31 (in millions)
Balance, beginning of year.................................... $743 $622 $674
Additions charged to income................................... 127 358 82
Deductions for writedowns and dispositions.................... (341) (237) (134)
---- ---- ----
Balance, end of year.......................................... $529 $743 $622
==== ==== ====
</TABLE>
The above table does not include valuation reserves of $118 million, $167
million and $95 million at December 31, 1996, 1995 and 1994, respectively,
relating to investments in real estate joint ventures.
Prior to 1996, the Company established valuation allowances for impaired real
estate investments. During 1996, $150 million of valuation allowances relating
to real estate held for investment were applied as writedowns to specific
properties. The balance in the real estate valuation allowance at December 31,
1996, relates to properties that management has committed to a plan of sale.
The carrying value, net of valuation allowances, of properties committed to a
plan of sale was $1,844 million at December 31, 1996. Net investment income
relating to such properties was $60 million for the year ended December 31,
1996.
MLI-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LEASES AND LEVERAGED LEASES
The Company's investment in direct financing leases and leveraged leases is
summarized below.
<TABLE>
<CAPTION>
DIRECT
FINANCING LEVERAGED
LEASES LEASES TOTAL
-------------- ------------ --------------
1996 1995 1996 1995 1996 1995
------ ------ ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31 (in millions)
Investment........................ $1,247 $1,054 $ 507 $298 $1,754 $1,352
Estimated Residual Values......... 238 231 543 445 781 676
------ ------ ------ ---- ------ ------
Total............................ 1,485 1,285 1,050 743 2,535 2,028
Unearned Income................... (336) (295) (316) (230) (652) (525)
------ ------ ------ ---- ------ ------
Net Investment.................... $1,149 $ 990 $ 734 $513 $1,883 $1,503
====== ====== ====== ==== ====== ======
</TABLE>
The investment amounts set forth above are due primarily in monthly
installments. The payment periods generally range from three to eight years,
but in certain circumstances are as long as 20 years. Average yields range from
7 percent to 12 percent. These receivables are generally collateralized by the
related property.
Scheduled aggregate receipts for the investment and estimated residual values
in direct financing leases are:
<TABLE>
<CAPTION>
DIRECT
FINANCING RESIDUALS TOTAL
--------- --------- ------
<S> <C> <C> <C>
YEAR ENDING DECEMBER 31 (in millions)
1997.............................................. $ 236 $ 20 $ 256
1998.............................................. 209 9 218
1999.............................................. 189 25 214
2000.............................................. 167 26 193
2001.............................................. 128 23 151
Thereafter.......................................... 318 135 453
------ ---- ------
Total............................................... $1,247 $238 $1,485
====== ==== ======
</TABLE>
Historical collection experience indicates that a portion of the above
amounts will be paid prior to contractual maturity. Accordingly, the future
receipts, as shown above, should not be regarded as a forecast of future cash
flow.
FINANCIAL INSTRUMENTS
The Company has a securities lending program whereby large blocks of
securities are loaned to third parties, primarily major brokerage firms.
Company policy requires a minimum of 102 percent of the fair value of the
loaned securities to be separately maintained as collateral for the loans. The
collateral is recorded in memorandum records and is not reflected in the
accompanying consolidated balance sheets. To further minimize the credit risks
related to this lending program, the Company regularly monitors the financial
condition of counterparties to these agreements.
The Company engages in a variety of derivative transactions. Certain
derivatives, such as forwards, futures, options and swaps, which do not
themselves generate interest or dividend income, are acquired or sold in order
to hedge or reduce risks applicable to assets held, or expected to be purchased
or sold, and liabilities incurred or expected to be incurred. The Company may
also sell covered call options for income generation purposes from time to
time. The Company does not engage in trading of these derivatives.
Derivative financial instruments involve varying degrees of market risk
resulting from changes in the volatility of interest rates, foreign currency
exchange rates or market values of the underlying financial instruments. The
Company's risk of loss is typically limited to the fair value of these
instruments and not by the notional or contractual amounts which reflect the
extent of involvement but not necessarily the amounts subject to risk. Credit
risk arises from the
MLI-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
possible inability of counterparties to meet the terms of the contracts. Credit
risk due to counterparty nonperformance associated with these instruments is
the unrealized gain, if any, reflected by the fair value of such instruments.
During the three year period ended December 31, 1996, the Company employed
several ongoing derivatives strategies. The Company entered into a number of
anticipatory hedges using securities forwards, futures and interest rate swaps
to limit the interest rate exposure of investments expected to be acquired or
sold within one year. The Company also executed swaps and foreign currency
forwards to hedge, including on an anticipatory basis, the foreign currency
risk of foreign currency denominated investments. The Company also used
interest rate swaps and forwards to reduce risks from changes in interest rates
and exposures arising from mismatches between assets and liabilities. In
addition, the Company has used interest rate caps to reduce the market and
interest rate risks relating to certain assets and liabilities.
Income and expenses related to derivatives used to hedge or manage risks are
recorded on the accrual basis as an adjustment to the yield of the related
securities over the periods covered by the derivative contracts. Gains and
losses relating to early terminations of interest rate swaps used to hedge or
manage interest rate risk are deferred and amortized over the remaining period
originally covered by the swap. Gains and losses relating to derivatives used
to hedge the risks associated with anticipated transactions are deferred and
utilized to adjust the basis of the transaction once it has closed. If it is
determined that the transaction will not close, such gains and losses are
included in realized investment gains and losses.
ASSETS ON DEPOSIT
As of December 31, 1996 and 1995, the Company had assets on deposit with
regulatory agencies of $4,062 million and $3,917 million, respectively.
3. INVESTMENT INCOME AND INVESTMENT GAINS
The sources of investment income are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31 (in millions)
Fixed maturities........................................ $6,042 $6,006 $5,682
Equity securities....................................... 60 45 53
Mortgage loans on real estate........................... 1,523 1,501 1,573
Policy loans............................................ 399 394 359
Real estate............................................. 1,647 1,833 1,870
Real estate joint ventures.............................. 21 41 (99)
Other limited partnership interests..................... 70 23 40
Leases and leveraged leases............................. 135 113 92
Cash, cash equivalents and short-term investments....... 214 231 146
Other investment income................................. 281 326 337
------ ------ ------
Gross investment income................................. 10,392 10,513 10,053
Investment expenses..................................... (1,544) (1,802) (1,770)
------ ------ ------
Investment income, net.................................. $8,848 $8,711 $8,283
====== ====== ======
</TABLE>
MLI-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment gains (losses), including changes in valuation allowances, are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31 (in millions)
Fixed maturities...................................... $ 234 $ 621 $ (97)
Equity securities..................................... 78 (5) 141
Mortgage loans on real estate......................... (86) (51) (41)
Real estate........................................... 165 (375) (20)
Real estate joint ventures............................ 206 (16) 18
Other limited partnership interests................... 82 117 28
Other................................................. (76) (92) (25)
------ ------ -------
Investment gains, net................................. $ 603 $ 199 $ 4
====== ====== =======
Proceeds from the sales of bonds classified as available for sale during 1996,
1995 and 1994 were $74,580 million, $58,537 million and $43,903 million,
respectively. During 1996, 1995 and 1994, respectively, gross gains of $1,069
million, $1,013 million and $642 million and gross losses of $842 million, $402
million and $719 million were realized on those sales. Proceeds from the sale of
bonds classified as held to maturity during 1996, 1995 and 1994 were $1,281
million, $1,806 million and $1,797 million, respectively. During 1996, 1995 and
1994, respectively, gross gains of $10 million, $17 million and $9 million and
gross losses of $1 million, $4 million and $13 million were realized on those
sales. Sales of held to maturity bonds were principally due to prepayments and
callable features on privately placed bonds.
The net unrealized investment gains (losses), which are included in the
consolidated balance sheets as a component of equity, and the changes for the
corresponding years are summarized as follows:
<CAPTION>
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
DECEMBER 31 (in millions)
Balance, end of year, comprised of:
Unrealized investment gains (losses) on:
Fixed maturities.................................... $2,226 $5,166 $(2,328)
Equity securities................................... 563 210 41
Other............................................... 474 380 378
------ ------ -------
3,263 5,756 (1,909)
Amounts of unrealized investment gains (losses)
attributable to:
Participating pension contracts..................... (9) (350) (92)
Loss recognition.................................... (1,219) (2,064) (1)
Deferred policy acquisition cost allowances......... (420) (748) 499
Deferred income tax (expense) benefit............... (587) (948) 548
------ ------ -------
Balance, end of year.................................. $1,028 $1,646 $ (955)
====== ====== =======
<CAPTION>
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31 (in millions)
Balance, beginning of year:........................... $1,646 $ (955) $ 259
Change in unrealized investment gains (losses)....... (2,493) 7,665 50
Unrealized loss at date of adoption of SFAS No. 115.. -- -- (2,449)
Change in unrealized investment gains (losses)
attributable to:
Participating pension contracts..................... 341 (258) (86)
Loss recognition.................................... 845 (2,063) 21
Deferred policy acquisition cost allowances......... 328 (1,247) 550
Deferred income tax (expense) benefit............... 361 (1,496) 700
------ ------ -------
Balance, end of year.................................. $1,028 $1,646 $ (955)
====== ====== =======
</TABLE>
MLI-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. REAL ESTATE JOINT VENTURES AND OTHER LIMITED PARTNERSHIP INTERESTS
Summarized combined financial information of real estate joint ventures and
other limited partnership interests accounted for under the equity method, in
which the Company has an investment of $10 million or greater and an equity
interest of 10 percent or greater, is as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
DECEMBER 31 (in millions)
Assets:
Investments in real estate, at depreciated cost.................. $1,030 $1,409
Investments in securities, generally at estimated fair value..... 621 534
Cash and cash equivalents........................................ 37 33
Other............................................................ 1,030 1,005
------ ------
Total assets...................................................... $2,718 $2,981
====== ======
Liabilities:
Borrowed funds--third party...................................... $ 243 $ 264
Borrowed funds--MetLife.......................................... 69 133
Other............................................................ 915 933
------ ------
Total liabilities................................................. 1,227 1,330
------ ------
Partners' Capital................................................. $1,491 $1,651
====== ======
MetLife equity in partners' capital included above................ $ 786 $1,103
====== ======
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31 (in millions)
Operations:
Revenues of real estate joint ventures...................... $275 $364 $357
Revenues of other limited partnerships interests............ 297 417 287
Interest expense--third party............................... (11) (26) (24)
Interest expense--MetLife................................... (19) (31) (27)
Other expenses.............................................. (411) (501) (499)
---- ---- ----
Net earnings................................................. $131 $223 $ 94
==== ==== ====
MetLife earnings from real estate joint ventures and other
limited partnership interests
included above.............................................. $ 34 $ 28 $ 9
==== ==== ====
</TABLE>
5. REINSURANCE AND OTHER INSURANCE TRANSACTIONS
In the normal course of business, the Company assumes and cedes insurance
with other insurance companies. The accompanying consolidated statements of
earnings are presented net of reinsurance ceded.
The effect of reinsurance on premiums earned is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31 (in millions)
Direct premiums...................................... $12,569 $11,944 $11,309
Reinsurance assumed.................................. 508 812 227
Reinsurance ceded.................................... (1,615) (1,578) (1,458)
------- ------- -------
Net premiums earned.................................. $11,462 $11,178 $10,078
======= ======= =======
</TABLE>
Policyholder benefits in the accompanying consolidated statements of earnings
are presented net of reinsurance recoveries of $1,667 million, $1,523 million
and $1,328 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Premiums and other receivables in the accompanying consolidated
balance sheets include reinsurance recoverables of $700 million and $458
million at December 31, 1996 and 1995, respectively.
MLI-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A contingent liability exists with respect to reinsurance ceded should the
reinsurers be unable to meet their obligations.
The Company acquired, in part through reinsurance effective in January 1995,
group life, dental, disability, accidental death and dismemberment, vision and
long-term care insurance businesses for $403 million, $53 million of which was
paid in 1994. In January 1995, the Company received assets with a fair market
value equal to the $1,565 million of liabilities assumed under the reinsurance
agreements. The reinsured contracts converted to Company contracts at policy
anniversary dates.
Activity in the liability for unpaid losses and loss adjustment expenses
relating to property and casualty and group accident and nonmedical health
policies and contracts is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31 (in millions)
Balance at January 1.................................... $3,296 $2,670 $2,553
Less reinsurance recoverables.......................... 214 104 88
------ ------ ------
Net balance at January 1................................ 3,082 2,566 2,465
------ ------ ------
Incurred related to:
Current year........................................... 2,951 3,420 2,831
Prior years............................................ (114) (68) (75)
------ ------ ------
Total incurred.......................................... 2,837 3,352 2,756
------ ------ ------
Paid related to:
Current year........................................... 1,998 2,053 1,887
Prior years............................................ 791 783 768
------ ------ ------
Total paid.............................................. 2,789 2,836 2,655
------ ------ ------
Net balance at December 31.............................. 3,130 3,082 2,566
Plus reinsurance recoverables.......................... 215 214 104
------ ------ ------
Balance at December 31.................................. $3,345 $3,296 $2,670
====== ====== ======
</TABLE>
The Company has exposure to catastrophes, which are an inherent risk of the
property and casualty insurance business and could contribute to material
fluctuations in the Company's results of operations. The Company uses excess of
loss and quota share reinsurance arrangements to reduce its catastrophe losses
and provide diversification of risk.
6. INCOME TAXES
Income tax expense for U.S. operations has been calculated in accordance with
the provisions of the Internal Revenue Code, as amended (the "Code"). Under the
Code, the amount of Federal income tax expense incurred by mutual life
insurance companies includes an equity tax calculated by a prescribed formula
that incorporates a differential earnings rate between stock and mutual life
insurance companies.
MetLife and its eligible subsidiaries file a consolidated U. S. income tax
return and separate income tax returns as required. The Company uses the
liability method of accounting for income taxes. Income tax provisions are
based on income reported for financial statement purposes. Deferred income
taxes arise from the recognition of temporary differences between income
determined for financial reporting purposes and taxable income.
MLI-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAX EXPENSE (BENEFIT) OF CONTINUING OPERATIONS
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1996 (in millions)
Federal.................................................. $346 $ 66 $412
State and local.......................................... 25 6 31
Foreign.................................................. 27 12 39
---- ---- ----
Total.................................................. $398 $ 84 $482
==== ==== ====
1995 (in millions)
Federal.................................................. $241 $ 65 $306
State and local.......................................... 52 3 55
Foreign.................................................. 22 24 46
---- ---- ----
Total.................................................. $315 $ 92 $407
==== ==== ====
1994 (in millions)
Federal.................................................. $443 $(95) $348
State and local.......................................... 15 (5) 10
Foreign.................................................. 17 5 22
---- ---- ----
Total.................................................. $475 $(95) $380
==== ==== ====
</TABLE>
Reconciliations of the differences between income taxes of continuing
operations computed at the federal statutory tax rates and consolidated
provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ---- ----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31 (in millions)
Income before taxes........................................ $1,406 $744 $413
Income tax rate............................................ 35% 35% 35%
------ ---- ----
Expected income tax expense at federal statutory income tax
rate....................................................... 492 260 145
Tax effect of:
Tax exempt investment income.............................. (18) (9) (9)
Differential earnings amount.............................. 38 67 206
State and local income taxes.............................. 23 37 5
Foreign operations........................................ (7) 25 3
Tax credits............................................... (15) (15) --
Prior year taxes.......................................... (46) (3) 3
Other, net................................................ 15 45 27
------ ---- ----
Income tax expense......................................... $ 482 $407 $380
====== ==== ====
</TABLE>
The deferred tax asset or liability recorded on the consolidated balance
sheets represents the future tax effects of the temporary differences between
the tax basis of assets and liabilities and their amounts for financial
reporting. Significant components of deferred tax assets relate to policyholder
liabilities and unrealized investment losses. The major items associated with
deferred tax liabilities relate to policy acquisition costs, the excess of tax
over financial statement depreciation, and unrealized investment gains.
As of December 31, 1996, the net deferred tax asset includes a benefit of $18
million resulting from foreign net operating loss carryforwards from several
foreign affiliates. This benefit is offset by a valuation allowance of $18
million. The valuation allowance reflects management's assessment, based on
available information, that it is more likely than not that the deferred tax
asset for foreign net operating loss carryforwards will not be realized. The
benefit will be recognized when management believes that it is more likely than
not that the deferred tax asset is realizable.
As of December 31, 1996, the deferred tax asset includes a benefit of $12
million resulting from U.S. tax basis net operating loss carryforwards of $34
million. Subject to statutory limitations, these carryforwards are available to
offset taxable income through the year 2011.
MLI-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has defined benefit pension plans covering all eligible employees
and sales representatives of MetLife and certain of its subsidiaries. The
Company is both the sponsor and administrator of these plans. Retirement
benefits are based on years of credited service and final average earnings
history.
Components of the net periodic pension cost for the defined benefit qualified
and nonqualified pension plans are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31 (in millions)
Service cost.................................................. $ 77 $ 62 $ 93
Interest cost on projected benefit obligation................. 232 222 216
Actual return on assets....................................... (273) (280) (246)
Net amortization and deferrals................................ (12) (13) (28)
---- ---- ----
Net periodic pension cost..................................... $ 24 $ (9) $ 35
==== ==== ====
</TABLE>
The funded status of the qualified and nonqualified defined benefit pension
plans and a comparison of the accumulated benefit obligation, plan assets and
projected benefit obligation are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31 (in millions)
Actuarial present value of
obligations:
Vested.......................... $2,756 $135 $2,682 $121
Nonvested....................... 38 -- 43 1
------ ---- ------ ----
Accumulated benefit obligation... $2,794 $135 $2,725 $122
====== ==== ====== ====
Projected benefit obligation..... $3,084 $184 $3,047 $166
Plan assets (principally Company
investment contracts) at
contract value.................. 3,495 133 3,236 117
------ ---- ------ ----
Plan assets in excess of (less
than) projected benefit obliga-
tion............................ 411 (51) 189 (49)
Unrecognized prior service cost.. 165 -- 71 (4)
Unrecognized net (loss) gain from
past experience different from
that assumed.................... (5) 38 351 43
Unrecognized net asset at transi-
tion............................ (172) (4) (206) (5)
------ ---- ------ ----
Prepaid (accrued) pension cost at
December 31..................... $ 399 $(17) $ 405 $(15)
====== ==== ====== ====
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation ranged from 7.25 percent to 8.0
percent for 1996 and 7.25 percent to 8.5 percent for 1995. The weighted average
assumed rate of increase in future compensation levels ranged from 4.0 percent
to 8.0 percent in 1996 and 1995. The assumed long-term rate of return on assets
used in determining the net periodic pension cost ranged from 8.0 percent to
8.5 percent in 1996 and 8.0 percent to 9.5 percent in 1995. In addition,
several other factors, such as expected retirement dates and mortality, enter
into the determination of the actuarial present value of the accumulated
benefit obligation.
SAVINGS AND INVESTMENT PLANS
The Company sponsors savings and investment plans available for substantially
all employees under which the Company matches a portion of employee
contributions. During 1996, 1995 and 1994, the Company contributed $42 million,
$49 million and $53 million, respectively, to the plans.
MLI-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OTHER POSTRETIREMENT BENEFITS
The Company also provides certain postretirement health care and life
insurance benefits for retired employees through insurance contracts.
Substantially all of the Company's employees may, in accordance with the plans
applicable to such benefits, become eligible for these benefits if they attain
retirement age, with sufficient service, while working for the Company.
The following table sets forth the postretirement health care and life
insurance plans' combined status reconciled with the amount included in the
Company's consolidated balance sheets.
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
DECEMBER 31 (in millions)
Accumulated postretirement benefit obligation:
Retirees...................................................... $1,170 $1,223
Fully eligible active employees............................... 135 111
Active employees not eligible to retire....................... 378 366
------ ------
Total........................................................ 1,683 1,700
Plan assets (Company insurance contracts) at contract value.... 897 804
------ ------
Plan assets less than accumulated postretirement benefit obli-
gation........................................................ (786) (896)
Unrecognized net (loss) gain from past experience different
from that assumed and from
changes in assumptions........................................ (20) 108
------ ------
Accrued nonpension postretirement benefit cost at December 31.. $ (806) $ (788)
====== ======
</TABLE>
The components of the net periodic nonpension postretirement benefit cost are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31 (in millions)
Service cost.................................................. $ 41 $28 $ 43
Interest cost on accumulated postretirement benefit obliga-
tion......................................................... 127 115 122
Actual return on plan assets (Company insurance contracts).... (58) (63) (56)
Net amortization and deferrals................................ 2 (9) (1)
---- --- ----
Net periodic nonpension postretirement benefit cost........... $112 $71 $108
==== === ====
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
nonpension postretirement benefit obligation was generally 9.5 percent in 1996,
gradually decreasing to 5.25 percent over 12 years and 10.0 percent in 1995
decreasing to 5.25 percent over 12 years. The weighted average discount rate
used in determining the accumulated postretirement benefit obligation ranged
from 7.0 percent to 7.75 percent at December 31, 1996 and was 7.25 percent at
December 31, 1995.
If the health care cost trend rate assumptions were increased 1.0 percent,
the accumulated postretirement benefit obligation as of December 31, 1996 would
be increased 9.0 percent. The effect of this change on the sum of the service
and interest cost components of the net periodic postretirement benefit cost
for the year ended December 31, 1996, would be an increase of 13.0 percent.
8. LEASES
LEASE INCOME ON REAL ESTATE
During 1996, 1995 and 1994, the Company received $1,658 million, $1,523
million and $1,538 million, respectively, in lease income related to its wholly
owned real estate portfolio. In accordance with industry practice, certain of
the Company's lease agreements with retail tenants result in income that is
contingent on the level of the tenants' sales revenues. At December 31, 1996,
the minimum future rental income on noncancelable operating leases for wholly
owned investments in real estate is $853 million, $783 million, $695 million,
$607 million and $526 million for 1997 and each of the succeeding four years,
respectively, and $1,609 million thereafter.
MLI-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LEASE EXPENSE
The Company has entered into various lease agreements for office space, data
processing and other equipment. Future gross minimum rental payments under
noncancelable leases for 1997 and the succeeding four years are $129 million,
$110 million, $91 million, $70 million and $55 million, respectively, and $74
million thereafter. Minimum future sublease rental income on these
noncancelable leases is $30 million, $25 million, $32 million, $23 million and
$17 million for 1997 and the succeeding four years, respectively, and $45
million thereafter.
9. DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
DECEMBER 31 (in millions)
6.300% surplus notes scheduled to mature on November 1, 2003..... $ 396 $ 395
7.000% surplus notes scheduled to mature on November 1, 2005..... 248 248
7.700% surplus notes scheduled to mature on November 1, 2015..... 197 197
7.450% surplus notes scheduled to mature on November 1, 2023..... 296 296
7.875% surplus notes scheduled to mature on February 15, 2024.... 148 148
7.800% surplus notes scheduled to mature on November 1, 2025..... 248 247
Mortgage debt, due 1997 through 2015, interest rates ranging from
7.25% to 10.25%.................................................. 96 187
Other............................................................ 425 627
------ ------
Total long-term debt............................................ 2,054 2,345
Short-term debt.................................................. 3,311 3,235
------ ------
Total........................................................... $5,365 $5,580
====== ======
</TABLE>
Payments of interest and principal on the surplus notes may be made only with
the prior approval of the Superintendent of Insurance of the State of New York
("Superintendent"). Subject to the prior approval of the Superintendent, the
7.45 percent surplus notes may be redeemed, as a whole or in part, at the
election of the Company at any time on or after November 1, 2003.
At December 31, 1996, aggregate maturities of the long-term debt based on
required principal payments at maturity for 1997 and the succeeding four years
amounted to $72 million, $22 million, $106 million, $38 million and $9 million,
respectively, and $1,828 million thereafter.
As of December 31, 1996, the Company had unused lines of credit under
agreements with various banks having a principal amount of $1,821 million.
10. CONTINGENCIES
Litigation seeking compensatory and/or punitive damages relating to the
marketing by the Company of individual life insurance (including putative class
and individual actions) has been instituted by or on behalf of policyholders
and others, and additional litigation relating to the Company's life insurance
marketing may be commenced in the future. In addition, an investigation into
certain life insurance marketing, which was commenced by the Office of the
United States Attorney for the Middle District of Florida, in conjunction with
a grand jury, as early as 1994, has not been terminated.
Numerous litigation, claims and assessments against the Company, in addition
to the aforementioned, have arisen in the course of the Company's business,
operations and activities. In certain of these matters, including actions with
multiple plaintiffs, 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 make a meaningful estimate
of the amount or range of loss that could result from an unfavorable outcome in
all such matters, it is the opinion of the Company's management that their
outcome, after consideration of the provisions made in the Company's financial
statements, is not likely to have a material adverse effect on the Company's
financial position.
MLI-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31 (in millions)
Compensation costs...................................... $1,813 $1,607 $1,553
Commissions............................................. 722 853 700
Interest and debt issue costs........................... 311 285 264
Amortization of policy acquisition costs................ 637 684 601
Capitalization of policy acquisition costs.............. (1,028) (1,060) (1,062)
Rent expense, net of sublease........................... 180 184 179
Restructuring charges................................... 18 88 --
Other................................................... 2,058 1,644 1,265
------ ------ ------
Total.................................................. $4,711 $4,285 $3,500
====== ====== ======
</TABLE>
During 1996 and 1995, the Company recorded restructuring charges primarily
related to the consolidation of administration and agency sales force leased
office space and costs relating to workforce reductions.
12. FAIR VALUE INFORMATION
The estimated fair value amounts of financial instruments presented below
have been determined by the Company using market information available as of
December 31, 1996 and 1995, and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value for financial instruments for which there
are no available market value quotations.
The estimates presented below are not necessarily indicative of the amounts
the Company could have realized in a market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
<TABLE>
<CAPTION>
ESTIMATED
NOTIONAL CARRYING FAIR
AMOUNT VALUE VALUE
-------- -------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1996 (in millions)
Assets
Fixed maturities.................................. $86,361 $86,588
Equity securities................................. 2,816 2,816
Mortgage loans on real estate..................... 18,964 19,342
Policy loans...................................... 5,842 5,796
Short-term investments............................ 741 741
Cash and cash equivalents......................... 2,325 2,325
Liabilities
Policyholder account balances..................... 30,470 30,611
Short- and long-term debt......................... 5,365 5,331
Other financial instruments
Interest rate swaps............................... $1,242 -- (14)
Interest rate caps................................ 1,946 20 14
Foreign currency swaps............................ 207 -- (23)
Foreign currency forwards......................... 151 3 3
Covered call options.............................. 25 (2) (2)
Unused lines of credit............................ 1,821 -- 1
</TABLE>
MLI-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED
NOTIONAL CARRYING FAIR
AMOUNT VALUE VALUE
-------- -------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1995 (in millions)
Assets
Fixed maturities.................................. $87,752 $88,227
Equity securities................................. 1,749 1,749
Mortgage loans on real estate..................... 17,216 18,161
Policy loans...................................... 5,714 5,884
Short-term investments............................ 1,769 1,769
Cash and cash equivalents......................... 1,930 1,930
Liabilities
Policyholder account balances..................... 31,595 31,974
Short- and long-term debt......................... 5,580 5,594
Other financial instruments
Interest rate swaps............................... $2,031 (29) (40)
Interest rate caps................................ 2,711 32 15
Foreign currency swaps............................ 89 -- 4
Foreign currency forwards......................... 121 1 1
Covered call options.............................. 25 (2) (2)
Futures contracts................................. 1,402 (19) --
Unused lines of credit............................ 1,645 -- 1
</TABLE>
For fixed maturities that are publicly traded, estimated fair value was
obtained from an independent market pricing service. Publicly traded fixed
maturities represented approximately 80 percent of the estimated fair value of
the total fixed maturities as of December 31, 1996 and 1995. For all other
bonds, estimated fair value was determined by management, based primarily on
interest rates, maturity, credit quality and average life. Included in fixed
maturities are loaned securities with estimated fair values of $7,293 million
and $8,418 million at December 31, 1996 and 1995, respectively. Estimated fair
values of equity securities were generally based on quoted market prices.
Estimated fair values of mortgage loans were generally based on discounted
projected cash flows using interest rates offered for loans to borrowers with
comparable credit ratings and for the same maturities. Estimated fair values of
policy loans were based on discounted projected cash flows using U.S. Treasury
rates to approximate interest rates and Company experience to project patterns
of loan accrual and repayment. For cash and cash equivalents and short-term
investments, the carrying amount is a reasonable estimate of fair value.
The fair values for policyholder account balances are estimated using
discounted projected cash flows, based on interest rates being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
The estimated fair value of short- and long-term debt was determined using
rates currently available to the Company for debt with similar terms and
remaining maturities.
For interest rate and foreign currency swaps, interest rate caps, foreign
currency forwards, covered call options and futures contracts, estimated fair
value is the amount at which the contracts could be settled based on estimates
obtained from dealers. The estimated fair values of unused lines of credit were
based on fees charged to enter into similar agreements.
MLI-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. STATUTORY FINANCIAL INFORMATION
The FASB Interpretation and the FASB Standard referred to in Note 1 required
mutual life insurance companies to adopt all standards promulgated by the FASB
in their general purpose financial statements. The effect (except for the
adoption of SFAS No. 115 in 1994) of applying the Interpretation and the
Standard is as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
DECEMBER 31, 1993,
statutory surplus:
MetLife historical...... $ 6,406
The New England
historical.............. 401
Adjustments to conform
statutory accounting
policies................ (315)
-------
6,492
Adjustments to GAAP:
Future policy benefits
and policyholder account
balances................ (3,975)
Deferred policy
acquisition costs....... 6,142
Deferred income taxes... 1,032
Valuation of
investments............. (2,216)
Statutory asset
valuation reserves...... 1,743
Statutory interest
maintenance reserve..... 962
Surplus notes........... (629)
Other, net.............. (38)
-------
January 1, 1994, equity.. $ 9,513
=======
</TABLE>
The following reconciles net change in statutory surplus and statutory
surplus determined in accordance with accounting practices prescribed or
permitted by insurance regulatory authorities with net earnings and equity on a
GAAP basis.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31 (in millions)
Net change in statutory surplus:
MetLife historical.......................................... $366 $260 $(102)
The New England historical.................................. -- (8) 231
Adjustments to conform statutory accounting policies........ -- (23) (65)
---- ---- -----
366 229 64
Adjustments to GAAP:
Future policy benefits and policyholder account balances.... (165) (17) (464)
Deferred policy acquisition costs........................... 391 376 461
Deferred income taxes....................................... (74) (97) 47
Valuation of investments.................................... (84) 106 (53)
Statutory asset valuation reserves.......................... 599 30 313
Statutory interest maintenance reserve...................... 19 284 (58)
Surplus notes............................................... -- (622) (148)
Other, net.................................................. (199) 410 (48)
---- ---- -----
Net Earnings................................................ $853 $699 $ 114
==== ==== =====
</TABLE>
MLI-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
DECEMBER 31 (in millions).....................................
Statutory surplus:
MetLife historical........................................... $ 7,151 $ 6,564
The New England historical................................... -- 624
Adjustments to conform statutory accounting policies......... -- (403)
------- -------
7,151 6,785
Adjustments to GAAP:
Future policy benefits and policyholder account balances.... (5,742) (6,781)
Deferred policy acquisition costs........................... 7,227 6,508
Deferred income taxes....................................... 264 (28)
Valuation of investments.................................... 610 3,070
Statutory asset valuation reserves.......................... 2,684 2,085
Statutory interest maintenance reserve...................... 1,208 1,189
Surplus notes............................................... (1,393) (1,391)
Other, net.................................................. (26) 317
------- -------
Equity....................................................... $11,983 $11,754
======= =======
</TABLE>
MLI-28
<PAGE>
[LOGO] MetLife(R)
Bulk
MetLife Customer Service Center--Tulsa Rate
P.O. Box 21889 U.S.
Tulsa, OK 74121-1889 Postage
Paid
Rutland,
VT
Permit
220
ADDRESS CORRECTION REQUESTED
FORWARDING AND RETURN
POSTAGE GUARANTEED
<PAGE>
[LOGO] MetLife(R)
Bulk
MetLife Customer Service Center--Warwick Rate
P.O. Box 520 U.S.
Warwick, RI 02887-0520 Postage
Paid
Rutland,
VT
Permit
220
ADDRESS CORRECTION REQUESTED
FORWARDING AND RETURN
POSTAGE GUARANTEED
